FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | June 30, 20192020 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ______ to ______ |
| Commission file number | 1-10816 |
MGIC Investment Corporation
(Exact name of registrant as specified in its charter)
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| | | |
Wisconsin | | 39-1486475 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
250 E. Kilbourn Avenue | | 53202 |
Milwaukee, | Wisconsin | | (Zip Code) |
(Address of principal executive offices) | | |
| | |
(414) | | 347-6480 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common stock | | MTG | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | |
Large accelerated filer | ☒
| Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | (Do not check if a smaller reporting company) |
Emerging growth company | ☐ | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of July 31, 2019,2020, there were 354,154,379338,573,493 shares of common stock of the registrant, par value $1.00 per share, outstanding.
Forward Looking and Other Statements
All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are “forward looking statements.” Forward looking statements consist of statements that relate to matters other than historical fact. In most cases, forward looking statements may be identified by words such as “believe,” “anticipate” or “expect,” or words of similar import. The risk factors referred to in “Forward Looking Statements and Risk Factors – Location of Risk Factors” in Management’s Discussion and Analysis of Financial Condition and Results of Operations below, may cause our actual results to differ materially from the results contemplated by forward looking statements that we may make. We are not undertaking any obligation to update any forward looking statements or other statements we may make 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 - Q2 20192020 | 2
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 20192020
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Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | |
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MGIC Investment Corporation - Q2 20192020 | 3
Glossary of terms and acronyms
/ A
ARMs
Adjustable rate mortgages
ABS
Asset-backed securities
ASC
Accounting Standards Codification
Available Assets
Assets, as designated under the PMIERs, that are readily available to pay claims, and include the most liquid investments
/ B
Book or book year
A group of loans insured in a particular calendar year
BPMI
Borrower-paid mortgage insurance
/ C
CARES Act
The Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020
CECL
Current expected credit losses covered under Accounting Standards Codification 326
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, that has spread globally, causing significant adverse effects on populations and economies. The outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency in the United States in March 2020
CRT
Credit risk transfer. The transfer of a portion of mortgage credit risk to the private sector through different forms of transactions and structures
Credit Union QSR Transaction
Quota share reinsurance transaction with an unaffiliated reinsurer to cede business from credit union institutions.
/ D
DAC
Deferred insurance policy acquisition costs
Debt-to-income (“DTI”) ratio
The ratio, expressed as a percentage, of a borrower’s total debt payments to gross income
Direct
When referring to insurance or risk written or in force, “direct”Direct means before giving effect to reinsurance
Delinquent Loan
A loan that is past due on a mortgage payment. A delinquent loan is typically reported to us by servicers when the loan has missed two or more payments. A loan will continue to be reported as delinquent until it becomes current or a claim payment has been made. A delinquent loan is also referred to as a default
/ E
EPS
Earnings per share
/ F
Fannie Mae
Federal National Mortgage Association
FCRA
Fair Credit Reporting Act
FEMA
Federal Emergency Management Agency
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FHLB
Federal Home Loan Bank of Chicago, of which MGIC is a member
FICO score
A measure of consumer credit risk provided by credit bureaus, typically produced from statistical models by Fair Isaac Corporation utilizing data collected by the credit bureaus
Freddie Mac
Federal Home Loan Mortgage Corporation
/ G
GAAP
Generally Accepted Accounting Principles in the United States
GSEs
Collectively, Fannie Mae and Freddie Mac
MGIC Investment Corporation - Q2 2020 | 4
/ H
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
Home Re Transactions
Excess-of-loss reinsurance transactions with unaffiliated special purpose insurers domiciled in Bermuda
HOPA
Homeowners Protection Act
HUD
Housing and Urban Development
/ I
IADA
Individual Assistance Disaster Area
IBNR
Losses incurred buton delinquent loans for which the delinquency has not been reported
IIF
Insurance in force, which for loans insured by us, is equal to the unpaid principal balance, as reported to us
MGIC Investment Corporation - Q2 2019 | 4
ILN
Insurance-linked notes
/ L
LAE
Loss adjustment expenses
Legacy book
Mortgage insurance policies written prior to 2009
Loan-to-value ("LTV") ratio
The ratio, expressed as a percentage, of the dollar amount of the first mortgage loan to the value of the property at the time the loan became insured and does not reflect subsequent housing price appreciation or depreciation. Subordinate mortgages may also be present.
Long-term debt:
5.75% Notes
5.75% Senior Notes due on August 15, 2023, with interest payable semi-annually on February 15 and August 15 of each year
9% Debentures
9% Convertible Junior Subordinated Debentures due on April 1, 2063, with interest payable semi-annually on April 1 and October 1 of each year
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on February 10, 2023, with interest payable monthly
Loss ratio
The ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to NPE
Low down payment loans or mortgages
Loans with less than 20% down payments
LPMI
Lender-paid mortgage insurance
/ M
MBS
Mortgage-backed securities
MD&A
Management's discussion and analysis of financial condition and results of operations
MGIC
Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corporation
MAC
MGIC Assurance Corporation, a subsidiary of MGIC
MIC
MGIC Indemnity Corporation, a subsidiary of MGIC
Minimum Required Assets
The greater of $400 million or the total of the minimum amount of Available Assets that must be held under the PMIERs which is based uponon an insurer’s book of IIF and is calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions, and subject to a percentagefloor of RIF weighted by certain risk attributes$400 million.
MPP
Minimum Policyholder Position, as required under certain state requirements. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums
/ N
N/A
Not applicable for the period presented
NAIC
The National Association of Insurance Commissioners
NIW
New Insurance Written, is the aggregate original principal amount of the mortgages that are insured during a period
N/M
Data, or calculation, deemed not meaningful for the period presented
NPE
The amount of premiums earned, net of premiums assumed and ceded under reinsurance agreements
MGIC Investment Corporation - Q2 2020 | 5
NPL
Non-performing loan, which is a delinquent loan, at any stage in its delinquency
NPW
The amount of premiums written, net of premiums assumed and ceded under reinsurance agreements
/ O
OCI
Office of the Commissioner of Insurance of the State of Wisconsin
OTTI
Other than temporary impairment
/ P
Persistency
The percentage of our insurance remaining in force from one year prior
PMI
Private Mortgage Insurance (as an industry or product type)
MGIC Investment Corporation - Q2 2019 | 5
PMIERs
Private Mortgage Insurer Eligibility Requirements issued by the GSEseach of Fannie Mae and Freddie Mac to set forth requirements that an approved insurer must meet and maintain to provide mortgage guaranty insurance on loans delivered to or acquired by Fannie Mae or Freddie Mac, as applicable.
Premium Yield
The ratio of NPE divided by the average IIF outstanding for the period measured
Premium Rate
The contractual rate charged for coverage under our insurance policies.
Primary Insurance
Insurance that provides mortgage default protection on individual loans. Primary insurance may be written on a "flow" basis, in which loans are insured in individual, loan-by-loan transactions, or on a "bulk" basis, in which each loan in a portfolio of loans is individually insured in a single bulk transaction.
/ Q
QSR Transaction
Quota share reinsurance transaction with a group of unaffiliated reinsurers
QM
A mortgage loan that satisfies the “qualified mortgage” loan characteristics pursuant to the Consumer Financial Protection Bureau’s ability-to-repay under the Truth in Lending Act. Originating a QM loan may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay.
/ R
RESPA
Real Estate Settlement Procedures Act
RIF
Risk in force, which for an individual loan insured by us, is equal to the unpaid loan principal balance, as reported to us, multiplied by the insurance coverage percentage. RIF is sometimes referred to as exposure.
Risk-to-capital
Under certain state regulations, the ratio of RIF, net of reinsurance and exposure on policies currently in default and for which loss reserves have been established, to the level of statutory capital
RMBS
Residential mortgage-backed securities
/ S
State Capital Requirements
Under certain state regulations, the minimum amount of statutory capital relative to risk in force (or similar measure)
/ T
TILA
Truth in Lending Act
/ U
Underwriting expense ratio
The ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance subsidiaries) to NPW
Underwriting profit
NPE minus incurred losses and underwriting and operating expenses
USDA
U.S. Department of Agriculture
/ V
VA
U.S. Department of Veterans Affairs
VIE
Variable interest entity
MGIC Investment Corporation - Q2 20192020 | 6
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
| | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | CONSOLIDATED BALANCE SHEETS | |
CONSOLIDATED BALANCE SHEETS (UNAUDITED) | | CONSOLIDATED BALANCE SHEETS (UNAUDITED) |
| (In thousands) | (In thousands) | | Note | | June 30, 2019 | | December 31, 2018 | (In thousands) | | Note | | June 30, 2020 | | December 31, 2019 |
ASSETS | ASSETS | | (Unaudited) | | | ASSETS | | | | |
Investment portfolio: | Investment portfolio: | | | | | | | Investment portfolio: | | 2 / 7 / 8 | | | | |
Fixed income, available-for-sale, at fair value (amortized cost 2019 - $5,357,436; 2018 - $5,196,784) | | $ | 5,504,823 |
| | $ | 5,151,987 |
| |
Equity securities, at fair value (cost 2019 - $3,991; 2018 - $3,993) | | | | 4,114 |
| | 3,932 |
| |
Fixed income, available-for-sale, at fair value (amortized cost 2020 - $5,597,554; 2019 - $5,562,550) | | Fixed income, available-for-sale, at fair value (amortized cost 2020 - $5,597,554; 2019 - $5,562,550) | | $ | 5,862,262 |
| | $ | 5,737,892 |
|
Equity securities, at fair value (cost 2020 - $17,467; 2019 - $17,188) | | Equity securities, at fair value (cost 2020 - $17,467; 2019 - $17,188) | | 17,953 |
| | 17,328 |
|
Other invested assets, at cost | Other invested assets, at cost | | | | 3,100 |
| | 3,100 |
| Other invested assets, at cost | | 3,100 |
| | 3,100 |
|
Total investment portfolio | Total investment portfolio | | 5,512,037 |
| | 5,159,019 |
| Total investment portfolio | | 5,883,315 |
| | 5,758,320 |
|
Cash and cash equivalents | Cash and cash equivalents | | 218,908 |
| | 151,892 |
| Cash and cash equivalents | | 366,715 |
| | 161,847 |
|
Restricted cash and cash equivalents | Restricted cash and cash equivalents | | 6,275 |
| | 3,146 |
| Restricted cash and cash equivalents | | 4,678 |
| | 7,209 |
|
Accrued investment income | Accrued investment income | | 48,272 |
| | 48,001 |
| Accrued investment income | | 46,790 |
| | 49,705 |
|
Reinsurance recoverable on loss reserves | Reinsurance recoverable on loss reserves | | | | 18,402 |
| | 33,328 |
| Reinsurance recoverable on loss reserves | | | | 63,444 |
| | 21,641 |
|
Reinsurance recoverable on paid losses | Reinsurance recoverable on paid losses | | 16,903 |
| | 2,948 |
| Reinsurance recoverable on paid losses | | 2 | | 1,351 |
| | 1,521 |
|
Premiums receivable | Premiums receivable | | 57,492 |
| | 55,090 |
| Premiums receivable | | 2 | | 54,028 |
| | 55,587 |
|
Home office and equipment, net | Home office and equipment, net | | 51,607 |
| | 51,734 |
| Home office and equipment, net | | 47,738 |
| | 50,121 |
|
Deferred insurance policy acquisition costs | Deferred insurance policy acquisition costs | | 17,669 |
| | 17,888 |
| Deferred insurance policy acquisition costs | | 20,645 |
| | 18,531 |
|
Deferred income taxes, net | Deferred income taxes, net | | 20,932 |
| | 69,184 |
| Deferred income taxes, net | | — |
| | 5,742 |
|
Other assets | Other assets | | 87,040 |
| | 85,572 |
| Other assets | | 85,884 |
| | 99,347 |
|
Total assets | Total assets | | $ | 6,055,537 |
| | $ | 5,677,802 |
| Total assets | | $ | 6,574,588 |
| | $ | 6,229,571 |
|
| | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Liabilities: | Liabilities: | | | | | Liabilities: | | | | |
Loss reserves | Loss reserves | | | | $ | 621,902 |
| | $ | 674,019 |
| Loss reserves | | | | $ | 797,396 |
| | $ | 555,334 |
|
Unearned premiums | Unearned premiums | | 400,999 |
| | 409,985 |
| Unearned premiums | | 343,229 |
| | 380,302 |
|
Federal Home Loan Bank advance | Federal Home Loan Bank advance | | | | 155,000 |
| | 155,000 |
| Federal Home Loan Bank advance | | | | 155,000 |
| | 155,000 |
|
Senior notes | Senior notes | | | | 420,290 |
| | 419,713 |
| Senior notes | | | | 421,443 |
| | 420,867 |
|
Convertible junior subordinated debentures | Convertible junior subordinated debentures | | | | 256,872 |
| | 256,872 |
| Convertible junior subordinated debentures | | | | 256,872 |
| | 256,872 |
|
Other liabilities | Other liabilities | | 164,809 |
| | 180,322 |
| Other liabilities | | 217,293 |
| | 151,962 |
|
Total liabilities | Total liabilities | | 2,019,872 |
| | 2,095,911 |
| Total liabilities | | 2,191,233 |
| | 1,920,337 |
|
Contingencies | Contingencies | | | |
|
| |
|
| Contingencies | | | |
|
| |
|
|
Shareholders’ equity: | Shareholders’ equity: | | | | | | | Shareholders’ equity: | | | | | | |
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2019 - 371,353; 2018 - 371,353; shares outstanding 2019 - 354,177; 2018 - 355,371) | | 371,353 |
| | 371,353 |
| |
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2020 - 371,353; 2019 - 371,353; shares outstanding 2020 - 338,567; 2019 - 347,308) | | Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2020 - 371,353; 2019 - 371,353; shares outstanding 2020 - 338,567; 2019 - 347,308) | | 371,353 |
| | 371,353 |
|
Paid-in capital | Paid-in capital | | 1,860,578 |
| | 1,862,536 |
| Paid-in capital | | 1,859,195 |
| | 1,869,719 |
|
Treasury stock at cost (shares 2019 - 17,176; 2018 - 15,982) | | (194,070 | ) | | (175,059 | ) | |
Accumulated other comprehensive income (loss), net of tax | | 30,810 |
| | (124,214 | ) | |
Treasury stock at cost (shares 2020 - 32,786; 2019 - 24,045) | | Treasury stock at cost (shares 2020 - 32,786; 2019 - 24,045) | | (393,425 | ) | | (283,196 | ) |
Accumulated other comprehensive income, net of tax | | Accumulated other comprehensive income, net of tax | | 145,412 |
| | 72,708 |
|
Retained earnings | Retained earnings | | 1,966,994 |
| | 1,647,275 |
| Retained earnings | | 2,400,820 |
| | 2,278,650 |
|
Total shareholders’ equity | Total shareholders’ equity | | 4,035,665 |
| | 3,581,891 |
| Total shareholders’ equity | | 4,383,355 |
| | 4,309,234 |
|
Total liabilities and shareholders’ equity | Total liabilities and shareholders’ equity | | $ | 6,055,537 |
| | $ | 5,677,802 |
| Total liabilities and shareholders’ equity | | $ | 6,574,588 |
| | $ | 6,229,571 |
|
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q2 20192020 | 7
| | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | | | | | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | | | | |
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share data) | (In thousands, except per share data) | | Note | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands, except per share data) | | Note | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Premiums written: | Premiums written: | | | | | | | | | Premiums written: | | | | | | | | |
Direct | Direct | | $ | 283,189 |
| | $ | 274,726 |
| | $ | 557,086 |
| | $ | 544,760 |
| Direct | | $ | 283,224 |
| | $ | 283,189 |
| | $ | 557,948 |
| | $ | 557,086 |
|
Assumed | Assumed | | 1,505 |
| | 2,085 |
| | 2,612 |
| | 2,177 |
| Assumed | | 3,899 |
| | 1,505 |
| | 6,758 |
| | 2,612 |
|
Ceded | Ceded | | | | (41,096 | ) | | (21,375 | ) | | (71,819 | ) | | (54,595 | ) | Ceded | | | | (65,738 | ) | | (41,096 | ) | | (97,314 | ) | | (71,819 | ) |
Net premiums written | Net premiums written | | 243,598 |
| | 255,436 |
| | 487,879 |
| | 492,342 |
| Net premiums written | | 221,385 |
| | 243,598 |
| | 467,392 |
| | 487,879 |
|
Decrease (increase) in unearned premiums, net | | 3,504 |
| | (8,472 | ) | | 8,984 |
| | (13,271 | ) | |
Decrease in unearned premiums, net | | Decrease in unearned premiums, net | | 22,177 |
| | 3,504 |
| | 37,071 |
| | 8,984 |
|
Net premiums earned | Net premiums earned | | 247,102 |
| | 246,964 |
| | 496,863 |
| | 479,071 |
| Net premiums earned | | 243,562 |
| | 247,102 |
| | 504,463 |
| | 496,863 |
|
Investment income, net of expenses | Investment income, net of expenses | | 42,423 |
| | 34,502 |
| | 83,008 |
| | 66,623 |
| Investment income, net of expenses | | 39,679 |
| | 42,423 |
| | 81,026 |
| | 83,008 |
|
Net realized investment gains (losses) | Net realized investment gains (losses) | | | | 307 |
| | (1,897 | ) | | (219 | ) | | (2,226 | ) | Net realized investment gains (losses) | | | | 6,701 |
| | 307 |
| | 8,592 |
| | (219 | ) |
Other revenue | Other revenue | | 2,485 |
| | 2,431 |
| | 4,315 |
| | 4,302 |
| Other revenue | | 4,026 |
| | 2,485 |
| | 6,780 |
| | 4,315 |
|
Total revenues | Total revenues | | 292,317 |
| | 282,000 |
| | 583,967 |
| | 547,770 |
| Total revenues | | 293,968 |
| | 292,317 |
| | 600,861 |
| | 583,967 |
|
| | | | | | | | | | | | | | | | | | |
Losses and expenses: | Losses and expenses: | | | | | | | | | Losses and expenses: | | | | | | | | |
Losses incurred, net | Losses incurred, net | | | | 21,836 |
| | (13,455 | ) | | 60,899 |
| | 10,395 |
| Losses incurred, net | | | | 217,374 |
| | 21,836 |
| | 278,330 |
| | 60,899 |
|
Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | | 2,760 |
| | 2,845 |
| | 5,238 |
| | 5,417 |
| Amortization of deferred policy acquisition costs | | 2,909 |
| | 2,760 |
| | 5,419 |
| | 5,238 |
|
Other underwriting and operating expenses, net | Other underwriting and operating expenses, net | | 42,960 |
| | 41,842 |
| | 88,900 |
| | 87,932 |
| Other underwriting and operating expenses, net | | 44,273 |
| | 42,960 |
| | 86,535 |
| | 88,900 |
|
Interest expense | Interest expense | | 13,550 |
| | 13,246 |
| | 26,783 |
| | 26,479 |
| Interest expense | | 12,929 |
| | 13,550 |
| | 25,855 |
| | 26,783 |
|
Total losses and expenses | Total losses and expenses | | 81,106 |
| | 44,478 |
| | 181,820 |
| | 130,223 |
| Total losses and expenses | | 277,485 |
| | 81,106 |
| | 396,139 |
| | 181,820 |
|
Income before tax | Income before tax | | 211,211 |
| | 237,522 |
| | 402,147 |
| | 417,547 |
| Income before tax | | 16,483 |
| | 211,211 |
| | 204,722 |
| | 402,147 |
|
Provision for income taxes | Provision for income taxes | | 43,433 |
| | 50,708 |
| | 82,428 |
| | 87,096 |
| Provision for income taxes | | 2,436 |
| | 43,433 |
| | 40,870 |
| | 82,428 |
|
Net income | Net income | | $ | 167,778 |
| | $ | 186,814 |
| | $ | 319,719 |
| | $ | 330,451 |
| Net income | | $ | 14,047 |
| | $ | 167,778 |
| | $ | 163,852 |
| | $ | 319,719 |
|
| | | | | | | | | | | | | | | | | | |
Earnings per share: | Earnings per share: | | | | | | | | | Earnings per share: | | | | | | | | |
Basic | Basic | | | | $ | 0.47 |
| | $ | 0.51 |
| | $ | 0.90 |
| | $ | 0.89 |
| Basic | | | | $ | 0.04 |
| | $ | 0.47 |
| | $ | 0.48 |
| | $ | 0.90 |
|
Diluted | Diluted | | | | $ | 0.46 |
| | $ | 0.49 |
| | $ | 0.87 |
| | $ | 0.87 |
| Diluted | | | | $ | 0.04 |
| | $ | 0.46 |
| | $ | 0.48 |
| | $ | 0.87 |
|
| | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | | | | 355,734 |
| | 368,578 |
| | 355,694 |
| | 369,736 |
| Weighted average common shares outstanding - basic | | | | 338,593 |
| | 355,734 |
| | 341,323 |
| | 355,694 |
|
Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | | | | 376,603 |
| | 388,881 |
| | 376,635 |
| | 390,236 |
| Weighted average common shares outstanding - diluted | | | | 339,661 |
| | 376,603 |
| | 362,003 |
| | 376,635 |
|
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q2 20192020 | 8
| | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | | | | | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | | | | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | Note | | 2019 | | 2018 | | 2019 | | 2018 | | Note | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 167,778 |
| | $ | 186,814 |
| | $ | 319,719 |
| | $ | 330,451 |
| | $ | 14,047 |
| | $ | 167,778 |
| | $ | 163,852 |
| | $ | 319,719 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Other comprehensive (loss) income, net of tax: | | | | | | | | | | | |
Change in unrealized investment gains and losses | | | | 70,754 |
| | (9,922 | ) | | 151,825 |
| | (74,375 | ) | | | | 143,181 |
| | 70,754 |
| | 70,596 |
| | 151,825 |
|
Benefit plan adjustments | | 1,549 |
| | 388 |
| | 3,199 |
| | 882 |
| | 1,007 |
| | 1,549 |
| | 2,108 |
| | 3,199 |
|
Other comprehensive income (loss), net of tax | | 72,303 |
| | (9,534 | ) | | 155,024 |
| | (73,493 | ) | |
Other comprehensive (loss) income, net of tax | | | 144,188 |
| | 72,303 |
| | 72,704 |
| | 155,024 |
|
Comprehensive income | | $ | 240,081 |
| | $ | 177,280 |
| | $ | 474,743 |
| | $ | 256,958 |
| | $ | 158,235 |
| | $ | 240,081 |
| | $ | 236,556 |
| | $ | 474,743 |
|
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q2 20192020 | 9
| | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | | | | | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | | | | |
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) | CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) | | | | | CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) | | | | |
| | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | Note | | 2019 | | 2018 | | 2019 | | 2018 | | Note | | 2020 | | 2019 | | 2020 | | 2019 |
Common stock | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 371,353 |
| | $ | 371,348 |
| | $ | 371,353 |
| | $ | 370,567 |
| |
Net common stock issued under share-based compensation plans | | — |
| | — |
| | — |
| | 781 |
| |
Balance, end of period | | 371,353 |
| | 371,348 |
| | 371,353 |
| | 371,348 |
| |
Balance, beginning and end of period | | | $ | 371,353 |
| | $ | 371,353 |
| | $ | 371,353 |
| | $ | 371,353 |
|
| | | | | | | | | | | | | | | | |
Paid-in capital | | | | | | | | | | | | | | | | |
Balance, beginning of period | | 1,856,236 |
| | 1,847,000 |
| | 1,862,536 |
| | 1,850,582 |
| | 1,855,371 |
| | 1,856,236 |
| | 1,869,719 |
| | 1,862,536 |
|
Net common stock issued under share-based compensation plans | | — |
| | — |
| | — |
| | (8,854 | ) | |
Reissuance of treasury stock, net under share-based compensation plans | | — |
| | — |
| | (11,582 | ) | | — |
| | — |
| | — |
| | (18,667 | ) | | (11,582 | ) |
Equity compensation | | 4,342 |
| | 5,251 |
| | 9,624 |
| | 10,523 |
| | 3,824 |
| | 4,342 |
| | 8,143 |
| | 9,624 |
|
Balance, end of period | | 1,860,578 |
| | 1,852,251 |
| | 1,860,578 |
| | 1,852,251 |
| | 1,859,195 |
| | 1,860,578 |
| | 1,859,195 |
| | 1,860,578 |
|
| | | | | | | | | | | | | | | | |
Treasury stock | | | | | | | | | | | | | | | | |
Balance, beginning of period | | (169,129 | ) | | — |
| | (175,059 | ) | | — |
| | (393,425 | ) | | (169,129 | ) | | (283,196 | ) | | (175,059 | ) |
Reissuance of treasury stock, net under share-based compensation plans | | — |
| | — |
| | 5,930 |
| | — |
| | — |
| | — |
| | 9,768 |
| | 5,930 |
|
Repurchase of common stock | | | | (24,941 | ) | | (100,059 | ) | | (24,941 | ) | | (100,059 | ) | | | | — |
| | (24,941 | ) | | (119,997 | ) | | (24,941 | ) |
Balance, end of period | | (194,070 | ) | | (100,059 | ) | | (194,070 | ) | | (100,059 | ) | | (393,425 | ) | | (194,070 | ) | | (393,425 | ) | | (194,070 | ) |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | | | | | | | | | | | | | | | |
Balance, beginning of period | | | | (41,493 | ) | | (107,760 | ) | | (124,214 | ) | | (43,801 | ) | | | | 1,224 |
| | (41,493 | ) | | 72,708 |
| | (124,214 | ) |
Other comprehensive income (loss), net of tax | | | | 72,303 |
| | (9,534 | ) | | 155,024 |
| | (73,493 | ) | |
Other comprehensive (loss) income, net of tax | | | | | 144,188 |
| | 72,303 |
| | 72,704 |
| | 155,024 |
|
Balance, end of period | | 30,810 |
| | (117,294 | ) | | 30,810 |
| | (117,294 | ) | | 145,412 |
| | 30,810 |
| | 145,412 |
| | 30,810 |
|
| | | | | | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | | | | | |
Balance, beginning of period | | 1,799,216 |
| | 1,120,815 |
| | 1,647,275 |
| | 977,178 |
| | 2,407,305 |
| | 1,799,216 |
| | 2,278,650 |
| | 1,647,275 |
|
Net income | | 167,778 |
| | 186,814 |
| | 319,719 |
| | 330,451 |
| | 14,047 |
| | 167,778 |
| | 163,852 |
| | 319,719 |
|
Cash dividends | | | | | (20,532 | ) | | — |
| | (41,682 | ) | | — |
|
Balance, end of period | | 1,966,994 |
| | 1,307,629 |
| | 1,966,994 |
| | 1,307,629 |
| | 2,400,820 |
| | 1,966,994 |
| | 2,400,820 |
| | 1,966,994 |
|
| | | | | | | | | | | | | | | | |
Total shareholders’ equity | | $ | 4,035,665 |
| | $ | 3,313,875 |
| | $ | 4,035,665 |
| | $ | 3,313,875 |
| | $ | 4,383,355 |
| | $ | 4,035,665 |
| | $ | 4,383,355 |
| | $ | 4,035,665 |
|
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q2 20192020 | 10
| | MGIC INVESTMENT CORPORATION AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | | | | Six Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2019 | | 2018 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 319,719 |
| | $ | 330,451 |
| | $ | 163,852 |
| | $ | 319,719 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 23,464 |
| | 31,395 |
| | 25,457 |
| | 23,464 |
|
Deferred tax expense | | 7,043 |
| | 92,428 |
| | 14,834 |
| | 7,043 |
|
Net realized investment losses | | 219 |
| | 2,226 |
| |
Net realized investment (gains) losses | | | (8,592 | ) | | 219 |
|
Change in certain assets and liabilities: | | | | | | | | |
Accrued investment income | | (271 | ) | | (1,065 | ) | | 2,915 |
| | (271 | ) |
Reinsurance recoverable on loss reserves | | 14,926 |
| | 11,423 |
| | (41,803 | ) | | 14,926 |
|
Reinsurance recoverable on paid losses | | (13,955 | ) | | 577 |
| | 170 |
| | (13,955 | ) |
Premium receivable | | (2,402 | ) | | (2,168 | ) | | 1,559 |
| | (2,402 | ) |
Deferred insurance policy acquisition costs | | 219 |
| | 34 |
| | (2,114 | ) | | 219 |
|
Profit commission receivable | | (976 | ) | | (11,202 | ) | | 32,331 |
| | (976 | ) |
Loss reserves | | (52,117 | ) | | (172,620 | ) | | 242,062 |
| | (52,117 | ) |
Unearned premiums | | (8,986 | ) | | 13,225 |
| | (37,071 | ) | | (8,986 | ) |
Return premium accrual | | (7,300 | ) | | (12,200 | ) | | (1,900 | ) | | (7,300 | ) |
Current income taxes | | (2,300 | ) | | (21,936 | ) | | 26,371 |
| | (2,300 | ) |
Other, net | | 4,328 |
| | 2,025 |
| | 2,054 |
| | 4,328 |
|
Net cash provided by operating activities | | 281,611 |
| | 262,593 |
| | 420,125 |
| | 281,611 |
|
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Purchases of investments | | (677,391 | ) | | (516,712 | ) | | (992,722 | ) | | (677,391 | ) |
Proceeds from sales of investments | | 183,620 |
| | 25,185 |
| | 476,639 |
| | 183,620 |
|
Proceeds from maturity of fixed income securities | | 327,818 |
| | 423,933 |
| | 469,559 |
| | 327,818 |
|
Net increase in payable for securities | | — |
| | 13,432 |
| |
Additions to property and equipment | | (3,280 | ) | | (8,256 | ) | | (942 | ) | | (3,280 | ) |
Net cash used in investing activities | | (169,233 | ) | | (62,418 | ) | | (47,466 | ) | | (169,233 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Repurchase of common stock | | (36,581 | ) | | (100,059 | ) | | (119,997 | ) | | (36,581 | ) |
Dividends paid | | | (41,426 | ) | | — |
|
Payment of withholding taxes related to share-based compensation net share settlement | | (5,652 | ) | | (8,073 | ) | | (8,899 | ) | | (5,652 | ) |
Net cash used in financing activities | | (42,233 | ) | | (108,132 | ) | | (170,322 | ) | | (42,233 | ) |
Net increase in cash and cash equivalents and restricted cash and cash equivalents | | 70,145 |
| | 92,043 |
| | 202,337 |
| | 70,145 |
|
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period | | 155,038 |
| | 99,851 |
| | 169,056 |
| | 155,038 |
|
Cash and cash equivalents and restricted cash and cash equivalents at end of period | | $ | 225,183 |
| | $ | 191,894 |
| | $ | 371,393 |
| | $ | 225,183 |
|
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q2 20192020 | 11
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 20192020
(Unaudited)
Note 1. Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”), is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans. MGIC Assurance Corporation (“MAC”) and MGIC Indemnity Corporation (“MIC”), insurance subsidiaries of MGIC, provide insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs.
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 20182019 included in our 20182019 Annual Report on Form 10-K. As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.
In the opinion of management, the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for the interim period maythree months ended June 30, 2020 are not benecessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
Substantially allIn 2019, the substantial majority of our insurance written since 2008NIW has been for loans purchased by the GSEs. The current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs include financial requirements, as well as business, quality control and certain transactional approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book of insurance in force, calculated from tables of factors with several risk dimensions and subject to a floor amount)dimensions). Based on our interpretationapplication of the PMIERs, as of June 30, 2019,2020, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.
Reclassifications
Certain reclassifications to 20182019 amounts have been made in the accompanying financial statements to conform to the 20192020 presentation.
Recent Developments
The COVID-19 pandemic had a material impact on our second quarter 2020 financial results. While uncertain, the future impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may also be material. The increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19 (including “shelter-in-place” restrictions), as well as COVID-19-related illnesses and deaths, negatively impacted our business. Among other things, the COVID-19 pandemic led to an increase in new defaults, which increased our capital requirements under PMIERs on those delinquent loans and increased our losses incurred. The magnitude of the future impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the resulting level of unemployment, and the impact of past and future government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by the GSEs (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce its transmission.
Subsequent events
We have considered subsequent events through the date of this filing. On July 25, 2019, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.06 per share payable on September 20, 2019, to shareholders of record at the close of business on August 30, 2019. On August 2, 2019, we entered into an agreement to settle a claims paying practices dispute for which we previously had recognized a probable loss. There was no additional loss recognized as a result of entering into the agreement, as the settlement amount is in line with our original estimate of the probable loss. The agreement remains subject to GSE approval.
Note 2. Significant Accounting Policies
Income taxesInvestments
Deferred income taxesEach quarter we perform reviews of our investments to assess declines in the fair value of available-for-sale securities. Effective January 1, 2020, we adopted Accounting Standards Board (FASB) ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related amendments, which created a new comprehensive credit loss standard, FASB Accounting Standards Codification (ASC) 326, Financial Instruments - Credit Losses. Upon adoption of ASC 326, any impairment losses on available-for-sale securities are providedrecorded as an allowance, subject to reversal, rather than as a reduction to amortized cost, as was required 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 finalprevious other-than-temporary impairment (OTTI) model. Our determination of tax audits or examinations, could materially affect our estimates and can be significant to our operating results. We evaluatewhether a decline below fair value requires an allowance does not consider the realizabilityduration of the deferred tax assets based ondecline as was considered under the weight of all available positive and negative evidence. Deferred tax assets are reduced by a valuation allowance if it is more likely thanprevious OTTI review. In accordance with the ASU, prior periods have not that all or some portion of the deferred tax assets will not be realized.
The recognition of a tax position is determined using a two-step approach. The first step applies a more-likely-than-not threshold for recognition and derecognition. The second step measures the tax position as the greatest amount of benefit that is cumulatively greater than 50% likely to be realized. When evaluating a tax position for recognition and measurement, we presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize interest accrued and penalties related to unrecognized tax benefits in our provision for income taxes.
Federal tax law permits mortgage guaranty insurance companies to deduct from taxable income, subject to certain limitations, the amounts added to contingency loss reserves that are recorded for regulatory purposes. The amounts we deduct must generally be included in taxable income in the tenth subsequent year. The deduction is allowed only to the extent that we purchase and hold U.S. government non-interest-bearing tax and loss bonds in an amount equal to the tax benefit attributable to the deduction. We account for these purchases as a payment of current federal income tax.been restated.
MGIC Investment Corporation - Q2 20192020 | 12
Reinsurance Recoverables
Each quarter, we assess the credit risk associated with our reinsurance recoverable. ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of a reinsurance recoverable. Upon adoption of ASC 326, our assessment included, at least quarterly, reviewing the credit ratings of individual reinsurers, investor reports for our Home Re Transactions, collateral held in trust accounts in which MGIC is the sole beneficiary, and aging of outstanding reinsurance recoverable balances.
Premium Receivable
ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of premium receivable. In determining if a credit loss allowance is required for premium receivable, consideration is given to the life of the premium receivable asset, areas of potential credit loss, and forward-looking predictive indicators.
Income Taxes
The CARES Act provides financial relief to individuals and businesses in the form of loans, grants, and tax changes, among other types of assistance. The tax changes in the CARES Act do not materially impact our financial results.
Recent accounting and reporting developments
Accounting standards effective in 2019,2020, or early adopted, and relevant to our financial statements
Accounting Standard Update
Measurement of Credit Losses on Financial Instruments: ASU 2016-13
Effective January 1, 2020, we adopted ASC 326, Financial Instruments - Credit Losses (“ASU”CECL”) 2016-02 - Leases
In February 2016,. This new standard replaced the Financial Accounting Standards Board (“FASB”) amendedincurred loss impairment methodology with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under CECL, allowances are established by incorporating the forecast of future economic conditions into our loss estimate unless such forecast is not reasonable and supportable, in which case we revert to historical loss experience. Application of the CECL model impacts our reinsurance recoverables and premium receivable. ASC 326 also replaced the OTTI model with an impairment allowance model, subject to reversal, for available-for-sale investments, which are measured at fair value. Our mortgage insurance policies are outside the scope of ASC 326. The new guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore requires significant judgment in application. Applying ASC 326, we have determined that an allowance for credit losses related to our premium receivables, reinsurance recoverables, or available-for-sale securities was not necessary as of June 30, 2020. We continue to apply the previous leasing standardguidance to 2019 and created ASC 842, Leases. ASC 842prior periods.
Changes to the Disclosure Requirements for Fair Value Measurement: ASU 2018-13
Effective January 1, 2020, we adopted FASB guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement
to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The updated guidance requires a lessee to recognize a right-of-use assetdisclosure of changes in unrealized gains and lease liability for substantially all leases. Effectivelosses for the quarter ended March 31, 2019, we adoptedperiod included in other comprehensive income for recurring Level 3 fair value measurements held at the updated guidance for leases and also elected to apply all practical expedients applicable to us in the updated guidance for transition of leases in effect at adoption. The adoptionend of the updated guidance resulted inreporting period; and the recognitionrange and weighted average of an immaterial right-of-use asset as part of other assets and a lease liability as part of other liabilities in the consolidated balance sheet.significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of the updated guidance did not have a material effect on our consolidated results of operations or liquidity. Our minimum future operating lease payments as of June 30, 2019 totaled $2.3 million.
Prospective Accounting Standards
Table 2.1 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.
|
| | | | |
Standard / Interpretation |
Table | 2.1 | | |
| | | |
Amended Standards | Effective date |
ASC 326321, 323, 815 | Financial Instruments - Credit LossesInvestments | |
| • | ASU 2016-132020-01 - Measurement of Credit Losses on Financial InstrumentsInvestments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) | January 1, 20202021 |
ASC 820740 | Fair Value MeasurementIncome Taxes | |
| • | ASU 2018-132019-12 - Changes toSimplifying the Disclosure RequirementsAccounting for Fair Value MeasurementsIncome Taxes | January 1, 20202021 |
ASC 715 | Compensation - Retirement Benefits | |
| • | ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans | January 1, 2021 |
MeasurementClarification of Credit Losses on Financial InstrumentsAccounting for Equity Securities: ASU 2020-01
In June 2016,January 2020, the FASB issued updated guidance that requires immediate recognitionwhich clarifies certain interactions of estimated credit losses expected to occur overaccounting for equity securities under Topic 321, under the remaining lifeequity method of many financial instruments. Entities will be required to incorporate their forecastaccounting in Topic 323, and accounting of future economic conditions into their loss estimate unless such forecast is not reasonablecertain forward contracts and supportable,purchased options in which caseTopic 815. The amendment clarifies the entity will revert to historical loss experience. The allowance for current expected credit losses (“CECL”) generally reducesconsideration of observable transactions before applying or discounting the amortized cost basisequity method of the financial instrument to the amount an entity expects to collect, however, credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods
within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. In May 2019, the FASB amended this guidance to provide entities with an option to irrevocably elect the fair value option for eligible instruments in order to provide targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. The effective dates remain the same. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements and disclosures, but do not expect it to have a material impact.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued updated guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The updated guidance clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurements as of the reporting date. Further, the updated guidance will require disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. An entity is permitted to early adopt any guidance that removed or modified disclosures upon issuance of this update and to delay adoption of the additional disclosures until its effective date.accounting. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
Simplifying the Accounting for Income Taxes: ASU 2019-12
In December 2019, the FASB issued guidance which simplifies Accounting for Income Taxes (Topic 740). The ASU intends to reduce complexity through clarification and amendments of existing guidance. The updated guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim periods for which financial statements have not been issued. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact.
MGIC Investment Corporation - Q2 2020 | 13
Changes to the Disclosure Requirements for Defined Benefit PlansPlans: ASU 2018-14
In August 2018, the FASB issued amendments to modify the disclosure requirements for defined benefit plans. The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the coming year and the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added disclosures for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation for the period. The updated guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. An entity should apply the amendments on a retrospective basis to all periods presented. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
MGIC Investment Corporation - Q2 2019 | 13
Note 3. Debt
Debt obligations
The par valueaggregate carrying values of our long-term debt obligations and their aggregate carryingpar values, if different, as of June 30, 20192020 and December 31, 20182019 are presented in table 3.1 below.
| | Long-term debt obligations | Table | 3.1 | | | | | 3.1 | | | | |
(In millions) | (In millions) | | June 30, 2019 | | December 31, 2018 | (In millions) | | June 30, 2020 | | December 31, 2019 |
FHLB Advance - 1.91%, due February 2023 | FHLB Advance - 1.91%, due February 2023 | | $ | 155.0 |
| | $ | 155.0 |
| FHLB Advance - 1.91%, due February 2023 | | $ | 155.0 |
| | $ | 155.0 |
|
5.75% Notes, due August 2023 (par value: $425 million) | 5.75% Notes, due August 2023 (par value: $425 million) | | 420.3 |
| | 419.7 |
| 5.75% Notes, due August 2023 (par value: $425 million) | | 421.4 |
| | 420.8 |
|
9% Debentures, due April 2063 (1) | 9% Debentures, due April 2063 (1) | | 256.9 |
| | 256.9 |
| 9% Debentures, due April 2063 (1) | | 256.9 |
| | 256.9 |
|
Long-term debt, carrying value | Long-term debt, carrying value | | $ | 832.2 |
| | $ | 831.6 |
| Long-term debt, carrying value | | $ | 833.3 |
| | $ | 832.7 |
|
| |
(1) | Convertible at any time prior to maturity at the holder’s option, at an initiala conversion rate, which is subject to adjustment, of 74.074174.4718 shares per $1,000 principal amount, representing an initiala conversion price of approximately $13.5013.43 per share. In the event of a cash dividend to all or substantially all holders of our common stock, the conversion rate shall be increased by multiplying the conversion rate in effect immediately prior to the ex-dividend date for such distribution by a fraction, (a) the numerator shall be the current market price of our common stock on the ex-dividend date; and (b) the denominator shall be the current market price of our common stock on the ex-dividend date less the amount by which the dividend per share exceeds $0.025. No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least one percent in such rate; provided that any such adjustments that are not required to be made shall be carried forward and such carry-forward adjustments shall be made, regardless of whether the aggregate adjustment is less than one percent at the end of each fiscal year, or in certain other circumstances. The conversion price per share is $1,000 divided by the conversion rate, and will change upon a change in the conversion rate. If a holder elects to convert its debentures, deferred interest owed on the 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. In lieu of issuing shares of common stock upon conversion of the debentures, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion. |
The 5.75% Senior Notes (“5.75% Notes”), and 9% Convertible Junior Subordinated Debentures (“9% Debentures”) are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.
In May 2019, we terminated our $175 million unsecured revolving credit facility. At the time of termination there were no amounts drawn on the credit facility. The unused portion of our revolving credit facility was subject to recurring commitment fees, which are reflected in interest payments.
Interest payments
Interest payments for the six months ended June 30, 2020 and 2019 were $31.3 million and 2018 were $25.5 million, and $25.6 million, respectively.
See Note 7 “Debt” in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information pertaining to our debt obligations. As of June 30, 2020 we are in compliance with all of our debt covenants.
Note 4. Reinsurance
The reinsurance agreements to which we are a party, excluding captive agreements (which were immaterial), are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.
| | Reinsurance | Reinsurance | Reinsurance | | | | |
Table | 4.1 | | | | | | | | | 4.1 | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Premiums earned: | Premiums earned: | | | | | | | | | Premiums earned: | | | | | | | | |
Direct | Direct | | $ | 287,183 |
| | $ | 268,236 |
| | $ | 566,796 |
| | $ | 533,487 |
| Direct | | $ | 305,921 |
| | $ | 287,183 |
| | $ | 595,789 |
| | $ | 566,796 |
|
Assumed | Assumed | | 1,015 |
| | 106 |
| | 1,887 |
| | 227 |
| Assumed | | 3,381 |
| | 1,015 |
| | 5,990 |
| | 1,887 |
|
Ceded | | (41,096 | ) | | (21,378 | ) | | (71,820 | ) | | (54,643 | ) | |
Ceded (1) | | Ceded (1) | | (65,740 | ) | | (41,096 | ) | | (97,316 | ) | | (71,820 | ) |
Net premiums earned | Net premiums earned | | $ | 247,102 |
| | $ | 246,964 |
| | $ | 496,863 |
| | $ | 479,071 |
| Net premiums earned | | $ | 243,562 |
| | $ | 247,102 |
| | $ | 504,463 |
| | $ | 496,863 |
|
| | | | | | | | | | | | | | | | | | |
Losses incurred: | Losses incurred: | | | | | | | | | Losses incurred: | | | | | | | | |
Direct | Direct | | $ | 25,276 |
| | $ | (16,778 | ) | | $ | 66,080 |
| | $ | 14,723 |
| Direct | | $ | 256,224 |
| | $ | 25,276 |
| | $ | 322,786 |
| | $ | 66,080 |
|
Assumed | Assumed | | (9 | ) | | (100 | ) | | (76 | ) | | (10 | ) | Assumed | | 133 |
| | (9 | ) | | 299 |
| | (76 | ) |
Ceded | Ceded | | (3,431 | ) | | 3,423 |
| | (5,105 | ) | | (4,318 | ) | Ceded | | (38,983 | ) | | (3,431 | ) | | (44,755 | ) | | (5,105 | ) |
Losses incurred, net | Losses incurred, net | | $ | 21,836 |
| | $ | (13,455 | ) | | $ | 60,899 |
| | $ | 10,395 |
| Losses incurred, net | | $ | 217,374 |
| | $ | 21,836 |
| | $ | 278,330 |
| | $ | 60,899 |
|
| |
(1) | Ceded premiums earned are net of profit commission. The profit commission varies directly and inversely with the level of ceded losses on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than we experienced in the first six months of 2020. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in more benefit from ceded losses and a lower profit commission. |
Quota share reinsurance
We utilize quota share reinsurance transactions (“QSR Transactions”) to manage our exposure to losses resulting from our mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs.Each of the reinsurers under our QSR Transactionsquota share reinsurance (“QSR”) agreements described below has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor’sPoor's Rating Services, A.M. Best, Moody's, or both.a combination of the three.
20192020 QSR Transaction.Coverage. We entered into a QSR transactionagreements with a group of unaffiliated reinsurers with an effective date of January 1, 20192020 (“20192020 QSR Transaction”), which provides coverage on eligible new insurance writtenNIW in 2019.2020. Under the 20192020 QSR Transaction, we will cede losses and premiums on or after the effective date through December 31, 2030,2031, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 or2022 and bi-annually thereafter, for a fee, or under specified scenarios for no0 fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.
The structure of the 2020 QSR Transaction is a 30% quota share, with a one-time option, elected by us, to reduce the cede rate to either 25% or 20% effective July 1, 2021, or bi-annually thereafter, for a fee, for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2020 QSR Transaction we will receive an annual profit commission
MGIC Investment Corporation - Q2 2020 | 14
provided the annual loss ratio on the loans covered under the transaction remains below
62%.
2021 QSR Coverage.In addition, one of the 2020 agreements also provides coverage on eligible NIW in 2021 ("2021 QSR Transaction").
Under the 2021 QSR Transaction, we will cede losses and premiums on or after the effective date through December 31, 2032 for 2021 NIW, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2023, and bi-annually thereafter, for a fee, or under specified scenarios for 0 fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.
The structure of the 20192021 QSR Transaction is a 30%17.5% quota share on 2021 NIW, with a one-timean option, elected by us, to reduce the cede rate to either 25%14.5% or 20%12% effective July 1, 2022 or semiannually thereafter. Generally, under the 2021 QSR Transaction, we will receive a profit commission provided the accident year loss ratio on the loans covered under the transaction remains below 62%.
Credit Union Quota Share Program
We entered into a Credit Union QSR Transaction with an unaffiliated reinsurer which covers NIW on loans originated by credit unions from April 1, 2020 through December 31, 2025 . Eligible credit union business written before 2020 was covered by our 2019 and prior QSR Transactions. Under the Credit Union QSR Transaction, we will cede losses and premiums on the covered NIW through December 31, 2039. Early termination of the agreement can be elected by us at any quarter-end if we will receive less than 80% of the full credit amount under the PMIERs full financial statement credit or bi-annually thereafter,full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.
The structure of the Credit Union QSR Transaction is a fee, for all policies covered,65% quota share, with a 20% ceding commission as well as a profit commission. Generally, under the 2019 QSR Transaction, we will receive a profit commission provided that the accident year loss ratio on the loans covered under the agreementtransaction remains below 62%50%.
MGIC Investment Corporation - Q2 2019 | 14
20182019 and prior QSR Transactions. See Note 9 of Notes“Reinsurance” to Consolidated Financial Statements in our 20182019 Form 10-K for more information about our QSR Transactions entered into prior to 2019.2020.
2015Our QSR Transaction.We terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and entered into an amended quota share reinsurance agreement with certain participants from the existing reinsurance panel that effectively reduces the quota share cede rate from 30% to 15% on the remaining eligible insurance. During the second quarter of 2019, we incurred a termination fee of $6.8 million, which was paid in July to participants of the reinsurance panel that are not participating in the amended 2015 QSR Transaction. Under the amended 2015 QSR Transaction we cede losses and premiums through December 31, 2031, at which time the agreement expires. Early termination of the amended agreement can be elected by us effective June 30, 2021 for no fee, or under specified scenarios, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period. Generally, under our amended 2015 QSR Transaction, we will receive a profit commission provided that theTransactions typically have annual loss ratio on the covered loans remains below 68%caps of 300% and lifetime loss ratio caps of 200%.
MGIC Investment Corporation - Q2 2020 | 15
Table 4.2 below presentsprovides a summary of our quota share reinsurance agreements, excluding captive agreements, for the three and six months ended June 30, 20192020 and 2018.2019.
| | Quota Share Reinsurance | Quota Share Reinsurance | Quota Share Reinsurance | | | | |
Table | 4.2 | | | | | | | | | 4.2 | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Ceded premiums written and earned, net of profit commission (1) | Ceded premiums written and earned, net of profit commission (1) | | $ | 36,525 |
| | $ | 21,432 |
| | $ | 64,689 |
| | $ | 54,468 |
| Ceded premiums written and earned, net of profit commission (1) | | $ | 61,357 |
| | $ | 36,525 |
| | $ | 88,203 |
| | $ | 64,689 |
|
Ceded losses incurred | Ceded losses incurred | | 3,440 |
| | (3,735 | ) | | 5,116 |
| | 4,053 |
| Ceded losses incurred | | 38,982 |
| | 3,440 |
| | 44,786 |
| | 5,116 |
|
Ceding commissions (2) | Ceding commissions (2) | | 13,356 |
| | 12,640 |
| | 26,765 |
| | 25,285 |
| Ceding commissions (2) | | 12,025 |
| | 13,356 |
| | 23,390 |
| | 26,765 |
|
Profit commission(3) | Profit commission(3) | | 37,021 |
| | 41,769 |
| | 75,902 |
| | 71,958 |
| Profit commission(3) | | (1,231 | ) | | 37,021 |
| | 28,748 |
| | 75,902 |
|
| |
(1) | PremiumsUnder our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements. The three and six months ended June 30, 2019 include the $6.8a $6.8 million termination fee discussed in “2015related to our 2015 QSR Transaction” above. Transaction. |
| |
(2) | Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations. |
| |
(3) | The profit commission varies directly and inversely with the level of ceded losses on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than we experienced in the first six months of 2020. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in a lower profit commission and more benefit from ceded losses. |
Under the terms of theour QSR Transactions, cededcurrently in effect, reinsurance premiums, ceding commission and profit commission 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”Other liabilities on the consolidated balance sheets.
The reinsurance recoverable on loss reserves related to our QSR Transactions was $18.3$63.4 million as of June 30, 20192020 and $33.2$21.6 million as of December 31, 2018.2019. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the amount of which areis based on the funding requirements of PMIERs that address ceded risk.PMIERs. An allowance for credit losses was not required for 2020.
Excess of loss reinsurance
Home Re.We have aggregate excess of loss reinsurance agreements (“Home Re Transactions”) with unaffiliated special purpose insurers domiciled in Bermuda (“Home Re Transactions”Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses, and a Home Re special purpose insurerentity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses in excess of the outstanding reinsurance coverage amount. The aggregate excess of loss reinsurance coverage decreases over a ten-year period, subject to certain conditions, as the underlying covered mortgages amortize principal isor are repaid, or mortgage insurance losses are paid. For each Home Re Transaction, a “Trigger Event” has occurred because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded 4% of the total reinsured principal balance of loans under each transaction. While the “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments.
MGIC has rights to terminate the Home Re Transactions.Transactions under certain circumstances. The Home Re special purpose insurersentities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. The notesILNs each have ten-year legal maturities and are non-recourse to any assets of MGIC or affiliates. The proceeds of the notes,ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.
Table 4.3 provides a summary of our excess of loss reinsurance agreements as of June 30, 2020 and December 31, 2019.
| | Home Re entities | |
Excess of Loss Reinsurance | | Excess of Loss Reinsurance | | |
Table | 4.3 | | | | | 4.3 | | | | |
(In thousands) | (In thousands) | | | | | (In thousands) | | June 30, 2020 | | December 31, 2019 |
Home Re entity (Issue Date) | | Policy Inforce Dates | | Termination Option Date (1) | | Remaining First Layer Retention | | Remaining Excess of Loss Reinsurance Coverages | |
Home Re Entity (Issue Date) | | Home Re Entity (Issue Date) | | Policy Inforce Dates | | Termination Option Date (1) | | Remaining First Layer Retention | Remaining Excess of Loss Reinsurance Coverages | | Remaining First Layer Retention | Remaining Excess of Loss Reinsurance Coverages |
Home Re 2018-1 Ltd. (Oct. - 2018) | Home Re 2018-1 Ltd. (Oct. - 2018) | | July 1, 2016 - December 31, 2017 | | October 25, 2025 | | $ | 168,691 |
| | $ | 318,636 |
| Home Re 2018-1 Ltd. (Oct. - 2018) | | July 1, 2016 - December 31, 2017 | | October 25, 2025 | | $ | 166,573 |
| $ | 218,343 |
| | $ | 167,779 |
| $ | 260,957 |
|
Home Re 2019-1 Ltd. (May - 2019) | Home Re 2019-1 Ltd. (May - 2019) | | January 1, 2018 - March 31, 2019 | | May 25, 2026 | | 185,730 |
| | 315,739 |
| Home Re 2019-1 Ltd. (May - 2019) | | January 1, 2018 - March 31, 2019 | | May 25, 2026 | | 185,162 |
| 208,146 |
| | 185,636 |
| 271,021 |
|
Total | Total | | $ | 354,421 |
| | $ | 634,375 |
| Total | | $ | 351,735 |
| $ | 426,489 |
| | $ | 353,415 |
| $ | 531,978 |
|
| |
(1) | We have the right to terminate the excess-of-loss reinsurance agreements under certain circumstances and on any payment date on or after the respective termination option date. |
MGIC Investment Corporation - Q2 20192020 | 1516
The reinsurance premiums ceded to each Home Re special purpose insurerEntity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable toby the Home Re Entity on the notesunpaid portion of the ILNs it issued to raise funds to collateralize its reinsurance obligations to us, and the investment income collected on the collateral assets. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changechanges in one-month LIBOR, (or the fallback reference rate, as applicable) and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As the reinsurance premium will vary based on changes in these rates,a result, we concluded that each reinsurance agreement contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at June 30, 2019,2020, were not material to our consolidated balance sheet, and the change in fair valuesvalue during the three and six months ended June 30, 2019 were2020 was not material to our consolidated statements of operations. Total ceded premiums were $4.4 million and $9.1 million for the three and six months ended June 30, 2020, respectively and $4.5 million and $7.0 million for the three and six months ended June 30, 2019, respectively.
At the time the Home Re Transactions were entered into, we assessed whetherconcluded that each Home Re entity wasEntity 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. We concluded that each Home Re entity is a VIE. However, givenGiven that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re entity’sEntity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re entity,Entity, consolidation of eitherneither Home Re entityEntity 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 June 30, 2019,2020, and December 31, 2018,2019, we did not have material exposure to the VIEs as we have no investment in the VIEs and had no reinsurance claim payments due from either VIE under our reinsurance agreements. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance agreements. The VIE assets are deposited in reinsurance trusts for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trusts is to provide security to MGIC for the obligations of the VIEs under the reinsurance agreements. The trustee of the reinsurance trusts, a recognized provider of corporate trust services, has established segregated accounts within the reinsurance trusts for the benefit of MGIC, pursuant to the trust agreements. The trust agreements are governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trusts failed to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to our losses ceded under the reinsurance agreements and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements
may have on our consolidated financial statements. As a result, we are unable to quantify our maximum exposure to loss related
to our involvement with the VIEs. MGIC has certain termination rights under the reinsurance agreements should its claims not be paid. We consider our exposure to loss from our reinsurance agreements with the VIEs to be remote.
The followingTable 4.4 presents the total assets of the Home Re entitiesEntities as of June 30, 20192020 and December 31, 2018.2019.
| | Home Re total assets | Table | 4.4 | | | 4.4 | | |
| | | |
(In thousands) | (In thousands) | | | (In thousands) | | |
Home Re entity (Issue date) | | Total VIE Assets | |
June 30, 2019 | | | |
Home Re Entity (Issue date) | | Home Re Entity (Issue date) | | Total VIE Assets |
June 30, 2020 | | June 30, 2020 | | |
Home Re 2018-01 Ltd. (Oct - 2018) | Home Re 2018-01 Ltd. (Oct - 2018) | | $ | 318,636 |
| Home Re 2018-01 Ltd. (Oct - 2018) | | $ | 218,343 |
|
Home Re 2019-01 Ltd. (May - 2019) | Home Re 2019-01 Ltd. (May - 2019) | | $ | 315,739 |
| Home Re 2019-01 Ltd. (May - 2019) | | 208,146 |
|
| | | | | | |
December 31, 2018 | | | |
December 31, 2019 | | December 31, 2019 | | |
Home Re 2018-01 Ltd. (Oct - 2018) | Home Re 2018-01 Ltd. (Oct - 2018) | | $ | 318,636 |
| Home Re 2018-01 Ltd. (Oct - 2018) | | $ | 269,451 |
|
Home Re 2019-01 Ltd. (May - 2019) | | Home Re 2019-01 Ltd. (May - 2019) | | 283,150 |
|
The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaa-mf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.
The assets of the Home Re special purpose insurersEntities provide capital credit under the PMIERs financial requirements (see Note 1 - “Nature of Business and Basis of Presentation”). A decline in the assets available to pay claims would reduceand principal repayments reduces the capital credit available to MGIC.
Note 5. Litigation and Contingencies
Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. We refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, our insurance policies generally provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call such reduction of claims “curtailments.” In recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In 2018, and the first half of 2019 and 2020, curtailments reduced our average claim paid by approximately 5.8%4.7% and 4.7%4.0%, respectively.
Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission,
MGIC Investment Corporation - Q2 2020 | 17
curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
When the insured disputes our right to rescind coverage or curtail claims, we generally engage in discussions in an attempt to settle the dispute. If we are unable to reach a settlement, the outcome of a dispute ultimately may be determined by legal proceedings.
MGIC Investment Corporation - Q2 2019 | 16
Under ASC 450-20, until a liabilityloss 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. WhereWhen we have determineddetermine that a loss is probable and can be reasonably estimated, we have recordedrecord our best estimate of our probable loss including recordingas a probable losscomponent of $23.5 million in the first quarter of 2019. Untilour IBNR and other reserves. In those cases, until settlement negotiations or legal proceedings for which we have recorded a probable loss are concluded (including the receipt of any necessary GSE approvals), it is reasonably possible that we will record an additional loss. In addition to matters for which we have recorded a probable loss, weWe are currently involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when all of these matters are resolved we will not prevail inon all cases,matters, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $289.0 million more than the amount of probable loss we have recorded.$39 million. This estimate of maximum exposure is based upon currently available information andinformation; is subject to significant judgment, numerous assumptions and known and unknown uncertainties, anduncertainties; will include an amount for matters for which we have recorded a probable loss until such matters are concluded. We do not consider settlements concluded until any required GSE approval for such settlements is obtained. Theconcluded; will include
different matters underlying the estimate of maximum exposure will change from time to time. This estimate of our maximum exposuretime; and does not include interest or consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. While these proceedings in the aggregate have not resulted in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse effect on us. In addition, various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable
laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.
Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2018 and the first six months of 2019 was immaterial to our consolidated financial statements.
In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or consolidated results of operations.
Note 6. 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. For purposes of calculating basic EPS, vested restricted stock and restricted stock units (“RSUs”) are considered outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. The determination of whether components are dilutive is calculated independently for each period. 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 unvested RSUs result in the issuance of common stock. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our 9% Debentures result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive.
For the quarter ended June 30, 2020, common stock equivalents of 19.1 million were not included because they were anti-dilutive.
MGIC Investment Corporation - Q2 2019 | 17
Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
| | Earnings per share | Earnings per share | Earnings per share | | | | |
Table | 6.1 | | | | | | | | | 6.1 | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share data) | (In thousands, except per share data) | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 |
Basic earnings per share: | Basic earnings per share: | | | | | | | | | Basic earnings per share: | | | | | | | | |
Net income | Net income | | $ | 167,778 |
| | $ | 186,814 |
| | $ | 319,719 |
| | $ | 330,451 |
| Net income | | $ | 14,047 |
| | $ | 167,778 |
| | $ | 163,852 |
| | $ | 319,719 |
|
Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | | 355,734 |
| | 368,578 |
| | 355,694 |
| | 369,736 |
| Weighted average common shares outstanding - basic | | 338,593 |
| | 355,734 |
| | 341,323 |
| | 355,694 |
|
Basic earnings per share | Basic earnings per share | | $ | 0.47 |
| | $ | 0.51 |
| | $ | 0.90 |
| | $ | 0.89 |
| Basic earnings per share | | $ | 0.04 |
| | $ | 0.47 |
| | $ | 0.48 |
| | $ | 0.90 |
|
| | | | | | | | | | | | | | | | | | |
Diluted earnings per share: | Diluted earnings per share: | | | | | | | | Diluted earnings per share: | | | | | | | |
Net income | Net income | | $ | 167,778 |
| | $ | 186,814 |
| | $ | 319,719 |
| | $ | 330,451 |
| Net income | | $ | 14,047 |
| | $ | 167,778 |
| | $ | 163,852 |
| | $ | 319,719 |
|
Interest expense, net of tax (1): | Interest expense, net of tax (1): | | | | | | | | | Interest expense, net of tax (1): | | | | | | | | |
9% Debentures | 9% Debentures | | 4,566 |
| | 4,566 |
| | 9,132 |
| | 9,132 |
| 9% Debentures | | — |
| | 4,566 |
| | 9,132 |
| | 9,132 |
|
Diluted income available to common shareholders | Diluted income available to common shareholders | | $ | 172,344 |
| | $ | 191,380 |
| | $ | 328,851 |
| | $ | 339,583 |
| Diluted income available to common shareholders | | $ | 14,047 |
| | $ | 172,344 |
| | $ | 172,984 |
| | $ | 328,851 |
|
| | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | | 355,734 |
| | 368,578 |
| | 355,694 |
| | 369,736 |
| Weighted average common shares outstanding - basic | | 338,593 |
| | 355,734 |
| | 341,323 |
| | 355,694 |
|
Effect of dilutive securities: | Effect of dilutive securities: | | | | | | | | | Effect of dilutive securities: | | | | | | | | |
Unvested RSUs | Unvested RSUs | | 1,841 |
| | 1,275 |
| | 1,913 |
| | 1,472 |
| Unvested RSUs | | 1,068 |
| | 1,841 |
| | 1,551 |
| | 1,913 |
|
9% Debentures | 9% Debentures | | 19,028 |
| | 19,028 |
| | 19,028 |
| | 19,028 |
| 9% Debentures | | — |
| | 19,028 |
| | 19,129 |
| | 19,028 |
|
Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | | 376,603 |
| | 388,881 |
| | 376,635 |
| | 390,236 |
| Weighted average common shares outstanding - diluted | | 339,661 |
| | 376,603 |
| | 362,003 |
| | 376,635 |
|
Diluted earnings per share | Diluted earnings per share | | $ | 0.46 |
| | $ | 0.49 |
| | $ | 0.87 |
| | $ | 0.87 |
| Diluted earnings per share | | $ | 0.04 |
| | $ | 0.46 |
| | $ | 0.48 |
| | $ | 0.87 |
|
| |
(1) | The periods ended June 30, 20192020 and 20182019 were tax-effected at a rate of 21%. |
MGIC Investment Corporation - Q2 2020 | 18
Note 7. Investments
Fixed income securities
The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at June 30, 20192020 and December 31, 20182019 are shown in tables 7.1a and 7.1b below.
|
| | | | | | | | | | | | | | | | | |
Details of fixed income securities by category as of June 30, 2019 |
Table | 7.1a | | | | | | | | |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) (1) | | Fair Value |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 194,222 |
| | $ | 1,474 |
| | $ | (127 | ) | | $ | 195,569 |
|
Obligations of U.S. states and political subdivisions | | 1,566,166 |
| | 88,379 |
| | (648 | ) | | 1,653,897 |
|
Corporate debt securities | | 2,570,289 |
| | 61,459 |
| | (3,134 | ) | | 2,628,614 |
|
Asset backed securities (“ABS”) | | 215,016 |
| | 2,787 |
| | (102 | ) | | 217,701 |
|
Residential mortgage backed securities (“RMBS”) | | 213,024 |
| | 183 |
| | (4,710 | ) | | 208,497 |
|
Commercial mortgage backed securities (“CMBS”) | | 268,189 |
| | 4,450 |
| | (750 | ) | | 271,889 |
|
Collateralized loan obligations (“CLO”) | | 330,530 |
| | 55 |
| | (1,929 | ) | | 328,656 |
|
Total fixed income securities | | $ | 5,357,436 |
| | $ | 158,787 |
| | $ | (11,400 | ) | | $ | 5,504,823 |
|
MGIC Investment Corporation - Q2 2019 | 18
|
| | | | | | | | | | | | | | | | | |
Details of fixed income securities by category as of June 30, 2020 |
Table | 7.1a | | | | | | | | |
(In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) (1) | | Fair Value |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 346,881 |
| | $ | 1,777 |
| | $ | (41 | ) | | $ | 348,617 |
|
Obligations of U.S. states and political subdivisions | | 1,666,017 |
| | 124,251 |
| | (1,291 | ) | | 1,788,977 |
|
Corporate debt securities | | 2,514,526 |
| | 137,465 |
| | (5,160 | ) | | 2,646,831 |
|
Asset backed securities (“ABS”) | | 198,238 |
| | 4,034 |
| | (2,716 | ) | | 199,556 |
|
Residential mortgage backed securities (“RMBS”) | | 293,790 |
| | 6,055 |
| | (353 | ) | | 299,492 |
|
Commercial mortgage backed securities (“CMBS”) | | 264,857 |
| | 10,453 |
| | (1,411 | ) | | 273,899 |
|
Collateralized loan obligations (“CLOs”) | | 313,245 |
| | — |
| | (8,355 | ) | | 304,890 |
|
Total fixed income securities | | $ | 5,597,554 |
| | $ | 284,035 |
| | $ | (19,327 | ) | | $ | 5,862,262 |
|
| | Details of fixed income securities by category as of December 31, 2018 | |
Details of fixed income securities by category as of December 31, 2019 | | Details of fixed income securities by category as of December 31, 2019 |
Table | 7.1b | | | | | | | | | 7.1b | | | | | | | | |
(In thousands) | (In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) (1) | | Fair Value | (In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) (2) | | Fair Value |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 167,655 |
| | $ | 597 |
| | $ | (1,076 | ) | | $ | 167,176 |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 195,176 |
| | $ | 1,237 |
| | $ | (210 | ) | | $ | 196,203 |
|
Obligations of U.S. states and political subdivisions | Obligations of U.S. states and political subdivisions | | 1,701,826 |
| | 29,259 |
| | (10,985 | ) | | 1,720,100 |
| Obligations of U.S. states and political subdivisions | | 1,555,394 |
| | 99,328 |
| | (857 | ) | | 1,653,865 |
|
Corporate debt securities | Corporate debt securities | | 2,439,173 |
| | 2,103 |
| | (40,514 | ) | | 2,400,762 |
| Corporate debt securities | | 2,711,910 |
| | 76,220 |
| | (3,008 | ) | | 2,785,122 |
|
ABS | ABS | | 111,953 |
| | 226 |
| | (146 | ) | | 112,033 |
| ABS | | 227,376 |
| | 2,466 |
| | (178 | ) | | 229,664 |
|
RMBS | RMBS | | 189,238 |
| | 32 |
| | (10,309 | ) | | 178,961 |
| RMBS | | 271,384 |
| | 429 |
| | (3,227 | ) | | 268,586 |
|
CMBS | CMBS | | 276,352 |
| | 888 |
| | (9,580 | ) | | 267,660 |
| CMBS | | 274,234 |
| | 5,531 |
| | (779 | ) | | 278,986 |
|
CLOs | CLOs | | 310,587 |
| | 2 |
| | (5,294 | ) | | 305,295 |
| CLOs | | 327,076 |
| | 33 |
| | (1,643 | ) | | 325,466 |
|
Total fixed income securities | Total fixed income securities | | $ | 5,196,784 |
| | $ | 33,107 |
| | $ | (77,904 | ) | | $ | 5,151,987 |
| Total fixed income securities | | $ | 5,562,550 |
| | $ | 185,244 |
| | $ | (9,902 | ) | | $ | 5,737,892 |
|
| |
(1) | At June 30, 20192020 andthere was no credit loss allowance established on available-for-sale securities. |
| |
(2) | At December 31, 20182019, there werewas no other-than-temporary impairment losses recorded in other comprehensive income. |
We had $13.7$14.2 million and $13.5$13.9 million of investments at fair value on deposit with various states as of June 30, 20192020 and December 31, 2018,2019, respectively, due to regulatory requirements of those state insurance departments.
MGIC Investment Corporation - Q2 2020 | 19
The amortized cost and fair values of fixed income securities at June 30, 2019,2020, by contractual maturity, are shown in table 7.2 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 ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.
| | Fixed income securities maturity schedule | Table | 7.2 | | | | | 7.2 | | | | |
| | | June 30, 2019 | | | June 30, 2020 |
(In thousands) | (In thousands) | | Amortized cost | | Fair Value | (In thousands) | | Amortized cost | | Fair Value |
Due in one year or less | Due in one year or less | | $ | 367,161 |
| | $ | 367,474 |
| Due in one year or less | | $ | 465,716 |
| | $ | 469,024 |
|
Due after one year through five years | Due after one year through five years | | 1,900,096 |
| | 1,930,664 |
| Due after one year through five years | | 1,854,619 |
| | 1,935,032 |
|
Due after five years through ten years | Due after five years through ten years | | 930,951 |
| | 976,031 |
| Due after five years through ten years | | 1,009,452 |
| | 1,096,842 |
|
Due after ten years | Due after ten years | | 1,132,469 |
| | 1,203,911 |
| Due after ten years | | 1,197,637 |
| | 1,283,527 |
|
| | | 4,330,677 |
| | 4,478,080 |
| | | 4,527,424 |
| | 4,784,425 |
|
| | | | | | | | | | |
ABS | ABS | | 215,016 |
| | 217,701 |
| ABS | | 198,238 |
| | 199,556 |
|
RMBS | RMBS | | 213,024 |
| | 208,497 |
| RMBS | | 293,790 |
| | 299,492 |
|
CMBS | CMBS | | 268,189 |
| | 271,889 |
| CMBS | | 264,857 |
| | 273,899 |
|
CLOs | CLOs | | 330,530 |
| | 328,656 |
| CLOs | | 313,245 |
| | 304,890 |
|
Total as of June 30, 2019 | | $ | 5,357,436 |
| | $ | 5,504,823 |
| |
Total as of June 30, 2020 | | Total as of June 30, 2020 | | $ | 5,597,554 |
| | $ | 5,862,262 |
|
Proceeds from sales of fixed income securities classified as available-for-sale were $183.6$448.5 million and $25.1$183.6 million during the six months ended June 30, 2020 and 2019, respectively. Gross gains of $7.3 million and 2018,$12.4 million and gross losses of $3.7 million and $5.0 million were realized during the three and six months ended June 30, 2020, respectively. We did not record realized losses for the three months ended June 30,2020 and recorded realized losses of $0.3 million for the six months ended June 30, 2020 related to our intent to sell certain securities. Gross gains of $1.2 million and $2.0 million and gross losses of $1.1 million and $2.3 million were realized on those sales during the three and six months ended June 30, 2019, respectively. Gross gainsrespectively, and we recorded OTTI losses of $0.1 million and $0.2 million and gross losses of $0.6 million and $1.0 million were realized on those sales during the three and six months ended June 30, 2018, respectively. Duringfor the six months ended June 30, 2019, we recorded other-than-temporary impairment (“OTTI”)2019. Realized investment gains and losses are reported in income based on specific identification of $0.1 million. During the three and six months ended June 30, 2018, we recorded OTTI losses of $1.3 million.securities sold.
Equity securities
The cost and fair value of investments in equity securities at June 30, 20192020 and December 31, 20182019 are shown in tables 7.3a and 7.3b below.
|
| | | | | | | | | | | | | | | | | |
Details of equity security investments as of June 30, 2019 |
Table | 7.3a | | | | | | | | |
(In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
Equity securities | | $ | 3,991 |
| | $ | 129 |
| | $ | (6 | ) | | $ | 4,114 |
|
|
| | | | | | | | | | | | | | | | | |
Details of equity security investments as of June 30, 2020 |
Table | 7.3a | | | | | | | | |
(In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
Equity securities | | $ | 17,467 |
| | $ | 507 |
| | $ | (21 | ) | | $ | 17,953 |
|
MGIC Investment Corporation - Q2 2019 | 19
| | Details of equity security investments as of December 31, 2018 | |
Details of equity security investments as of December 31, 2019 | | Details of equity security investments as of December 31, 2019 |
Table | 7.3b | | | | | | | | | 7.3b | | | | | | | | |
(In thousands) | (In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value | (In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
Equity securities | Equity securities | | $ | 3,993 |
| | $ | 11 |
| | $ | (72 | ) | | $ | 3,932 |
| Equity securities | | $ | 17,188 |
| | $ | 154 |
| | $ | (14 | ) | | $ | 17,328 |
|
For the three and six months ended June 30, 2020, we recognized $1.2 million and $0.3 million of net gains on equity securities still held as of June 30, 2020. For the three and six months ended June 30, 2019, we recognized $0.1 million and $0.2 million of net gains on equity securities still held as of June 30, 2019. For the six months ended June 30, 2018, we recognized $0.1 million of net losses on equity securities still held as of June 30, 2018.
Other invested assets
Other invested assets include an investment in Federal Home Loan Bank (“FHLB”("FHLB") stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current FHLB Advance amount is secured by eligible collateral whose fair value is maintained at a minimum of 102% of the outstanding principal balance.balance of the FHLB Advance. As of June 30, 2019,2020, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of $163.0$165.8 million.
MGIC Investment Corporation - Q2 2020 | 20
Unrealized investment losses
Tables 7.4a and 7.4b below summarize, for all available-for-sale investments in an unrealized loss position at June 30, 20192020 and December 31, 2018,2019, 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 7.4a and 7.4b are estimated using the process described in Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 20182019 Annual Report on Form 10-K. | | Unrealized loss aging for securities by type and length of time as of June 30, 2019 | |
Unrealized loss aging for securities by type and length of time as of June 30, 2020 | | Unrealized loss aging for securities by type and length of time as of June 30, 2020 |
Table | 7.4a | | | | | | | | | | | | | 7.4a | | | | | | | | | | | | |
| | | Less Than 12 Months | | 12 Months or Greater | | Total | | | Less Than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 12,483 |
| | $ | (19 | ) | | $ | 45,423 |
| | $ | (108 | ) | | $ | 57,906 |
| | $ | (127 | ) | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 207,786 |
| | $ | (41 | ) | | $ | — |
| | $ | — |
| | $ | 207,786 |
| | $ | (41 | ) |
Obligations of U.S. states and political subdivisions | Obligations of U.S. states and political subdivisions | | 2,283 |
| | (468 | ) | | 57,193 |
| | (180 | ) | | 59,476 |
| | (648 | ) | Obligations of U.S. states and political subdivisions | | 37,445 |
| | (1,291 | ) | | — |
| | — |
| | 37,445 |
| | (1,291 | ) |
Corporate debt securities | Corporate debt securities | | 29,333 |
| | (1,987 | ) | | 298,419 |
| | (1,147 | ) | | 327,752 |
| | (3,134 | ) | Corporate debt securities | | 175,570 |
| | (5,160 | ) | | — |
| | — |
| | 175,570 |
| | (5,160 | ) |
ABS | ABS | | 9,257 |
| | (102 | ) | | — |
| | — |
| | 9,257 |
| | (102 | ) | ABS | | 17,415 |
| | (2,716 | ) | | — |
| | — |
| | 17,415 |
| | (2,716 | ) |
RMBS | RMBS | | 32,181 |
| | (297 | ) | | 158,325 |
| | (4,413 | ) | | 190,506 |
| | (4,710 | ) | RMBS | | 51,169 |
| | (284 | ) | | 4,913 |
| | (69 | ) | | 56,082 |
| | (353 | ) |
CMBS | CMBS | | — |
| | — |
| | 78,697 |
| | (750 | ) | | 78,697 |
| | (750 | ) | CMBS | | 28,609 |
| | (1,397 | ) | | 3,225 |
| | (14 | ) | | 31,834 |
| | (1,411 | ) |
CLOs | CLOs | | 247,983 |
| | (1,587 | ) | | 45,137 |
| | (342 | ) | | 293,120 |
| | (1,929 | ) | CLOs | | 162,838 |
| | (3,831 | ) | | 142,051 |
| | (4,524 | ) | | 304,889 |
| | (8,355 | ) |
Total | Total | | $ | 333,520 |
| | $ | (4,460 | ) | | $ | 683,194 |
| | $ | (6,940 | ) | | $ | 1,016,714 |
| | $ | (11,400 | ) | Total | | $ | 680,832 |
| | $ | (14,720 | ) | | $ | 150,189 |
| | $ | (4,607 | ) | | $ | 831,021 |
| | $ | (19,327 | ) |
| | Unrealized loss aging for securities by type and length of time as of December 31, 2018 | |
Unrealized loss aging for securities by type and length of time as of December 31, 2019 | | Unrealized loss aging for securities by type and length of time as of December 31, 2019 |
Table | 7.4b | | | | | | | | | | | | | 7.4b | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Greater | | Total | | Less Than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 23,710 |
| | $ | (15 | ) | | $ | 69,146 |
| | $ | (1,061 | ) | | $ | 92,856 |
| | $ | (1,076 | ) | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 57,301 |
| | $ | (200 | ) | | $ | 5,806 |
| | $ | (10 | ) | | $ | 63,107 |
| | $ | (210 | ) |
Obligations of U.S. states and political subdivisions | Obligations of U.S. states and political subdivisions | | 316,655 |
| �� | (3,875 | ) | | 358,086 |
| | (7,110 | ) | | 674,741 |
| | (10,985 | ) | Obligations of U.S. states and political subdivisions | | 74,859 |
| | (847 | ) | | 6,957 |
| | (10 | ) | | 81,816 |
| | (857 | ) |
Corporate debt securities | Corporate debt securities | | 1,272,279 |
| | (18,130 | ) | | 785,627 |
| | (22,384 | ) | | 2,057,906 |
| | (40,514 | ) | Corporate debt securities | | 221,357 |
| | (2,847 | ) | | 43,505 |
| | (161 | ) | | 264,862 |
| | (3,008 | ) |
ABS | ABS | | 51,324 |
| | (146 | ) | | — |
| | — |
| | 51,324 |
| | (146 | ) | ABS | | 21,542 |
| | (118 | ) | | 3,851 |
| | (60 | ) | | 25,393 |
| | (178 | ) |
RMBS | RMBS | | 24 |
| | — |
| | 178,573 |
| | (10,309 | ) | | 178,597 |
| | (10,309 | ) | RMBS | | 105,443 |
| | (461 | ) | | 110,452 |
| | (2,766 | ) | | 215,895 |
| | (3,227 | ) |
CMBS | CMBS | | 65,704 |
| | (1,060 | ) | | 163,272 |
| | (8,520 | ) | | 228,976 |
| | (9,580 | ) | CMBS | | 62,388 |
| | (728 | ) | | 11,852 |
| | (51 | ) | | 74,240 |
| | (779 | ) |
CLOs | CLOs | | 296,497 |
| | (5,294 | ) | | — |
| | — |
| | 296,497 |
| | (5,294 | ) | CLOs | | 81,444 |
| | (225 | ) | | 196,988 |
| | (1,418 | ) | | 278,432 |
| | (1,643 | ) |
Total | Total | | $ | 2,026,193 |
| | $ | (28,520 | ) | | $ | 1,554,704 |
| | $ | (49,384 | ) | | $ | 3,580,897 |
| | $ | (77,904 | ) | Total | | $ | 624,334 |
| | $ | (5,426 | ) | | $ | 379,411 |
| | $ | (4,476 | ) | | $ | 1,003,745 |
| | $ | (9,902 | ) |
Based on current facts and circumstances, we believe the unrealized losses as of June 30, 2020 presented in table 7.4a above are not indicative of the ultimate collectability of the current amortized cost of the securities and a credit loss allowance is not required. We believe the gross unrealized losses are primarily attributable to widening credit spreads over risk free rates, as a result of economic and market uncertainties arising from the COVID-19 pandemic, which includes demand shocks in multiple sectors that originated in the first half of 2020.
The unrealized losses in all categories of our investments at June 30, 2019 and December 31, 20182019 were primarily caused by changes in interest rates between the time of purchase and the respective fair value measurement date. December 31, 2019.
There were 243156 and 721217 securities in an unrealized loss position at June 30, 20192020 and December 31, 2018,2019, respectively.
We report accrued investment income separately from fixed income, available-for-sale, securities and we have determined an allowance for credit losses for accrued investment income is not required. Accrued investment income is written off through net realized investment gains (losses) if, and at the time, the issuer of the security defaults or is expected to default on payments.
MGIC Investment Corporation - Q2 20192020 | 2021
Note 8. 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.
Level 1 measurements
Fixed income securities: Consist of primarily U.S. Treasury securities with valuations derived from quoted prices for identical instruments in active markets that we can access.
Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”), with valuations derived from quoted prices for identical assets in active markets that we can access.
Other: Consists ofIncludes money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access.
Level 2 measurements
Fixed income securities:
Corporate Debt & U.S. Government and Agency Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process.
Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.
Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.
Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.
Asset-Backed Securities ("ABS") are valued using spreads and other information solicited from market buy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in tranche specific prices.
Collateralized loan obligations ("CLO"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.
Level 3 measurements
Real estate acquired is valued at the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.
MGIC Investment Corporation - Q2 20192020 | 2122
Assets measured at fair value, by hierarchy level, as of June 30, 20192020 and December 31, 20182019 are shown in tables 8.1a and 8.1b below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 20182019 Annual Report on Form 10-K.
| | Assets carried at fair value by hierarchy level as of June 30, 2019 | |
Assets carried at fair value by hierarchy level as of June 30, 2020 | | Assets carried at fair value by hierarchy level as of June 30, 2020 |
Table | 8.1a | | | | | | | | | 8.1a | | | | | | | | |
(In thousands) | (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 195,569 |
| | $ | 42,825 |
| | $ | 152,744 |
| | $ | — |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 348,617 |
| | $ | 164,052 |
| | $ | 184,565 |
| | $ | — |
|
Obligations of U.S. states and political subdivisions | Obligations of U.S. states and political subdivisions | | 1,653,897 |
| | — |
| | 1,653,897 |
| | — |
| Obligations of U.S. states and political subdivisions | | 1,788,977 |
| | — |
| | 1,788,977 |
| | — |
|
Corporate debt securities | Corporate debt securities | | 2,628,614 |
| | — |
| | 2,628,614 |
| | — |
| Corporate debt securities | | 2,646,831 |
| | — |
| | 2,646,831 |
| | — |
|
ABS | ABS | | 217,701 |
| | — |
| | 217,701 |
| | — |
| ABS | | 199,556 |
| | — |
| | 199,556 |
| | — |
|
RMBS | RMBS | | 208,497 |
| | — |
| | 208,497 |
| | — |
| RMBS | | 299,492 |
| | — |
| | 299,492 |
| | — |
|
CMBS | CMBS | | 271,889 |
| | — |
| | 271,889 |
| | — |
| CMBS | | 273,899 |
| | — |
| | 273,899 |
| | — |
|
CLOs | CLOs | | 328,656 |
| | — |
| | 328,656 |
| | — |
| CLOs | | 304,890 |
| | — |
| | 304,890 |
| | — |
|
Total fixed income securities | Total fixed income securities | | 5,504,823 |
| | 42,825 |
| | 5,461,998 |
| | — |
| Total fixed income securities | | 5,862,262 |
| | 164,052 |
| | 5,698,210 |
| | — |
|
Equity securities | Equity securities | | 4,114 |
| | 4,114 |
| | — |
| | — |
| Equity securities | | 17,953 |
| | 17,953 |
| | — |
| | — |
|
Other (1) | Other (1) | | 169,584 |
| | 169,584 |
| | — |
| | — |
| Other (1) | | 362,417 |
| | 362,417 |
| | — |
| | — |
|
Real estate acquired (2) | Real estate acquired (2) | | 10,250 |
| | — |
| | — |
| | 10,250 |
| Real estate acquired (2) | | 1,963 |
| | — |
| | — |
| | 1,963 |
|
Total | Total | | $ | 5,688,771 |
| | $ | 216,523 |
| | $ | 5,461,998 |
| | $ | 10,250 |
| Total | | $ | 6,244,595 |
| | $ | 544,422 |
| | $ | 5,698,210 |
| | $ | 1,963 |
|
| | Assets carried at fair value by hierarchy level as of December 31, 2018 | |
Assets carried at fair value by hierarchy level as of December 31, 2019 | | Assets carried at fair value by hierarchy level as of December 31, 2019 |
Table | 8.1b | | | | | | | | | 8.1b | | | | | | | | |
(In thousands) | (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 167,176 |
| | $ | 42,264 |
| | $ | 124,912 |
| | $ | — |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 196,203 |
| | $ | 34,240 |
| | $ | 161,963 |
| | $ | — |
|
Obligations of U.S. states and political subdivisions | Obligations of U.S. states and political subdivisions | | 1,720,100 |
| | — |
| | 1,720,087 |
| | 13 |
| Obligations of U.S. states and political subdivisions | | 1,653,865 |
| | — |
| | 1,653,865 |
| | — |
|
Corporate debt securities | Corporate debt securities | | 2,400,762 |
| | — |
| | 2,400,762 |
| | — |
| Corporate debt securities | | 2,785,122 |
| | — |
| | 2,785,122 |
| | — |
|
ABS | ABS | | 112,033 |
| | — |
| | 112,033 |
| | — |
| ABS | | 229,664 |
| | — |
| | 229,664 |
| | — |
|
RMBS | RMBS | | 178,961 |
| | — |
| | 178,961 |
| | — |
| RMBS | | 268,586 |
| | — |
| | 268,586 |
| | — |
|
CMBS | CMBS | | 267,660 |
| | — |
| | 267,660 |
| | — |
| CMBS | | 278,986 |
| | — |
| | 278,986 |
| | — |
|
CLOs | CLOs | | 305,295 |
| | — |
| | 305,295 |
| | — |
| CLOs | | 325,466 |
| | — |
| | 325,466 |
| | — |
|
Total fixed income securities | Total fixed income securities | | 5,151,987 |
| | 42,264 |
| | 5,109,710 |
| | 13 |
| Total fixed income securities | | 5,737,892 |
| | 34,240 |
| | 5,703,652 |
| | — |
|
Equity securities | Equity securities | | 3,932 |
| | 3,932 |
| | — |
| | — |
| Equity securities | | 17,328 |
| | 17,328 |
| | — |
| | — |
|
Other (1) | Other (1) | | 96,403 |
| | 96,403 |
| | — |
| | — |
| Other (1) | | 164,693 |
| | 164,693 |
| | — |
| | — |
|
Real estate acquired (2) | Real estate acquired (2) | | 14,535 |
| | — |
| | — |
| | 14,535 |
| Real estate acquired (2) | | 7,252 |
| | — |
| | — |
| | 7,252 |
|
Total | Total | | $ | 5,266,857 |
| | $ | 142,599 |
| | $ | 5,109,710 |
| | $ | 14,548 |
| Total | | $ | 5,927,165 |
| | $ | 216,261 |
| | $ | 5,703,652 |
| | $ | 7,252 |
|
| |
(1) | Consists ofIncludes money market funds included in “Cash and Cash Equivalents” and “Restricted Cash and Cash Equivalents” on the consolidated balance sheets. |
| |
(2) | Real estate acquired through claim settlement, which is held for sale, is reported in “Other assets” on the consolidated balance sheets. |
MGIC Investment Corporation - Q2 2019 | 22
Reconciliations of Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2019 and 2018 is shown in tables 8.2a through 8.2d below. As shown in table 8.2d below, we transferred our FHLB stock out of Level 3 assets, and it is carried at cost, which approximates fair value, on our consolidated balance sheet in “Other invested assets.” There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
|
| | | | | | | | | | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2019 |
Table | 8.2a | | | | | | | | |
(In thousands) | | Fixed income | | Equity Securities | | Total Investments | | Real Estate Acquired |
Balance at March 31, 2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11,639 |
|
Purchases | | — |
| | — |
| | — |
| | 7,107 |
|
Sales | | — |
| | — |
| | — |
| | (8,152 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (344 | ) |
Balance at June 30, 2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,250 |
|
|
| | | | | | | | | | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the six months ended June 30, 2019 |
Table | 8.2b | | | | | | | | |
(In thousands) | | Fixed income | | Equity Securities | | Total Investments | | Real Estate Acquired |
Balance at December 31, 2018 | | $ | 13 |
| | $ | — |
| | $ | 13 |
| | $ | 14,535 |
|
Purchases | | — |
| | — |
| | — |
| | 15,191 |
|
Sales | | (13 | ) | | — |
| | (13 | ) | | (19,024 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (452 | ) |
Balance at June 30, 2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,250 |
|
|
| | | | | | | | | | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2018 |
Table | 8.2c | | | | | | | | |
(In thousands) | | Fixed income | | Equity Securities | | Total Investments | | Real Estate Acquired |
Balance at March 31, 2018 | | 254 |
| | 1,168 |
| | 1,422 |
| | 10,078 |
|
Purchases | | — |
| | — |
| | — |
| | 10,869 |
|
Sales | | (62 | ) | | — |
| | (62 | ) | | (6,630 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (996 | ) |
Balance at June 30, 2018 | | $ | 192 |
| | $ | 1,168 |
| | $ | 1,360 |
| | $ | 13,321 |
|
|
| | | | | | | | | | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the six months ended June 30, 2018 |
Table | 8.2d | | | | | | | | |
(In thousands) | | Fixed income | | Equity Securities | | Total Investments | | Real Estate Acquired |
Balance at December 31, 2017 | | 271 |
| | 4,268 |
| | 4,539 |
| | 12,713 |
|
Transfers out of Level 3 | | — |
| | (3,100 | ) | | (3,100 | ) | | — |
|
Purchases | | — |
| | — |
| | — |
| | 16,763 |
|
Sales | | (79 | ) | | — |
| | (79 | ) | | (15,500 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (655 | ) |
Balance at June 30, 2018 | | $ | 192 |
| | $ | 1,168 |
| | $ | 1,360 |
| | $ | 13,321 |
|
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 7 – “Investments.”
MGIC Investment Corporation - Q2 2020 | 23
Reconciliations of Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2020 and 2019 is shown in tables 8.2a through 8.2d below. There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
|
| | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2020 |
Table | 8.2a | | | | |
(In thousands) | | Fixed income | | Real Estate Acquired |
Balance at March 31, 2020 | | $ | — |
| | $ | 6,226 |
|
Purchases | | — |
| | 1,806 |
|
Sales | | — |
| | (6,526 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | 457 |
|
Balance at June 30, 2020 | | $ | — |
| | $ | 1,963 |
|
|
| | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the six months ended June 30, 2020 |
Table | 8.2b | | | | |
(In thousands) | | Fixed income | | Real Estate Acquired |
Balance at December 31, 2019 | | $ | — |
| | $ | 7,252 |
|
Purchases | | — |
| | 5,921 |
|
Sales | | — |
| | (11,725 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | 515 |
|
Balance at June 30, 2020 | | $ | — |
| | $ | 1,963 |
|
|
| | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended June 30, 2019 |
Table | 8.2c | | | | |
(In thousands) | | Fixed income | | Real Estate Acquired |
Balance at March 31, 2019 | | $ | — |
| | $ | 11,639 |
|
Purchases | | — |
| | 7,107 |
|
Sales | | — |
| | (8,152 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | (344 | ) |
Balance at June 30, 2019 | | $ | — |
| | $ | 10,250 |
|
|
| | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the six months ended June 30, 2019 |
Table | 8.2d | | | | |
(In thousands) | | Fixed income | | Real Estate Acquired |
Balance at December 31, 2018 | | $ | 13 |
| | $ | 14,535 |
|
Purchases | | — |
| | 15,191 |
|
Sales | | (13 | ) | | (19,024 | ) |
Included in earnings and reported as losses incurred, net | | — |
| | (452 | ) |
Balance at June 30, 2019 | | $ | — |
| | $ | 10,250 |
|
Financial assets and 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.
MGIC Investment Corporation - Q2 2019 | 23
Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% Notes and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2.
MGIC Investment Corporation - Q2 2020 | 24
Table 8.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at June 30, 20192020 and December 31, 2018.2019.
| | Financial assets and liabilities not measured at fair value | Table | 8.3 | | | | | | | | | 8.3 | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 | | | June 30, 2020 | | December 31, 2019 |
(In thousands) | (In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | (In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial assets | Financial assets | | | | | | | | | Financial assets | | | | | | | | |
Other invested assets | Other invested assets | | $ | 3,100 |
| | $ | 3,100 |
| | $ | 3,100 |
| | $ | 3,100 |
| Other invested assets | | $ | 3,100 |
| | $ | 3,100 |
| | $ | 3,100 |
| | $ | 3,100 |
|
| | | | | | | | | | | | | | | | | | |
Financial liabilities | Financial liabilities | | | | | | | | | Financial liabilities | | | | | | | | |
FHLB Advance | FHLB Advance | | $ | 155,000 |
| | $ | 155,690 |
| | $ | 155,000 |
| | $ | 150,551 |
| FHLB Advance | | $ | 155,000 |
| | $ | 161,773 |
| | $ | 155,000 |
| | $ | 156,422 |
|
5.75% Senior Notes | 5.75% Senior Notes | | 420,290 |
| | 462,702 |
| | 419,713 |
| | 425,791 |
| 5.75% Senior Notes | | 421,443 |
| | 441,545 |
| | 420,867 |
| | 471,827 |
|
9% Convertible Junior Subordinated Debentures | 9% Convertible Junior Subordinated Debentures | | 256,872 |
| | 340,669 |
| | 256,872 |
| | 338,069 |
| 9% Convertible Junior Subordinated Debentures | | 256,872 |
| | 305,562 |
| | 256,872 |
| | 346,289 |
|
Total financial liabilities | Total financial liabilities | | $ | 832,162 |
| | $ | 959,061 |
| | $ | 831,585 |
| | $ | 914,411 |
| Total financial liabilities | | $ | 833,315 |
| | $ | 908,880 |
| | $ | 832,739 |
| | $ | 974,538 |
|
Note 9. Other Comprehensive Income
The pretax and related income tax benefit (expense) benefit components of our other comprehensive (loss) income (loss) for the three and six months ended June 30, 20192020 and 20182019 are included in table 9.1 below.
| | Components of other comprehensive income (loss) | Components of other comprehensive income (loss) | | | | | Components of other comprehensive income (loss) | | | | |
Table | 9.1 | | | | | | | | | 9.1 | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net unrealized investment gains (losses) arising during the period | | $ | 89,562 |
| | $ | (12,558 | ) | | $ | 192,183 |
| | $ | (94,145 | ) | |
Income tax (expense) benefit | | (18,808 | ) | | 2,636 |
| | (40,358 | ) | | 19,770 |
| |
Net unrealized investment gains arising during the period | | Net unrealized investment gains arising during the period | | $ | 181,242 |
| | $ | 89,562 |
| | $ | 89,362 |
| | $ | 192,183 |
|
Total income tax benefit (expense) | | Total income tax benefit (expense) | | (38,061 | ) | | (18,808 | ) | | (18,766 | ) | | (40,358 | ) |
Net of taxes | Net of taxes | | 70,754 |
| | (9,922 | ) | | 151,825 |
| | (74,375 | ) | Net of taxes | | 143,181 |
| | 70,754 |
| | 70,596 |
| | 151,825 |
|
| | | | | | | | | | | | | | | | | | |
Net changes in benefit plan assets and obligations | Net changes in benefit plan assets and obligations | | 1,961 |
| | 491 |
| | 4,050 |
| | 1,116 |
| Net changes in benefit plan assets and obligations | | 1,275 |
| | 1,961 |
| | 2,669 |
| | 4,050 |
|
Income tax expense | | (412 | ) | | (103 | ) | | (851 | ) | | (234 | ) | |
Total income tax benefit (expense) | | Total income tax benefit (expense) | | (268 | ) | | (412 | ) | | (561 | ) | | (851 | ) |
Net of taxes | Net of taxes | | 1,549 |
| | 388 |
| | 3,199 |
| | 882 |
| Net of taxes | | 1,007 |
| | 1,549 |
| | 2,108 |
| | 3,199 |
|
| | | | | | | | | | | | | | | | | | |
Total other comprehensive income (loss) | | 91,523 |
| | (12,067 | ) | | 196,233 |
| | (93,029 | ) | |
Total income tax (expense) benefit | | (19,220 | ) | | 2,533 |
| | (41,209 | ) | | 19,536 |
| |
Total other comprehensive income (loss), net of tax | | $ | 72,303 |
| | $ | (9,534 | ) | | $ | 155,024 |
| | $ | (73,493 | ) | |
Total other comprehensive income | | Total other comprehensive income | | 182,517 |
| | 91,523 |
| | 92,031 |
| | 196,233 |
|
Total income tax benefit (expense) | | Total income tax benefit (expense) | | (38,329 | ) | | (19,220 | ) | | (19,327 | ) | | (41,209 | ) |
Total other comprehensive income, net of tax | | Total other comprehensive income, net of tax | | $ | 144,188 |
| | $ | 72,303 |
| | $ | 72,704 |
| | $ | 155,024 |
|
MGIC Investment Corporation - Q2 2019 | 24
The pretax and related income tax (expense) benefit (expense) components of the amounts reclassified from our accumulated other comprehensive income (loss) (“AOCI”) to our consolidated statements of operations for the three and six months ended June 30, 20192020 and 20182019 are included in table 9.2 below.
| | Reclassifications from AOCI | Reclassifications from AOCI | | | | | Reclassifications from AOCI | | | | |
Table | 9.2 | | | | | | | | | 9.2 | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Reclassification adjustment for net realized gains (losses) (1) | | $ | 1,701 |
| | $ | (3,621 | ) | | $ | (978 | ) | | $ | (3,712 | ) | |
Reclassification adjustment for net realized (losses) gains(1) | | Reclassification adjustment for net realized (losses) gains(1) | | $ | (6,390 | ) | | $ | 1,701 |
| | $ | (1,676 | ) | | $ | (978 | ) |
Income tax (expense) benefit | Income tax (expense) benefit | | (357 | ) | | 760 |
| | 206 |
| | 779 |
| Income tax (expense) benefit | | 1,342 |
| | (357 | ) | | 352 |
| | 206 |
|
Net of taxes | Net of taxes | | 1,344 |
| | (2,861 | ) | | (772 | ) | | (2,933 | ) | Net of taxes | | (5,048 | ) | | 1,344 |
| | (1,324 | ) | | (772 | ) |
| | | | | | | | | | | | | | | | | | |
Reclassification adjustment related to benefit plan assets and obligations (2) | Reclassification adjustment related to benefit plan assets and obligations (2) | | (1,961 | ) | | (491 | ) | | (4,050 | ) | | (1,116 | ) | Reclassification adjustment related to benefit plan assets and obligations (2) | | (1,275 | ) | | (1,961 | ) | | (2,669 | ) | | (4,050 | ) |
Income tax benefit | | 412 |
| | 103 |
| | 851 |
| | 234 |
| |
Income tax (expense) benefit | | Income tax (expense) benefit | | 268 |
| | 412 |
| | 561 |
| | 851 |
|
Net of taxes | Net of taxes | | (1,549 | ) | | (388 | ) | | (3,199 | ) | | (882 | ) | Net of taxes | | (1,007 | ) | | (1,549 | ) | | (2,108 | ) | | (3,199 | ) |
| | | | | | | | | | | | | | | | | | |
Total reclassifications | Total reclassifications | | (260 | ) | | (4,112 | ) | | (5,028 | ) | | (4,828 | ) | Total reclassifications | | (7,665 | ) | | (260 | ) | | (4,345 | ) | | (5,028 | ) |
Total income tax benefit | | 55 |
| | 863 |
| | 1,057 |
| | 1,013 |
| |
Income tax (expense) benefit | | Income tax (expense) benefit | | 1,610 |
| | 55 |
| | 913 |
| | 1,057 |
|
Total reclassifications, net of tax | Total reclassifications, net of tax | | $ | (205 | ) | | $ | (3,249 | ) | | $ | (3,971 | ) | | $ | (3,815 | ) | Total reclassifications, net of tax | | $ | (6,055 | ) | | $ | (205 | ) | | $ | (3,432 | ) | | $ | (3,971 | ) |
| |
(1) | (Decreases) Increases (decreases) Net realized investment gains (losses) gains on the consolidated statements of operations. |
| |
(2) | Decreases (increases)(Increases) Other underwriting and operating expenses, net on the consolidated statements of operations. |
MGIC Investment Corporation - Q2 2020 | 25
A rollforward of AOCI for the six months ended June 30, 2019,2020, including amounts reclassified from AOCI, are included in table 9.3 below.
| | Rollforward of AOCI | Table | 9.3 | | | | | | | 9.3 | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2020 |
(In thousands) | (In thousands) | | Net unrealized gains and (losses) on available-for-sale securities | | Net benefit plan assets and (obligations) recognized in shareholders' equity | | Total accumulated other comprehensive income (loss) | (In thousands) | | Net unrealized gains and (losses) on available-for-sale securities | | Net benefit plan assets and (obligations) recognized in shareholders' equity | | Total accumulated other comprehensive income (loss) |
Balance, December 31, 2018, net of tax | | $ | (35,389 | ) | | $ | (88,825 | ) | | $ | (124,214 | ) | |
Balance at December 31, 2019, net of tax | | Balance at December 31, 2019, net of tax | | 138,521 |
| | (65,813 | ) | | 72,708 |
|
Other comprehensive income before reclassifications | Other comprehensive income before reclassifications | | 151,053 |
| | — |
| | 151,053 |
| Other comprehensive income before reclassifications | | 69,272 |
| | — |
| | 69,272 |
|
Less: Amounts reclassified from AOCI | Less: Amounts reclassified from AOCI | | (772 | ) | | (3,199 | ) | | (3,971 | ) | Less: Amounts reclassified from AOCI | | (1,324 | ) | | (2,108 | ) | | (3,432 | ) |
Balance, June 30, 2019, net of tax | | $ | 116,436 |
| | $ | (85,626 | ) | | $ | 30,810 |
| |
Balance, June 30, 2020, net of tax | | Balance, June 30, 2020, net of tax | | $ | 209,117 |
| | $ | (63,705 | ) | | $ | 145,412 |
|
Note 10. Benefit Plans
TablesTable 10.1 and 10.2 provide the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for the three and six months ended June 30, 20192020 and 2018.2019.
| | Components of net periodic benefit cost | Table | 10.1 | | | | | | | | | 10.1 | | | | | | | | |
| | | Three Months Ended June 30, | | | Three Months Ended June 30, |
| | | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans | | | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans |
(In thousands) | (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | Service cost | | $ | 2,176 |
| | $ | 2,703 |
| | $ | 360 |
| | $ | 310 |
| Service cost | | $ | 1,876 |
| | $ | 2,176 |
| | $ | 322 |
| | $ | 360 |
|
Interest cost | Interest cost | | 3,898 |
| | 3,765 |
| | 274 |
| | 203 |
| Interest cost | | 3,336 |
| | 3,898 |
| | 202 |
| | 274 |
|
Expected return on plan assets | Expected return on plan assets | | (4,825 | ) | | (5,555 | ) | | (1,447 | ) | | (1,591 | ) | Expected return on plan assets | | (5,473 | ) | | (4,825 | ) | | (1,852 | ) | | (1,447 | ) |
Amortization of net actuarial losses/(gains) | Amortization of net actuarial losses/(gains) | | 2,039 |
| | 1,684 |
| | — |
| | (79 | ) | Amortization of net actuarial losses/(gains) | | 1,526 |
| | 2,039 |
| | (201 | ) | | — |
|
Amortization of prior service cost/(credit) | Amortization of prior service cost/(credit) | | (70 | ) | | (88 | ) | | (9 | ) | | (1,026 | ) | Amortization of prior service cost/(credit) | | (62 | ) | | (70 | ) | | 12 |
| | (9 | ) |
Net periodic benefit cost (benefit) | Net periodic benefit cost (benefit) | | $ | 3,218 |
| | $ | 2,509 |
| | $ | (822 | ) | | $ | (2,183 | ) | Net periodic benefit cost (benefit) | | $ | 1,203 |
| | $ | 3,218 |
| | $ | (1,517 | ) | | $ | (822 | ) |
MGIC Investment Corporation - Q2 2019 | 25
|
| | | | | | | | | | | | | | | | | |
Components of net periodic benefit cost |
Table | 10.2 | | | | | | | | |
| | | Six Months Ended June 30, |
| | | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefits |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Service cost | | $ | 4,172 |
| | $ | 5,265 |
| | $ | 672 |
| | $ | 580 |
|
Interest cost | | 7,853 |
| | 7,547 |
| | 565 |
| | 417 |
|
Expected return on plan assets | | (9,733 | ) | | (11,125 | ) | | (2,892 | ) | | (3,179 | ) |
Recognized net actuarial gain (loss) | | 4,206 |
| | 3,469 |
| | — |
| | (125 | ) |
Amortization of prior service cost | | (140 | ) | | (175 | ) | | (17 | ) | | (2,052 | ) |
Net period benefit cost (benefit) | | $ | 6,358 |
| | $ | 4,981 |
| | $ | (1,672 | ) | | $ | (4,359 | ) |
|
| | | | | | | | | | | | | | | | | |
Components of net periodic benefit cost |
Table | 10.2 | | | | | | | | |
| | Six Months Ended June 30, |
| | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Service cost | | $ | 3,697 |
| | $ | 4,172 |
| | $ | 631 |
| | $ | 672 |
|
Interest cost | | 6,750 |
| | 7,853 |
| | 416 |
| | 565 |
|
Expected return on plan assets | | (11,053 | ) | | (9,733 | ) | | (3,704 | ) | | (2,892 | ) |
Amortization of net actuarial losses/(gains) | | 3,160 |
| | 4,206 |
| | (391 | ) | | — |
|
Amortization of prior service cost/(credit) | | (124 | ) | | (140 | ) | | 25 |
| | (17 | ) |
Net periodic benefit cost (benefit) | | $ | 2,430 |
| | $ | 6,358 |
| | $ | (3,023 | ) | | $ | (1,672 | ) |
In July 2020, a contribution of $6.5 million was made to our qualified pension plan. We currently intend to make additional contributions totaling $10.2$6.0 million to our qualified pension plan and supplemental executive retirement plan in 2019.2020.
MGIC Investment Corporation - Q2 2020 | 26
Note 11. Loss Reserves
We establish case reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) relatedreserves on delinquent loans that were reported to defaults on insured mortgage loans. Lossus 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 reserves are established by estimating the number of loans in our delinquency inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
IBNR reserves are established for estimated losses from delinquencies occurring prior to the close of an accounting period on notices of delinquency not yet reported to us. IBNR reserves are also established using estimated notices of delinquency, claim rates, and claim severities.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between defaultdelinquency and claim filing; and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment.
The “Losses incurred” section of table 11.1 below shows losses incurred on delinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to delinquencies that occurred in the current year represents the estimated amount to be ultimately paid on such delinquencies. The amount of losses incurred relating to delinquencies that occurred in prior years represents the difference between the actual claim rate and severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and severity at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on delinquencies continuing from the end of the prior year. This re-estimation of the claim rate and severity is the result of our review of current trends in the delinquent inventory, such as percentages of delinquencies that have resulted in a claim, the
amount of the claims relative to the average loan exposure, changes in the relative level of delinquencies by geography and changes in average loan exposure.
Losses incurred on delinquencies that occurred in the current year decreasedincreased in the first six months of 20192020 compared to the same period in 2018,2019, due to a decreasean increase in the numbernew delinquency notices reported and IBNR reserve estimates, due to the impact of new delinquencies, net of related cures and a decrease in the estimated claim rate on delinquencies that occurred in the current year.COVID-19 pandemic.
For the six months ended June 30, 2020 we experienced adverse loss reserve development of $12.8 million on previously received delinquencies primarily related to severity. For the six months ended June 30, 2019, and 2018, we experienced favorable loss reserve development on previously received delinquencies. This was,delinquencies, due in large part due to the resolution of approximately 49% and 51%, respectively, of the prior year delinquent inventory, with lower claim rates due to improved cure rates. TheThis favorable loss reserve development resulting from a reduction in the estimated claim rate was partially offset in the six months ended June 30, 2019 by the recognition of a probable loss of $23.5 million related to litigation of our claims paying practices, and for the six months ended June 30, 2018, by an increase in our severity assumption on previously received delinquencies.practices.
The “Losses paid” section of table 11.1 below shows the amount of losses paid on delinquencies that occurred in the current year and losses paid on delinquencies that occurred in prior years. For several years, the average time it took to receive a claim associated with a delinquency had increased significantly from our historical experience of approximately twelve months. This was, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. In recent quarters, we have experienced a decline in the average time it takes servicers are utilizing to process foreclosures, which has reduced the average time to receive a claim associated with new delinquent notices that do not cure. All else being equal, the longer the period between delinquency and claim filing, the greater the severity.
MGIC Investment Corporation - Q2 2019 | 26
DuringIn light of the first six months of 2018, our losses paid included $21 million paid upon commutation of coverage of pools of non-performing loans (“NPLs”). The commutations reduced our delinquent inventoryuncertainty caused by 662 delinquenciesthe COVID-19 pandemic, specifically the foreclosure moratoriums and had no material impact on our losses incurred, net.forbearance plans, we expect the average time it takes to receive a claim will increase.
Premium refunds
Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated $34$28 million and $40$30 million at June 30, 20192020 and December 31, 2018,2019, respectively.
MGIC Investment Corporation - Q2 2020 | 27
Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the six months ended June 30, 20192020 and 2018.2019.
| | Development of reserves for losses and loss adjustment expenses | Table | 11.1 | | | | | 11.1 | | | | |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | (In thousands) | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 |
Reserve at beginning of period | Reserve at beginning of period | | $ | 674,019 |
| | $ | 985,635 |
| Reserve at beginning of period | | $ | 555,334 |
| | $ | 674,019 |
|
Less reinsurance recoverable | Less reinsurance recoverable | | 33,328 |
| | 48,474 |
| Less reinsurance recoverable | | 21,641 |
| | 33,328 |
|
Net reserve at beginning of period | Net reserve at beginning of period | | 640,691 |
| | 937,161 |
| Net reserve at beginning of period | | 533,693 |
| | 640,691 |
|
| | | | | | | | | | |
Losses incurred: | Losses incurred: | | | | | Losses incurred: | | | | |
Losses and LAE incurred in respect of delinquency notices received in: | Losses and LAE incurred in respect of delinquency notices received in: | | | | | Losses and LAE incurred in respect of delinquency notices received in: | | | | |
Current year | Current year | | 94,063 |
| | 108,361 |
| Current year | | 265,546 |
| | 94,063 |
|
Prior years (1) | Prior years (1) | | (33,164 | ) | | (97,966 | ) | Prior years (1) | | 12,784 |
| | (33,164 | ) |
Total losses incurred | Total losses incurred | | 60,899 |
| | 10,395 |
| Total losses incurred | | 278,330 |
| | 60,899 |
|
| | | | | | | | | | |
Losses paid: | Losses paid: | | | | | Losses paid: | | | | |
Losses and LAE paid in respect of delinquency notices received in: | Losses and LAE paid in respect of delinquency notices received in: | | | | | Losses and LAE paid in respect of delinquency notices received in: | | | | |
Current year | Current year | | 2,650 |
| | 263 |
| Current year | | 271 |
| | 2,650 |
|
Prior years | Prior years | | 109,420 |
| | 173,313 |
| Prior years | | 77,820 |
| | 109,420 |
|
Reinsurance terminations | Reinsurance terminations | | (13,980 | ) | | (1,984 | ) | Reinsurance terminations | | (20 | ) | | (13,980 | ) |
Total losses paid | Total losses paid | | 98,090 |
| | 171,592 |
| Total losses paid | | 78,071 |
| | 98,090 |
|
Net reserve at end of period | Net reserve at end of period | | 603,500 |
| | 775,964 |
| Net reserve at end of period | | 733,952 |
| | 603,500 |
|
Plus reinsurance recoverables | Plus reinsurance recoverables | | 18,402 |
| | 37,051 |
| Plus reinsurance recoverables | | 63,444 |
| | 18,402 |
|
Reserve at end of period | Reserve at end of period | | $ | 621,902 |
| | $ | 813,015 |
| Reserve at end of period | | $ | 797,396 |
| | $ | 621,902 |
|
| |
(1) | A positive number for prior year loss development indicates a deficiency of prior year reserves. A negative number for prior year losses incurredloss development indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss development. |
The prior year development of the reserves in the first six months of 20192020 and 20182019 is reflected in table 11.2 below.
| | Reserve development on previously received delinquencies | Table | 11.2 | | | | | 11.2 | | | | |
| | Six Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | | 2019 | | 2018 | |
(In thousands) | | (In thousands) | | 2020 | | 2019 |
Decrease in estimated claim rate on primary defaults | Decrease in estimated claim rate on primary defaults | | $ | (67 | ) | | $ | (120 | ) | Decrease in estimated claim rate on primary defaults | | $ | (2,104 | ) | | $ | (67,465 | ) |
Increase in estimated severity on primary defaults | Increase in estimated severity on primary defaults | | 3 |
| | 19 |
| Increase in estimated severity on primary defaults | | 13,767 |
| | 3,140 |
|
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other | Change in estimates related to pool reserves, LAE reserves, reinsurance, and other | | 31 |
| | 3 |
| Change in estimates related to pool reserves, LAE reserves, reinsurance, and other | | 1,121 |
| | 31,161 |
|
Total prior year loss development (1) | Total prior year loss development (1) | | $ | (33 | ) | | $ | (98 | ) | Total prior year loss development (1) | | $ | 12,784 |
| | $ | (33,164 | ) |
| |
(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 - Q2 2020 | 28
Delinquent
Delinquency inventory
A rollforward of our primary delinquentdelinquency inventory for the three and six months ended June 30, 20192020 and 20182019 appears in table 11.3 below. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the accuracy of the data provided by servicers, the number of business days in a month and transfers of servicing between loan servicers and whether all servicers have provided the reports in a given month.servicers.
MGIC Investment Corporation - Q2 2019 | 27
| | Delinquent inventory rollforward | | | | | |
Delinquency inventory rollforward | | Delinquency inventory rollforward | | | | |
Table | 11.3 | | | | | | | | | 11.3 | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 |
Delinquent inventory at beginning of period | | 30,921 |
| | 41,243 |
| | 32,898 |
| | 46,556 |
| |
Delinquency inventory at beginning of period | | Delinquency inventory at beginning of period | | 27,384 |
| | 30,921 |
| | 30,028 |
| | 32,898 |
|
New notices | New notices | | 12,915 |
| | 12,159 |
| | 26,526 |
| | 26,782 |
| New notices | | 57,584 |
| | 12,915 |
| | 69,982 |
| | 26,526 |
|
Cures | Cures | | (12,882 | ) | | (15,350 | ) | | (27,230 | ) | | (33,423 | ) | Cures | | (14,964 | ) | | (12,882 | ) | | (29,077 | ) | | (27,230 | ) |
Paid claims | Paid claims | | (1,112 | ) | | (1,501 | ) | | (2,300 | ) | | (3,072 | ) | Paid claims | | (661 | ) | | (1,112 | ) | | (1,558 | ) | | (2,300 | ) |
Rescissions and denials | Rescissions and denials | | (47 | ) | | (76 | ) | | (99 | ) | | (144 | ) | Rescissions and denials | | (17 | ) | | (47 | ) | | (49 | ) | | (99 | ) |
Other items removed from inventory | | — |
| | (438 | ) | | — |
| | (662 | ) | |
Delinquent inventory at end of period | | 29,795 |
| | 36,037 |
| | 29,795 |
| | 36,037 |
| |
Delinquency inventory at end of period | | Delinquency inventory at end of period | | 69,326 |
| | 29,795 |
| | 69,326 |
| | 29,795 |
|
COVID-19 Activity
New delinquency notices increased in 2020 because of the impacts of the COVID-19 pandemic, including the high level of unemployment and economic uncertainty resulting from measures to reduce the transmission of the COVID-19. The decreaseCARES Act and other related actions provide for payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. These forbearance plans generally allow for mortgage payments to be suspended for up to 360 days. As of June 30, 2020, 67% of our delinquency inventory was reported as subject to a COVID-19 forbearance plan. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicers, and we believe represents only forbearances related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the primary delinquentprior month-end, the information provided by loan servicers may be more current. We expect our delinquency inventory experiencedwill continue to increase during 2019the year due to the impacts of the COVID-19 pandemic and 2018 was generally across all markets and primarily in book years 2008 and prior. Historically as a delinquency ages it becomes more likelyinitiatives intended to result in a claim.reduce the transmission of COVID-19.
Hurricane activity
New delinquent notice activity increased in the fourth quarter of 2017 because of hurricane activity that primarily impacted Puerto Rico, Texas, and Florida in the third quarter of 2017. Many of the loans from the hurricane impacted areas remained delinquent through the period ending June 30, 2018 and are shown in the 4-11 months delinquent category in table 11.4. The majority of the delinquent notices received from the hurricane activity cured as of December 31, 2018.
Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a delinquency ages it becomes more likely to result in a claim.
| | Primary delinquent inventory - consecutive months delinquent | |
Primary delinquency inventory - consecutive months delinquent | | Primary delinquency inventory - consecutive months delinquent |
Table | 11.4 | | 11.4 | |
| | June 30, 2019 | December 31, 2018 | June 30, 2018 | | June 30, 2020 | December 31, 2019 | June 30, 2019 |
3 months or less | 3 months or less | 8,970 |
| 9,829 |
| 8,554 |
| 3 months or less | 50,646 |
| 9,447 |
| 8,970 |
|
4-11 months | 4-11 months | 8,951 |
| 9,655 |
| 12,506 |
| 4-11 months | 8,370 |
| 9,664 |
| 8,951 |
|
12 months or more (1) | 12 months or more (1) | 11,874 |
| 13,414 |
| 14,977 |
| 12 months or more (1) | 10,310 |
| 10,917 |
| 11,874 |
|
Total | Total | 29,795 |
| 32,898 |
| 36,037 |
| Total | 69,326 |
| 30,028 |
| 29,795 |
|
3 months or less | 3 months or less | 30 | % | 30 | % | 24 | % | 3 months or less | 73 | % | 32 | % | 30 | % |
4-11 months | 4-11 months | 30 | % | 29 | % | 35 | % | 4-11 months | 12 | % | 32 | % | 30 | % |
12 months or more | 12 months or more | 40 | % | 41 | % | 41 | % | 12 months or more | 15 | % | 36 | % | 40 | % |
Total | Total | 100 | % | 100 | % | 100 | % | Total | 100 | % | 100 | % | 100 | % |
Primary claims received inventory included in ending delinquent inventory | Primary claims received inventory included in ending delinquent inventory | 630 |
| 809 |
| 827 |
| Primary claims received inventory included in ending delinquent inventory | 247 |
| 538 |
| 630 |
|
| |
(1) | Approximately 37%33%, 38%36%, and 43%37% of the primary delinquentdelinquency inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of June 30, 20192020, December 31, 20182019, and June 30, 20182019, respectively. |
Claims paying practices
Our loss reserving methodology incorporates our estimates of future rescissions and curtailments.rescissions. A variance between ultimate actual rescission and curtailment rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses. Our estimate of premiums to be refunded on expected future rescissions is accrued for separately and is included in “Other liabilities” on our consolidated balance sheets. For information about discussions and legal proceedings with customers with respect to our claims paying practices see Note 5 – “Litigation and Contingencies.”
Note 12. Shareholders’ Equity
Share repurchase programs
In March 2019, our board of directors authorized an additional shareWe did 0t repurchase program under which we may repurchase up to $200 millionany of our common stock throughduring the endsecond quarter of 2020. During the secondfirst quarter of 20192020 we repurchased approximately 1.89.6 million shares of our common stock at a weighted average cost per share of $13.79,$12.47, which included commissions. These repurchases used the remaining $25We may repurchase up to an additional $291 million of our common stock through the end of 2021 under a share repurchase authorization onprogram approved by our Board of Directors in the program announced in April 2018.January 2020. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.time, and in light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases.
Cash dividends
In February and May 2020, we paid quarterly cash dividends of $0.06 per share to shareholders which totaled $41 million. On July 30, 2020, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.06 per share payable on August 28, 2020, to shareholders of record at the close of business on August 11, 2020.
MGIC Investment Corporation - Q2 2020 | 29
Note 13. 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.
Table 13.1 shows the number of sharesrestricted stock units (RSUs) granted to employees and the weighted average fair value per share during the periods presented (shares in thousands).
| | Restricted stock grants | |
Restricted stock unit grants | | Restricted stock unit grants |
Table | 13.1 | | | | | | 13.1 | | | | | |
| | Six months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2020 | | 2019 |
| | Shares Granted | Weighted Average Share Fair Value | | Shares Granted | Weighted Average Share Fair Value | | RSUs Granted (in thousands) | Weighted Average Share Fair Value | | RSUs Granted (in thousands) | Weighted Average Share Fair Value |
RSUs subject to performance conditions | RSUs subject to performance conditions | 1,378 |
| $ | 11.76 |
| | 1,239 |
| $ | 15.80 |
| RSUs subject to performance conditions | 1,282 |
| $ | 12.87 |
| | 1,378 |
| $ | 11.76 |
|
RSUs subject only to service conditions | RSUs subject only to service conditions | 412 |
| 11.76 |
| | 412 |
| 15.71 |
| RSUs subject only to service conditions | 373 |
| 13.11 |
| | 412 |
| 11.76 |
|
MGIC Investment Corporation - Q2 2019 | 28
Note 14. Statutory Information
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 net risk in forceRIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements” and, together with the GSE Financial Requirements, the “Financial Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires a minimum policyholder position (“MPP”). The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums.
At June 30, 2019,2020, MGIC’s risk-to-capital ratio was 10.19.6 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $2.7$2.9 billion above the required MPP of $1.6 billion. In calculatingThe calculation of our risk-to-capital ratio and MPP we have taken fullreflect credit for the risk ceded under our QSR Transactions and Home Re Transactions with a group of unaffiliated reinsurers.reinsurance transactions. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded to the reinsurers. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the financial requirements of the PMIERs, MGIC may terminate the reinsurance transactions, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, you should read the rest of these financial statement footnotes for information about matters that could negatively affect such compliance are discussed in the rest of these consolidated financial statement footnotes.compliance.
At June 30, 2019,2020, the risk-to-capital ratio of our combined insurance operations was 10.09.5 to 1.
The NAIC plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk, minimum capital floors, and action level triggers. Currently, we believe that the PMIERs contain more restrictive capital requirements than the draft Mortgage Guaranty Insurance Model Act in most circumstances.
While MGIC currently meets the State Capital Requirements of Wisconsin and all other jurisdictions, it could be prevented from writing new business in the future in all jurisdictions if it fails to meet the State Capital Requirements of Wisconsin, or it could be prevented from writing new business in a particular jurisdiction if it fails to meet the State Capital Requirements of that jurisdiction, and in each case MGIC does not obtain a waiver of such requirements. It is possible that regulatory action by one
or more jurisdictions, including those that do not have specific State Capital Requirements, may prevent MGIC from continuing to write new insurance in such jurisdictions.
If we are unable to write business in a particular jurisdiction,all jurisdictions, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the future ability of our insurance operations to meet the State Capital Requirements or the PMIERs may affect its willingness to procure insurance from us. A possible future failure by MGIC to meet the State Capital Requirements or the PMIERs will not necessarily mean that MGIC lacks sufficient resources to pay claims on its insurance liabilities. While we believe MGIC has sufficient claims paying resources to meet its claim obligations on its insurance in force on a timely basis, you should read the rest of these financial statement footnotes for information about matters that could negatively affect MGIC’s claims paying resources are discussed in the rest of these consolidated financial statement footnotes.
Tax and Loss Bonds
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. During the three months ended June 30, 2019, we had net purchases of T&L Bonds in the amount of $74 million. 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.resources.
Dividend restrictions
In each ofDuring the first and second quartersquarter of 2019,2020, MGIC paid a $70$390 million dividendin dividends to our holding company. MGIC did not pay dividends
MGIC Investment Corporation - Q2 2020 | 30
to our holding company during the second quarter of 2020 due to the uncertainty of the COVID-19 pandemic. 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 such dividends being subject to regulatory disapprovalapproval by the OCI is the lesser of adjusted statutory net income or 10% of statutory policyholders’‘policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three calendar years. The OCI recognizes only statutory accounting principles prescribed, or practices permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those found in other states. Specifically, Wisconsin domiciled companies record changes in their contingency reserves through their income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency reserves, statutory net income is lowered.reduced.
Under the PMIERs guidance, any dividend paid by MGIC to our holding company, through March 31, 2021, requires GSE approval.
Statutory Financial Information
The statutory net income, policyholders’ surplus, and contingency reserve liability of the insurance subsidiaries of our holding company are shown in table 14.1. The surplus amounts included in the following table are the combined policyholders’ surplus of our insurance operations as utilized in our risk-to-capital calculations.
|
| | | | | | | | |
Financial information of our insurance subsidiaries |
Table 14.1 | | | | |
| | As of and for the Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 |
Statutory net income | | $ | 4,545 |
| | $ | 147,372 |
|
Statutory policyholders' surplus | | 1,249,803 |
| | 1,634,128 |
|
Contingency reserve | | 3,230,255 |
| | 2,729,132 |
|
| | | | |
MGIC Investment Corporation - Q2 20192020 | 2931
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is management’s discussion and analysis of the financial condition and results of operations of MGIC Investment Corporation for the second quarter of 2019.2020. The increased unemployment and economic uncertainty resulting from the COVID-19 pandemic had a material impact on our second quarter financial results, as we reserved for losses associated with the increased delinquency notices received. While the magnitude of the impact of the COVID-19 pandemic on future financial results, liquidity and/or financial condition is uncertain, we expect it will negatively impact our business and that impact may be material. As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. This form 10-Q should be read in conjunction with “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, 2018.2019. See the “Glossary of terms and acronyms” for definitions and descriptions of terms used throughout this MD&A. The Risk Factors referred to under “Forward Looking Statements and Risk Factors” below, discuss trends and uncertainties affecting us and are an integral part of the MD&A.
Forward Looking and Other Statements
As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. These forward looking statements, including the discussion of the impact of the COVID-19 pandemic, speak only as of the date of this filing and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. 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 - Q2 20192020 | 3032
Overview
| | Summary financial results of MGIC Investment Corporation | Summary financial results of MGIC Investment Corporation | | | | | | | Summary financial results of MGIC Investment Corporation | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions, except per share data, unaudited) | (In millions, except per share data, unaudited) | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | (In millions, except per share data, unaudited) | | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Selected statement of operations data | Selected statement of operations data | | | | | | | | | | | | | Selected statement of operations data | | | | | | | | | | | | |
Total revenues | Total revenues | | $ | 292.3 |
| | $ | 282.0 |
| | 4 |
| | $ | 584.0 |
| | $ | 547.8 |
| | 7 |
| Total revenues | | $ | 294.0 |
| | $ | 292.3 |
| | 1 |
| | $ | 600.9 |
| | $ | 584.0 |
| | 3 |
|
Losses incurred, net | Losses incurred, net | | 21.8 |
| | (13.5 | ) | | 261 |
| | 60.9 |
| | 10.4 |
| | 486 |
| Losses incurred, net | | 217.4 |
| | 21.8 |
| | N/M |
| | 278.3 |
| | 60.9 |
| | N/M |
|
Other underwriting and operating expenses, net | Other underwriting and operating expenses, net | | 43.0 |
| | 41.8 |
| | 3 |
| | 88.9 |
| | 87.9 |
| | 1 |
| Other underwriting and operating expenses, net | | 44.3 |
| | 43.0 |
| | 3 |
| | 86.5 |
| | 88.9 |
| | (3 | ) |
Income before tax | Income before tax | | 211.2 |
| | 237.5 |
| | (11 | ) | | 402.1 |
| | 417.5 |
| | (4 | ) | Income before tax | | 16.5 |
| | 211.2 |
| | (92 | ) | | 204.7 |
| | 402.1 |
| | (49 | ) |
Provision for income taxes | Provision for income taxes | | 43.4 |
| | 50.7 |
| | (14 | ) | | 82.4 |
| | 87.1 |
| | (5 | ) | Provision for income taxes | | 2.4 |
| | 43.4 |
| | (94 | ) | | 40.9 |
| | 82.4 |
| | (50 | ) |
Net income | Net income | | 167.8 |
| | 186.8 |
| | (10 | ) | | 319.7 |
| | 330.5 |
| | (3 | ) | Net income | | 14.0 |
| | 167.8 |
| | (92 | ) | | 163.9 |
| | 319.7 |
| | (49 | ) |
Diluted income per share | Diluted income per share | | $ | 0.46 |
| | $ | 0.49 |
| | (6 | ) | | $ | 0.87 |
| | $ | 0.87 |
| | — |
| Diluted income per share | | $ | 0.04 |
| | $ | 0.46 |
| | (91 | ) | | $ | 0.48 |
| | $ | 0.87 |
| | (45 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-GAAP Financial Measures (1) | Non-GAAP Financial Measures (1) | | | | | | | Non-GAAP Financial Measures (1) | | | | | | |
Adjusted pre-tax operating income | Adjusted pre-tax operating income | | $ | 211.0 |
| | $ | 239.4 |
| | (12 | ) | | $ | 402.6 |
| | $ | 419.8 |
| | (4 | ) | Adjusted pre-tax operating income | | $ | 11.2 |
| | $ | 211.0 |
| | (95 | ) | | $ | 196.6 |
| | $ | 402.6 |
| | (51 | ) |
Adjusted net operating income | Adjusted net operating income | | 167.6 |
| | 189.2 |
| | (11 | ) | | 320.0 |
| | 333.8 |
| | (4 | ) | Adjusted net operating income | | 9.9 |
| | 167.6 |
| | (94 | ) | | 157.4 |
| | 320.0 |
| | (51 | ) |
Adjusted net operating income per diluted share | Adjusted net operating income per diluted share | | $ | 0.46 |
| | $ | 0.50 |
| | (8 | ) | | $ | 0.87 |
| | $ | 0.88 |
| | (1 | ) | Adjusted net operating income per diluted share | | $ | 0.03 |
| | $ | 0.46 |
| | (93 | ) | | $ | 0.46 |
| | $ | 0.87 |
| | (47 | ) |
Summary of second quarter 20192020 results
Comparative quarterly results
We recorded second quarter 20192020 net income of $167.8$14.0 million, or $0.46$0.04 per diluted share. Net income decreased by $19.0$153.7 million (10%(92%) from net income of $186.8$167.8 million in the prior year, primarily reflecting an increase in losses incurred, net. Revenues were up slightly as net realized investment gains more than offset a decrease in investment income and net premiums earned. Diluted income per share decreased due to a decline in net income.
Adjusted net operating income for the second quarter 2020 was $9.9 million (Q2 2019: $167.6 million) and adjusted net operating income per diluted share was $0.03 (Q2 2019: $0.46). Adjusted net operating income per diluted share decreased due to a decline in adjusted net operating income.
Net premiums earned decreased due to lower premium rates on our insurance in force and a decrease in profit commission that was a result of higher ceded losses incurred, partially offset by higher average insurance in force and an increase in accelerated premiums from single premium policy cancellations.
Losses incurred, netfor the second quarter of 2020 were $217.4 million, an increase of $195.5 million compared to the prior year. The increase reflects an increase in new delinquency notices and an increase in our IBNR and other reserve, from $30 million to $61 million due to the COVID-19 pandemic and the current macroeconomic environment. In the second quarter of 2020, we received new delinquency notices of 57,584 compared to 12,915 for the same period last year. In the second quarter of 2020, our re-estimation of reserves on previous delinquencies resulted in $10 million adverse loss reserve development.
The decrease in our provision for income taxes in the second quarter of 2020 as compared to the prior year was primarily due to a decrease in income before tax.
Comparative year to date results
We recorded net income of $163.9 million, or $0.48 per diluted share during the first six months of 2020. Net income decreased by $155.8 million from net income of $319.7 million in the prior year, primarily reflecting an increase in losses incurred, net, partially offset by an increase in investment incomerevenue and a decrease in our provision for income taxes. The increase in revenue was primarily driven by an increase in net realized investment gains and net premiums earned. Diluted income per share declined 6 percent reflectingwas lower than the decreaseprior year due to the decline in net income, partially offset in part by a decrease in our diluted weighted average shares outstanding.
Adjusted net operating income for the second quarter 2019first six months of 2020 was $167.6$157.4 million (Q2 2018: $189.2(YTD 2019: $320.0 million) and adjusted net operating income per diluted share was $0.46 (Q2 2018: $0.50). Adjusted net operating income per diluted share declined 8% reflecting the decrease in net income, offset in part by a decrease in our diluted weighted average shares outstanding.
Losses incurred, netfor the second quarter of 2019 were $21.8 million, an increase of $35.3 million compared to the prior year. The increase was due to a lower level of favorable loss reserve development on previously received delinquencies compared to the prior year. The increase was offset in part by lower current year losses incurred as the estimated claim rate on new notices in the second quarter of 2019 was 8%, compared to 9.5% in the prior year.
The decrease in our provision for income taxes in the second quarter of 2019 as compared to the prior year was primarily due to a decrease in income before tax.
In June 2019, MGIC paid a dividend of $70 million to our holding company and we expect MGIC to continue to pay quarterly dividends of at least that amount, subject to approval by MGIC’s board of directors and non-disapproval by the OCI.
Comparative year to date results
We recorded net income of $319.7 million, or $0.87 per diluted share during the first six months of 2019. Net income decreased by $10.7 million from net income of $330.5 million in the prior year, primarily reflecting an increase in losses incurred, net, partially offset by an increase in premiums and investment income. Diluted income per share was the same as the prior year as the decrease in net income was offset by a decrease in our diluted weighted average shares outstanding.
Adjusted net operating income for the first six months of 2019 was $320.0 million (YTD 2018: $333.8 million) and adjusted net operating income per diluted share was $0.87 (YTD 2018: $0.88)2019: $0.87). Adjusted net operating income per diluted share was roughly the same aslower than the prior year asdue to the decreasedecline in adjusted net operating income, waspartially offset by a decrease in our diluted weighted average shares outstanding.
Net premiums earned increased due to higher average insurance in force and an increase in accelerated premiums from single premium policy cancellations, partially offset by lower premium rates and a decrease in the profit commission from our QSR Transactions that was a result of higher ceded losses incurred.
Losses incurred, net for the first six months of 20192020 were $60.9$278.3 million, an increase of $50.5$217.4 million over the prior year.year losses incurred of $60.9 million. The increase wasreflects an increase in new delinquency notices, and an increase in our IBNR and other reserve due to a lower level of favorable loss reserve development on previously received delinquenciesthe COVID-19 pandemic and the current macroeconomic environment. This increase was partially offset by the non-recurring recognition of a probable loss of $23.5 million for litigation of our claims paying practices during the first quarter of 2019. The increase was offset in part by lower current year losses incurred as the estimated claim rate on new notices in the first six months of 2019 was 8%, compared to 9% in the prior year.
MGIC Investment Corporation - Q2 2020 | 33
The decrease in our provision for income taxes in the first six months of 20192020 as compared to the prior year was primarily due to a decrease in income before tax.
See “Consolidated Results of Operations” below for additional discussion of our results for the three and six months ended June 30, 20192020 compared to the respective prior year periods.
Capital
MGIC Investment Corporation - Q2 2019 | 31dividend payments to our holding company
In the second quarter of 2020, MGIC did not pay dividends to our holding company due to the uncertainty arising from the COVID-19 pandemic. Future dividend payments from MGIC to the holding company will continue to be determined on a quarterly basis in consultation with the board, and after considering any updated estimates about the length and severity of the economic impacts of the COVID-19 pandemic on our business. We ask the Wisconsin OCI not to object before MGIC pays dividends to the holding company.
Under the PMIERs guidance, any dividend paid by MGIC to our holding company, through March 31, 2021, requires GSE approval.
Capital
Share repurchase programs
On March 19, 2019,In the second quarter of 2020, we did not repurchase any shares of our board of directors authorized an additional share repurchase program under which wecommon stock. We may repurchase up to $200an additional $291 million of our common stock through the end of 2020. During the second quarter2021 under a share repurchase program approved by our Board of 2019, we repurchased approximately 1.8 million shares of common stock for $25 million, which used the remaining authorization on the program announcedDirectors in April 2018.January 2020. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase programs may be suspended for periods or discontinued at any time.time, and in light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases. As of June 30, 2019,2020, we had approximately 354339 million shares of common stock outstanding.
Since the end of the second quarter of 2019, through August 5, 2019, we repurchased approximately 1.8 million shares of our common stock for approximately $23 million.
Dividends to shareholders
In May 2020, we paid a dividend of $0.06 per common share totaling $21 million to our shareholders. On July 25, 2019, the30, 2020, our Board of Directors declared a quarterly cash dividend to shareholders of the company of $0.06 per common share payable on September 20, 2019, to shareholders of record at the close of business on August 30, 2019.11, 2020, payable on August 28, 2020.
GSEs
Based on our interpretation of the PMIERs, as of June 30, 2020, MGIC’s Available Assets totaled $4.5 billion, or $1.1 billion in excess of its Minimum Required Assets.
The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases. For delinquent loans whose initial missed payment occurred on or after March 1, 2020 and prior to January 1, 2021 (the "COVID-19 Crisis Period"), the Minimum Required Assets are generally reduced by 70% for at least three months. The 70% reduction will continue, or be newly applied, for delinquent loans that are subject to a forbearance plan that is granted in response to a financial hardship related to COVID-19, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. Under the PMIERs, a forbearance plan on a loan with an initial missed payment occurring during the COVID-19 Crisis Period is assumed to have been granted in response to a financial hardship related to COVID-19. Loans considered to be subject to a forbearance plan include those that are in a repayment plan or loan modification trial period following the forbearance plan.
We expect the GSEs and servicers will provide us with information about the forbearance status for nearly all of the loans in our delinquency inventory. The forbearance information provided by the GSEs will be with respect to delinquent loans in forbearance as of the prior month-end, while the information provided by loan servicers may be more current. As a result, in some cases, there may be a delay in our ability to take advantage of the 70% reduction.
If our Available Assets are less than our Minimum Required Assets, then we would not be in compliance with the PMIERs. At the extreme, the GSEs may suspend or terminate eligibility If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs, itGSEs. Such suspension or termination, would significantly reduce the volume of our new business writings. Factorswritings; in 2019, the substantial majority of our NIW has been for loans purchased by the GSEs. In addition to the increase in Minimum Required Assets associated with delinquent loans whose borrowers are affected by the COVID-19 pandemic, factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:
|
| |
è
| The GSEs may amend the PMIERs at any time and may make the PMIERs more onerous in the future. 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 have indicated that therewill 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. |
MGIC Investment Corporation - Q2 2020 | 34
|
| |
è
| There may be potential future implications for PMIERs based upon feedback the FHFA receives on its June 2018 proposed rule onchanges to the regulatory capital requirements for the GSEs. In May 2020, the FHFA re-proposed a capital rule for the GSEs whichthat, if enacted, would increase the capital requirements of the GSEs. That increase may ultimately result in an increase in the Minimum Required Assets required to be held by mortgage insurers. The re-proposed capital rule included a framework for determining the capital relief allowed to the GSEs for loans with private mortgage insurance (public comments were dueand it affords more capital relief to the GSEs when its counterparty is a more diversified entity. The proposed changes also decreased the GSEs' capital credit provided by November 16, 2018).credit risk transfer transactions, which could result in decreased PMIERs credit for existing or future reinsurance or insurance linked notes transactions entered into by MGIC. Further, any changes to the GSEs' capital and liquidity requirements resulting from the Treasury Housing Reform Plan (discussed below) could have future implications for PMIERs. In addition, the PMIERs provide that the factors that determine Minimum Required Assets will be updated every two years and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. The GSEs have indicated that they will generally provide notice 180 days prior to the effective date of such updates. |
è
| Our future operating results may be negatively impacted by the matters discussed in our risk factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets. |
è
| Should capital be needed by MGIC in the future, capital contributions from our holding company may not be available due to competing demands on holding company resources, including for repayment of debt.
|
WhileOur reinsurance transactions enable us to earn higher returns on an overall basis, the amount ofour business than we would without them because fewer Available Assets MGIC must hold in orderare required to continue to insure GSE loans is greaterbe held under the PMIERs than what state regulation currently requires, our reinsurance transactions mitigate the negative effect of the PMIERs on our returns.PMIERs. However, reinsurance may not always be available to us or available on similar terms itand our quota share reinsurance subjects us to counterparty credit risk and the GSEs may change therisk. The total credit they allow under the PMIERs for risk ceded under our reinsurance transactions is subject to a modest reduction. Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future transactions that we receive under existing transactions.
State Regulations
The insurance laws of 16 jurisdictions, including Wisconsin, MGIC’sour domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its net RIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires an MPP. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve, and a portion of the reserve for unearned premiums
At June 30, 2019,2020, MGIC’s risk-to-capital ratio was 10.19.6 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $2.7$2.9 billion above the required MPP of $1.6 billion. In calculatingThe calculation of our risk-to-capital ratio and MPP we have taken fullreflect credit for the risk ceded under our QSR Transactions and Home Re Transactions.reinsurance transactions. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded to the reinsurers. If
MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the PMIERs, MGIC may terminate the reinsurance transactions, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, refer to our risk factor titled “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis” for more information about matters that could negatively affect such compliance.
At June 30, 2019,2020, the risk-to-capital ratio of our combined insurance operations (which includes a reinsurance affiliate) was 109.5 to 1.
The NAIC has previously announced plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016,December 2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk and minimum capital floors, and action level triggers.floors. Currently we believe that the PMIERs contain more restrictive capital requirements than the draft Mortgage Guaranty Insurance Model Act in most circumstances.
MGIC Investment Corporation - Q2 2019 | 32
GSE reform
The FHFA has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorship may increase the likelihood that the business practices of the GSEs change, including through administrative action, in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation. In the past, members of Congress have introduced several bills intended to change the business practices of the GSEs and the FHA; however, no legislation has been enacted.
In MarchSeptember 2019, at the direction of President Trump, directed the U.S. Treasury Department to develop a plan, as soon as practicable, for(“Treasury”) released the “Treasury Housing Reform Plan” (the “Plan”). The Plan recommends administrative and legislative reforms for the housing finance system, (“Treasury Housing Reform Plan”), with such reforms intended to reduce taxpayer risk, expandachieve the private sector’s role, modernize the government housing programs, and achieve sustainable homeownership. The directive outlines numerous goals and objectives, including but not limited to, the end of conservatorshipending conservatorships of the GSEs, increasedGSEs; increasing competition and participation ofby the private sector in the mortgage market including by authorizing the FHFA to approve additional guarantors of conventional mortgages in the secondary market, appropriatesimplifying the qualified mortgage (“QM”) rule of the Consumer Financial Protection Bureau (“CFPB”), transferring risk to the private sector, and eliminating the GSE Patch (discussed below); establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and providing that the Federal Government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. Also, in September 2019, the Treasury and FHFA entered into a letter agreement that will allow the GSEs to remit less of their earnings to the government, which will help them rebuild their capital.
The impact of the Plan on private mortgage insurance is unclear. The plan does not refer to mortgage insurance explicitly; however, it refers to a requirement for credit enhancement on high LTV ratio loans, which is a requirement of the current GSE
MGIC Investment Corporation - Q2 2020 | 35
charters. The Plan also indicates that the FHFA should continue to support efforts to expand credit risk transfer (“CRT”) programs and should encourage the GSEs to continue to engage in a diverse mix of economically sensible CRT programs, including by increasing reliance on institution-level capital (presumably, as distinguished from capital obtained in the capital markets). For more information about CRT programs, see our risk factor titled "The amount of insurance we write could be adversely affected if lenders and liquidity requirementsinvestors select alternatives to private mortgage insurance."
In May 2020, the FHFA re-proposed a capital rule for the GSEs and evaluationthat, if enacted, would increase the capital requirements of the GSE Patch.GSEs. The proposed capital rule may result in the GSEs purchasing fewer loans, charging higher guaranty fees and favoring a lower mortgage insurance coverage percentage than is typically used, each of which may reduce the size of the private mortgage insurance market. For information about the possible impact of the re-proposed capital rule on the Minimum Required Assets required to be held by mortgage insurers under the PMIERs, see our risk factor title "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 June 2020, it was announced that each of the GSEs has selected an underwriting financial advisor to assist with their recapitalization and exit from conservatorship.
The current GSE Patch expands the definition of Qualified Mortgage (“QM”)QM under the Truth in Lending Act (Regulation Z) ("TILA") to include mortgages eligible to be purchased by the GSEs, even if the mortgages do not meet the DTIdebt-to-income ("DTI") ratio limit of 43% that is included in the standard QM definition.
Originating a QM may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay. The GSE Patch is scheduled to expire no later than January 2021. In July 2019, the CFPB released an Advanced Notice of Proposed Rulemaking on the QM definition. The director of the CFPB indicated that the CFPB would consider only a short-term extension of the GSE Patch. Approximately 30%20% and 24%23% of our NIW in the firstsecond and secondfirst quarters of 2019,2020, respectively, was on loans with DTI ratios greater than 43%. However, it is possible that expiration of the GSE Patch will be delayed and that not all future loans with DTI ratios greater than 43% will be affected by a sunset of the GSE Patch, in part because the standard QM definition may be liberalized under the new rules.such expiration. In this regard, we note that in June 2020, the CFPB askedissued for comment, about whethera proposed definition of QM that would replace the use of the DTI ratio in the definition with a pricing threshold that would exclude from the definition of QM should retain a direct measure of a consumer’s personal finances (for example, DTI ratio); whetherloan whose annual percentage rate exceeds the definition should include an alternative methodaverage prime offer rate for assessing financial capacity; whether, if the QM definition retains a DTI ratio limit, the limit should remain 43%comparable loans by two percentage points or be increased or decreased; and whether loans with DTI ratios above a prescribed limit should be given QM status if certain compensating factors are present. more.
We may insure loans that do not qualify as QMs, however, we are unsure the extent to which lenders will make non-QM loans because they will not be entitled to the presumptions about compliance with the “ability to repay” rulesATR rule that the law allows with respect to QM loans. We are also unsure the extent to which lenders will purchase private mortgage insurance for loans that cannot be sold to the GSEs.
Finally, certain lenders have suspended their non-QM lending due to COVID-19 pandemic-related concerns.The rule that includes the QM definition that applies tofor loans insured by the FHA, waswhich issued by the Department of Housing and Urban Development (“HUD”) and that definition is less restrictive than the CFPB’s current definition in certain respects, including that (i) it has no DTI ratio limit, and (ii) it allows the lenderlenders certain presumptions about compliance with the “ability to repay” requirementsATR rule on higher priced loans. It is possible that, in the future, lenders will prefer FHA-insured loans to loans insured by private
mortgage insurance as a result of the FHA’s less restrictive QM definition.
In MarchHowever, in September 2019, the President also directed the Secretary of HUD to develop a planreleased its Housing Reform Plan and indicated that would recommend administrative and legislative reforms to the programs HUD oversees, including those of the FHA should refocus on its mission of providing housing finance support to low and moderate-income families that cannot be fulfilled through traditional underwriting. In addition, Treasury’s Plan indicated that the Government National Mortgage Association.FHFA and HUD should develop and implement a specific understanding as to the appropriate roles and overlap between the GSEs and FHA, including with respect to the GSEs’ acquisitions of high LTV ratio and high DTI ratio loans.
For additional information about the business practices of the GSEs, see our risk factor titled “Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.”
COVID-19 Pandemic
The COVID-19 pandemic had a material impact on our second quarter 2020 financial results. While uncertain, the future impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may also be material. We expect that the increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19(including "shelter-in-place" restrictions), as well as COVID-19‑related illnesses and deaths, will negatively impact our business. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19remain in place, the resulting level of unemployment, and the impact of past and future government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by the GSEs (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce its transmission.
The programs contained in the CARES Act and actions taken by the GSEs include, among many others:
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• | Payment forbearance on federally-backed mortgages (including those delivered to or purchased by the GSEs) to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance allows for mortgage payments to be suspended for up to 360 days. The substantial majority of our 2019 NIW was delivered to or purchased by the GSEs. While servicers of some non-GSE loans may not be required to offer forbearance to borrowers, we allow servicers to apply GSE loss mitigation programs to non-GSE loans. In addition, the Consumer Financial Protection Bureau ("CFPB") requires substantial loss mitigation efforts be made prior to servicers initiating foreclosure, therefore, servicers of non-GSE loans may have an incentive to offer forbearance or deferment. |
For those mortgages that are not subject to forbearance, a suspension of foreclosures and evictions until at least August 31, 2020, on mortgages purchased or securitized by the GSEs.
Direct aid to individuals in the form of refundable tax credit rebates paid in April 2020.
MGIC Investment Corporation - Q2 2020 | 36
"Paycheck Protection Program" to provide small businesses with funds to pay up to eight weeks of payroll costs, and certain other expenses.
Enhanced unemployment benefits.
Increased flexibility under retirement plans.
The number of loans entering forbearance plans is unprecedented. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. The severity of losses associated with loans whose delinquencies do not cure will depend on economic conditions at that time, including home prices. The GSEs have introduced specific loss mitigation options for borrowers impacted by COVID-19 when their forbearance plans end, including the COVID-19 Payment Deferral solution for borrowers who are unable to immediately or gradually repay their missed loan payments. Under the COVID-19 Payment Deferral solution, the borrower's monthly loan payment would be returned to its pre-COVID amount and the missed payments would be added to the end of the mortgage term without accruing any additional interest or late fees. The deferred payments would be due when the loan is paid off, refinanced or the home is sold.
The foreclosure moratoriums and forbearance plans in place under the CARES act and GSE initiatives may delay the receipt of claims and slow down our claim payments.
The tax changes in the CARES Act did not materially impact our financial results.
Factors affecting our results
The COVID-19 pandemic may adversely affect our future business, results of operations, and financial condition. The extent of the adverse effects will depend on the duration and continued severity of the COVID-19 pandemic and its effects on the U.S. economy and housing market. We have addressed some of the potential impacts throughout this document.
Our results of operations are generally affected by:
Premiums written and earned
Premiums written and earned in a year are influenced by:
NIW, which increases IIF. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages from the FHA, the VA, other mortgage insurers, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance. NIW does not include loans previously insured by us that are modified, such as loans modified under HARP.
Cancellations, which reduce IIF. Cancellations due to refinancings are affected by the level of current mortgage interest rates compared to the mortgage coupon rates throughout the in force book, current home values compared to values when the loans in the in force book were
insured and the terms on which mortgage credit is available. Home price appreciation can give homeowners the right to cancel mortgage insurance on their loans if sufficient home equity is achieved. Cancellations also result from policy rescissions, which require us to return any premiums received on the rescinded policies and claim payments, which require us to return any premium received on the related policies from the date of default on the insured loans. Cancellations of single premium policies, which are generally non-refundable, result in immediate recognition of any remaining unearned premium.
Premium rates, which are affected by product type, competitive pressures, the risk characteristics of the insured loans, 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
MGIC Investment Corporation - Q2 2019 | 33
balance; thereafter, the premium rate resets to a lower rate used for the remaining life of the policy. However, for loans that have utilized HARP, the initial ten-year period resets as of the date of the HARP transaction. The remainder of our monthly and annual premiums are under premium plans for which premiums are determined by a fixed percentage of the loan’s amortizing balance over the life of the policy.
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• | Premiums ceded, net of a profit commission, under our QSR Transactions and premiums ceded under our Home Re Transactions. The profit commission varies directly and inversely with the level of ceded losses on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than we experienced in the first half of 2020. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in more benefit from ceded losses and a lower profit commission (or for certain levels of accident year loss ratios, its elimination). See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance transactions. |
Premiums are generated by the insurance that is in force during all or a portion of the period. A change in the average IIF in the current period compared to an earlier period is a factor that will increase (when the average in force is higher) or reduce (when it is lower) premiums written and earned in the current period, although this effect may be enhanced (or mitigated) by differences in the average premium rate between the two periods as well as by premiums that are returned or expected to be returned in connection with claim payments and rescissions, and premiums ceded under reinsurance agreements. Also, NIW and cancellations during a period will generally have a greater effect on premiums written and earned in subsequent periods than in the period in which these events occur.
Investment income
Our investment portfolio is composed principally of investment grade fixed income securities. The principal factors that influence investment income are the size of the portfolio and its yield. As measured by amortized cost (which excludes changes in fair value, such as from changes in interest rates), the size of the investment portfolio is mainly a function of cash generated from (or used in) operations, such as NPW, investment income, net claim payments and expenses, and cash provided by (or used
MGIC Investment Corporation - Q2 2020 | 37
for) non-operating activities, such as debt, stock issuances or repurchases, orand dividends.
Losses incurred
Losses incurred are the current expense that reflects estimated payments that will ultimately be made as a result of delinquencies on insured loans. As explained under “Critical Accounting Policies” in our 20182019 10-K MD&A, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. The level of new delinquencies has historically followed a seasonal pattern, with new delinquencies in the first part of the year lower than new delinquencies in the latter part of the year, though this pattern can be affected by the state of the economy and local housing markets. Pandemics, including COVID-19, and other natural disasters may result in delinquencies not following the typical pattern. Losses incurred are generally affected by:
The state of the economy, including unemployment and housing values, each of which affects the likelihood that loans will become delinquent and whether loans that are delinquent cure their delinquency.
The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.
The size of loans insured, with higher average loan amounts tending to increase losses incurred.
The percentage of coverage on insured loans, with deeper average coverage tending to increase losses incurred.
The rate at which we rescind policies or curtail claims. Our estimated loss reserves incorporate our estimates of future rescissions of policies and curtailments of claims, and reversals of rescissions and curtailments. We collectively refer to rescissions and denials as “rescissions” and variations of this term. We call reductions to claims “curtailments.”
The distribution of claims over the life of a book. Historically, the first few years after loans are originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining, although persistency, the condition of the economy, including unemployment and housing prices, and other factors can affect this pattern. For example, a weak economy or housing value declines can lead to claims from older books increasing, continuing at stable levels or experiencing a lower rate of decline. See further information under “Mortgage insurance earnings and cash flow cycle” below.
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• | Losses ceded under reinsurance transactions. See Note 4 - “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 services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions associated with our reinsurance transactions. Employee compensation expenses are variable due to share-based compensation, changes in
benefits, and headcount (which can fluctuate due to volume). See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of the ceding commission on our reinsurance transactions.
Interest expense
Other
Certain activities that we do not consider part of our fundamental operating activities may also impact our results of operations and are described ininclude the following.
Net realized investment gains (losses)
Fixed income securities. Realized investment gains and losses are a function of the difference between the amount received on the sale of a fixed income security and the fixed income security’s cost basis, as well as any “other than temporary” impairments (“OTTI”)credit allowances recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
MGIC Investment Corporation - Q2 2019 | 34
Equity securities. Realized investment gains and losses are a function of the periodic change in fair value, as well as any OTTIcredit allowances recognized in earnings.
Mortgage insurance earnings and cash flow cycle
In general, the majority of any underwriting profit that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year following the year the book was written. Subsequent years of a book may result in either underwriting profit or underwriting losses. This pattern of results typically occurs because relatively few of the incurred losses on delinquencies that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments) and increasing losses. The typical pattern is also a function of premium rates generally resetting to lower levels after ten years. Pandemics, including COVID-19, and other natural disasters may result in delinquencies not following the typical pattern.
MGIC Investment Corporation - Q2 20192020 | 3538
Explanation and reconciliation of our use of non-GAAP financial measures
Non-GAAP financial measures
We believe that use of the Non-GAAP measures of adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance.
Adjusted pre-tax operating income (loss) is defined as GAAP income (loss) before tax, excluding the effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss) and infrequent or unusual non-operating items where applicable.
Adjusted net operating income (loss) is defined as GAAP net income (loss) excluding the after-tax effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss), and infrequent or unusual non-operating items where applicable. 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 for interest expense on convertible debt, whenever the impact is dilutive by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the “if-converted” method.
Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these adjustments. Other companies may calculate these measures differently. Therefore, their measures may not be comparable to those used by us.
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(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. |
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(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. |
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(3) | Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles, individual issuer performance, and general economic conditions. |
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(4) | Infrequent or unusual non-operating items. Income tax expense related to our IRS dispute is related to past transactions which are non-recurring in nature and are not part of our primary operating activities.
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MGIC Investment Corporation - Q2 20192020 | 3639
| | Non-GAAP reconciliations | | | | | |
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | | Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | |
| | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2019 | | 2018 | | | 2020 | | 2019 | |
(In thousands, except per share amounts) | | Pre-tax | | Tax effect | | Net (after-tax) | | Pre-tax | | Tax effect | | Net (after-tax) | | | Pre-tax | | Tax effect | | Net (after-tax) | | Pre-tax | | Tax effect | | Net (after-tax) | |
Income before tax / Net income | | $ | 211,211 |
| | $ | 43,433 |
| | $ | 167,778 |
| | $ | 237,522 |
| | $ | 50,708 |
| | $ | 186,814 |
| | | $ | 16,483 |
| | $ | 2,436 |
| | $ | 14,047 |
| | $ | 211,211 |
| | $ | 43,433 |
| | $ | 167,778 |
| |
Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Additional income tax benefit (provision) related to IRS litigation | | — |
| | — |
| | — |
| | — |
| | (923 | ) | | 923 |
| | |
Net realized investment (gains) losses | | (217 | ) | | (46 | ) | | (171 | ) | | 1,897 |
| | 398 |
| | 1,499 |
| | | (5,274 | ) | | (1,107 | ) | | (4,167 | ) | | (217 | ) | | (46 | ) | | (171 | ) | |
Adjusted pre-tax operating income / Adjusted net operating income | | $ | 210,994 |
| | $ | 43,387 |
| | $ | 167,607 |
| | $ | 239,419 |
| | $ | 50,183 |
| | $ | 189,236 |
| | | $ | 11,209 |
| | $ | 1,329 |
| | $ | 9,880 |
| | $ | 210,994 |
| | $ | 43,387 |
| | $ | 167,607 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | | Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | |
Weighted average diluted shares outstanding | | | | | | 376,603 |
| | | | | | 388,881 |
| | | | | | | 339,661 |
| | | | | | 376,603 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per diluted share | | | | | | $ | 0.46 |
| | | | | | $ | 0.49 |
| | | | | | | $ | 0.04 |
| | | | | | $ | 0.46 |
| |
Additional income tax provision related to IRS litigation | | | | | | — |
| | | | | | — |
| (1) | |
Net realized investment losses | | | | | | — |
| | | | | | — |
| (1) | |
Net realized investment (gains) losses | | | | | | | (0.01 | ) | | | | | | — |
| |
Adjusted net operating income per diluted share | | | | | | $ | 0.46 |
| | | | | | $ | 0.50 |
| | | | | | | $ | 0.03 |
| | | | | | $ | 0.46 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) For the three months ended June 30, 2018, the individual adjustments are each less than $0.01 per diluted share, but collectively aggregate to $0.01 per diluted share. | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | | Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2019 | | 2018 | | | 2020 | | 2019 | |
(In thousands, except per share amounts) | | Pre-tax | | Tax effect | | Net (after-tax) | | Pre-tax | | Tax effect | | Net (after-tax) | | | Pre-tax | | Tax effect | | Net (after-tax) | | Pre-tax | | Tax effect | | Net (after-tax) | |
Income before tax / Net income | | $ | 402,147 |
| | $ | 82,428 |
| | $ | 319,719 |
| | $ | 417,547 |
| | $ | 87,096 |
| | $ | 330,451 |
| | | $ | 204,722 |
| | $ | 40,870 |
| | $ | 163,852 |
| | $ | 402,147 |
| | $ | 82,428 |
| | $ | 319,719 |
| |
Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Additional income tax provision related to IRS litigation | | — |
| | — |
| | — |
| | — |
| | (1,631 | ) | | 1,631 |
| | |
Net realized investment losses | | 403 |
| | 85 |
| | 318 |
| | 2,226 |
| | 467 |
| | 1,759 |
| | |
Net realized investment (gains) losses | | | (8,149 | ) | | (1,711 | ) | | (6,438 | ) | | 403 |
| | 85 |
| | 318 |
| |
Adjusted pre-tax operating income / Adjusted net operating income | | $ | 402,550 |
| | $ | 82,513 |
| | $ | 320,037 |
| | $ | 419,773 |
| | $ | 85,932 |
| | $ | 333,841 |
| | | $ | 196,573 |
| | $ | 39,159 |
| | $ | 157,414 |
| | $ | 402,550 |
| | $ | 82,513 |
| | $ | 320,037 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | | Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average diluted shares outstanding | | | | | | 376,635 |
| | | | | | 390,236 |
| | | | | | | 362,003 |
| | | | | | 376,635 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income per diluted share | | | | | | $ | 0.87 |
| | | | | | $ | 0.87 |
| | | | | | | $ | 0.48 |
| | | | | | $ | 0.87 |
| |
Additional income tax provision related to IRS litigation | | | | | | — |
| | | | | | — |
| (1) | |
Net realized investment losses | | | | | | — |
| | | | | | — |
| (1) | |
Net realized investment (gains) losses | | | | | | | (0.02 | ) | | | | | | — |
| |
Adjusted net operating income per diluted share | | | | | | $ | 0.87 |
| | | | | | $ | 0.88 |
| | | | | | | $ | 0.46 |
| | | | | | $ | 0.87 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) For the six months ended June 30, 2018, the individual adjustments are each less than $0.01 per diluted share, but collectively aggregate to $0.01 per diluted share. | | |
MGIC Investment Corporation - Q2 20192020 | 3740
Mortgage Insurance Portfolio
New insurance written
According to Inside Mortgage Finance and GSE estimates, total mortgage originations for the second quarter and first six months of 2019, on average, are estimated to have increased from the respective prior year periods. The total amount of mortgage originations is generally influenced by the level of new and existing home sales, the percentage of homes purchased for cash, and the level of refinance activity. PMI market share of total mortgage originations is influenced by the mix of purchase and refinance originations as PMI market share is typically 3-4 times higher for purchase originations than refinance originations. In recent quarters, we have experienced an increase in our NIW from refinances. 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.
The COVID-19 pandemic, including the related restrictions on business in many parts of the U.S., and its effect on unemployment and consumer confidence, may affect the number of purchase mortgage originations.
NIW for the second quarter of 20192020 was $14.9$28.2 billion (Q2 2018: $13.22019: $14.9 billion) and for the first six months of 20192020 was $25.0$46.1 billion (YTD 2018: $23.82019: $25.0 billion). The percentage of ourincrease is primarily driven by higher NIW on loans with DTI ratios greater than 45% has declinedfrom refinances and purchases in 2019, which we believe is due in partQ2 2020 compared to changes in GSE underwriting guidelines and our pricing for loans with such DTI ratios. We are continuing to monitor our exposure to such loans and may take further action.Q2 2019.
The following tables present characteristics of our primary NIW for the three and six months ended June 30, 20192020 and 2018.2019.
| | Primary NIW by FICO score | Primary NIW by FICO score | | | | | Primary NIW by FICO score | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(% of primary NIW) | (% of primary NIW) | | 2019 | | 2018 | | 2019 | | 2018 | (% of primary NIW) | | 2020 | | 2019 | | 2020 | | 2019 |
760 and greater | 760 and greater | | 43.9 | % | | 43.1 | % | | 42.9 | % | | 42.4 | % | 760 and greater | | 47.1 | % | | 43.9 | % | | 46.6 | % | | 42.9 | % |
740 - 759 | 740 - 759 | | 18.0 | % | | 17.3 | % | | 17.7 | % | | 17.2 | % | 740 - 759 | | 19.3 | % | | 18.0 | % | | 19.6 | % | | 17.7 | % |
720 - 739 | 720 - 739 | | 13.6 | % | | 14.6 | % | | 14.0 | % | | 14.6 | % | 720 - 739 | | 13.4 | % | | 13.6 | % | | 13.6 | % | | 14.0 | % |
700 - 719 | 700 - 719 | | 11.4 | % | | 11.8 | % | | 11.7 | % | | 11.7 | % | 700 - 719 | | 9.7 | % | | 11.4 | % | | 10.0 | % | | 11.7 | % |
680 - 699 | 680 - 699 | | 7.3 | % | | 6.9 | % | | 7.4 | % | | 7.2 | % | 680 - 699 | | 7.0 | % | | 7.3 | % | | 7.0 | % | | 7.4 | % |
660 - 679 | 660 - 679 | | 3.3 | % | | 3.4 | % | | 3.6 | % | | 3.7 | % | 660 - 679 | | 2.0 | % | | 3.3 | % | | 1.9 | % | | 3.6 | % |
640 - 659 | 640 - 659 | | 1.7 | % | | 2.1 | % | | 1.9 | % | | 2.2 | % | 640 - 659 | | 1.0 | % | | 1.7 | % | | 1.0 | % | | 1.9 | % |
639 and less | 639 and less | | 0.8 | % | | 0.8 | % | | 0.9 | % | | 0.9 | % | 639 and less | | 0.5 | % | | 0.8 | % | | 0.3 | % | | 0.8 | % |
| | Primary NIW by loan-to-value | Primary NIW by loan-to-value | | | | | Primary NIW by loan-to-value | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(% of primary NIW) | (% of primary NIW) | | 2019 | | 2018 | | 2019 | | 2018 | (% of primary NIW) | | 2020 | | 2019 | | 2020 | | 2019 |
95.01% and above | 95.01% and above | | 16.1 | % | | 15.4 | % | | 16.7 | % | | 14.4 | % | 95.01% and above | | 8.5 | % | | 16.1 | % | | 8.5 | % | | 16.7 | % |
90.01% to 95.00% | 90.01% to 95.00% | | 43.3 | % | | 44.1 | % | | 42.7 | % | | 44.1 | % | 90.01% to 95.00% | | 38.8 | % | | 43.3 | % | | 40.4 | % | | 42.7 | % |
85.01% to 90.00% | 85.01% to 90.00% | | 27.9 | % | | 28.8 | % | | 28.2 | % | | 28.9 | % | 85.01% to 90.00% | | 31.8 | % | | 27.9 | % | | 31.4 | % | | 28.2 | % |
80.01% to 85% | 80.01% to 85% | | 12.7 | % | | 11.7 | % | | 12.4 | % | | 12.6 | % | 80.01% to 85% | | 20.9 | % | | 12.7 | % | | 19.7 | % | | 12.4 | % |
| | Primary NIW by debt-to-income ratio (1) | Primary NIW by debt-to-income ratio (1) | | | | | Primary NIW by debt-to-income ratio (1) | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(% of primary NIW) | (% of primary NIW) | | 2019 | | 2018 | | 2019 | | 2018 | (% of primary NIW) | | 2020 | | 2019 | | 2020 | | 2019 |
45.01% and above | 45.01% and above | | 14.7 | % | | 19.2 | % | | 16.3 | % | | 19.6 | % | 45.01% and above | | 10.8 | % | | 14.7 | % | | 11.6 | % | | 16.3 | % |
38.01% to 45.00% | 38.01% to 45.00% | | 31.9 | % | | 32.1 | % | | 32.8 | % | | 31.9 | % | 38.01% to 45.00% | | 30.0 | % | | 31.9 | % | | 31.0 | % | | 32.8 | % |
38.00% and below | 38.00% and below | | 53.4 | % | | 48.7 | % | | 50.9 | % | | 48.5 | % | 38.00% and below | | 59.2 | % | | 53.4 | % | | 57.4 | % | | 50.9 | % |
| |
(1)
| In 2018, we started considering DTI ratios when setting our premium rates, and we changed our methodology for calculating DTI ratios for pricing and eligibility purposes to exclude the impact of mortgage insurance premiums. As a result of this change, loan originators may have changed the information they provide to us. Although we have changed our operational procedures to account for this, we cannot be sure that the DTI ratio we report for each loan beginning in late 2018 includes the related mortgage insurance premiums in the calculation. |
| | Primary NIW by policy payment type | Primary NIW by policy payment type | | | | | Primary NIW by policy payment type | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(% of primary NIW) | (% of primary NIW) | | 2019 | | 2018 | | 2019 | | 2018 | (% of primary NIW) | | 2020 | | 2019 | | 2020 | | 2019 |
Monthly premiums | Monthly premiums | | 84.2 | % | | 83.9 | % | | 84.1 | % | | 82.3 | % | Monthly premiums | | 88.1 | % | | 84.2 | % | | 86.9 | % | | 84.1 | % |
Single premiums | Single premiums | | 15.7 | % | | 15.9 | % | | 15.8 | % | | 17.5 | % | Single premiums | | 11.8 | % | | 15.7 | % | | 13.0 | % | | 15.8 | % |
Annual premiums | Annual premiums | | 0.1 | % | | 0.2 | % | | 0.1 | % | | 0.2 | % | Annual premiums | | 0.1 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % |
| | Primary NIW by type of mortgage | Primary NIW by type of mortgage | | | | | Primary NIW by type of mortgage | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(% of primary NIW) | (% of primary NIW) | | 2019 | | 2018 | | 2019 | | 2018 | (% of primary NIW) | | 2020 | | 2019 | | 2020 | | 2019 |
Purchases | Purchases | | 89.2 | % | | 94.1 | % | | 90.2 | % | | 91.5 | % | Purchases | | 56.8 | % | | 89.2 | % | | 60.1 | % | | 90.2 | % |
Refinances | Refinances | | 10.8 | % | | 5.9 | % | | 9.8 | % | | 8.5 | % | Refinances | | 43.2 | % | | 10.8 | % | | 39.9 | % | | 9.8 | % |
Insurance and risk in force
The amount of our IIF and RIF is impacted by the amount of NIW and cancellations of primary IIF during the period. Cancellation activity is primarily due to refinancing activity, but is also impacted by rescissions, cancellations due to claim payment, and policies cancelled when borrowers achieve the required amount of home equity. Refinancing activity has historically been affected by the level of mortgage interest rates and the level of home price appreciation. Cancellations generally move inversely to the change in the direction of interest rates, although they generally lag a change in direction.
MGIC Investment Corporation - Q2 2020 | 41
Persistency. Our persistency was 68.2% at June 30, 2020 compared to 75.8% at December 31, 2019 and 80.8% at June 30, 2019 compared to 81.7% at December 31, 2018 and 80.1% at June 30, 2018.2019. Since 2000, our year-end persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003.
MGIC Investment Corporation - Q2 2019 | 38
| | IIF and RIF | IIF and RIF | | | | | IIF and RIF | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In billions) | (In billions) | | 2019 | | 2018 | | 2019 | | 2018 | (In billions) | | 2020 | | 2019 | | 2020 | | 2019 |
NIW | NIW | | $ | 14.9 |
| | $ | 13.2 |
| | $ | 25.0 |
| | $ | 23.8 |
| NIW | | $ | 28.2 |
| | $ | 14.9 |
| | $ | 46.1 |
| | $ | 25.0 |
|
Cancellations | Cancellations | | (12.4 | ) | | (10.0 | ) | | (20.8 | ) | | (18.0 | ) | Cancellations | | (23.2 | ) | | (12.4 | ) | | (37.9 | ) | | (20.8 | ) |
Increase in primary IIF | Increase in primary IIF | | $ | 2.5 |
| | $ | 3.2 |
| | $ | 4.2 |
| | $ | 5.8 |
| Increase in primary IIF | | $ | 5.0 |
| | $ | 2.5 |
| | $ | 8.2 |
| | $ | 4.2 |
|
| | | | | | | | | | | | | | | | | | |
(In billions) | | 2019 | | 2018 | | | | | |
Direct primary IIF as of June 30, | Direct primary IIF as of June 30, | | $ | 213.9 |
| | $ | 200.7 |
| | | | | Direct primary IIF as of June 30, | | $ | 230.5 |
| | $ | 213.9 |
| | $ | 230.5 |
| | $ | 213.9 |
|
Direct primary RIF as of June 30, | Direct primary RIF as of June 30, | | $ | 55.2 |
| | $ | 51.7 |
| | | | | Direct primary RIF as of June 30, | | $ | 58.7 |
| | $ | 55.2 |
| | $ | 58.7 |
| | $ | 55.2 |
|
Credit profile of our primary RIF
The proportion of our total primary RIF written after 2008 has been steadily increasing in proportion to our total primary RIF. Our 2009 and later books possess significantly improved risk characteristics when compared to our 2005-2008 origination years.books. The credit profile of our pre-2009 RIF has benefited from modification and refinance programs making outstanding loans more affordable to borrowers with the goal of reducing the number of foreclosures. These programs included HAMP and HARP, which expired at the end of 2016 and 2018, respectively, but have been replaced by other GSE modification programs. HARP allowed borrowers who were not delinquent, but who may not otherwise have been able to refinance their loans under the current GSE underwriting standards due to, for example, the current LTV exceeding 100%, to refinance and lower their note rate.
As shown in the following table, Loans associated with 93.8% of all our HARP modifications were current as of June 30, 2019 approximately 11%2020. The aggregate of our 2009 and later books and our HARP modifications accounted for approximately 93% of our total primary RIF has been modified.
|
| | | | | | | |
Modifications |
Policy year | | HARP Modifications (1) | | HAMP & Other Modifications |
2003 and prior | | 9.7 | % | | 46.5 | % |
2004 | | | 17.4 | % | | 50.7 | % |
2005 | | | 25.3 | % | | 48.5 | % |
2006 | | | 28.6 | % | | 45.3 | % |
2007 | | | 41.0 | % | | 35.1 | % |
2008 | | | 57.8 | % | | 21.6 | % |
2009 | | | 47.2 | % | | 9.5 | % |
2010 - Q2 2019 | | — | % | | 0.5 | % |
| | | | | |
Total | | 5.4 | % | | 6.0 | % |
| |
(1)
| Includes proprietary programs that are substantially the same as HARP. |
As ofat June 30, 2019, based on loan count, the loans associated with 97.7% of HARP modifications and 80.5% of HAMP and other modifications were current.2020.
We cannot determine the total benefit we may derive from loan modification programs, particularly given the uncertainty around the re-default rates for defaulted loans that have been modified. Our loss reserves do not account for potential re-defaults of current loans.
The composition of our primary RIF as of June 30, 2020, December 31, 2019, and June 30, 2019 is shown below:
|
| | | | | | | | | | | | | | | | | | | |
Primary RIF |
($ in millions) | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Policy Year | | RIF | % of RIF | | RIF | % of RIF | | RIF | % of RIF |
2009+ | | $ | 52,237 |
| 89 | % | | $ | 50,044 |
| 88 | % | | $ | 47,141 |
| 85 | % |
2005 - 2008 (HARP) | | 2,213 |
| 4 | % | | 2,485 |
| 4 | % | | 2,805 |
| 5 | % |
Other years (HARP) | | 95 |
| — | % | | 165 |
| — | % | | 196 |
| 1 | % |
Subtotal | | 54,545 |
| 93 | % | | 52,694 |
| 92 | % | | 50,142 |
| 91 | % |
2005- 2008 (Non-HARP) | | 3,600 |
| 6 | % | | 3,868 |
| 7 | % | | 4,287 |
| 8 | % |
Other years (Non-HARP) | | 533 |
| 1 | % | | 651 |
| 1 | % | | 775 |
| 1 | % |
Subtotal | | 4,133 |
| 7 | % | | 4,519 |
| 8 | % | | 5,062 |
| 9 | % |
Total Primary RIF | | $ | 58,678 |
| 100 | % | | $ | 57,213 |
| 100 | % | | $ | 55,204 |
| 100 | % |
The aggregate of our 2009-2019 books and our HARP modifications accounted for approximately 91% of our total primary RIF at June 30, 2019.
|
| | | | | | | | | | | | | | | | | | | |
Primary RIF |
($ in millions) | | June 30, 2019 | | December 31, 2018 | | June 30, 2018 |
Policy Year | | RIF | % of RIF | | RIF | % of RIF | | RIF | % of RIF |
2009+ | | $ | 47,141 |
| 85 | % | | $ | 45,083 |
| 83 | % | | $ | 41,799 |
| 81 | % |
2005 - 2008 (HARP) | | 2,805 |
| 5 | % | | 3,109 |
| 5 | % | | 3,425 |
| 6 | % |
Other years (HARP) | | 196 |
| 1 | % | | 229 |
| 1 | % | | 266 |
| 1 | % |
Subtotal | | 50,142 |
| 91 | % | | 48,421 |
| 89 | % | | 45,490 |
| 88 | % |
2005- 2008 (Non-HARP) | | 4,287 |
| 8 | % | | 4,796 |
| 9 | % | | 5,289 |
| 10 | % |
Other years (Non-HARP) | | 775 |
| 1 | % | | 846 |
| 2 | % | | 965 |
| 2 | % |
Subtotal | | 5,062 |
| 9 | % | | 5,642 |
| 11 | % | | 6,254 |
| 12 | % |
Total Primary RIF | | $ | 55,204 |
| 100 | % | | $ | 54,063 |
| 100 | % | | $ | 51,744 |
| 100 | % |
MGIC Investment Corporation - Q2 2019 | 39
Pool and other insurance
MGIC has written no new pool insurance since 2008; however, for a variety of reasons, including responding to capital market alternatives to PMI and customer demands, MGIC may write pool risk in the future. Our direct pool risk in force was $393$360 million ($215212 million on pool policies with aggregate loss limits and $178$148 million on pool policies without aggregate loss limits) at June 30, 20192020 compared to $419$376 million ($228213 million on pool policies with aggregate loss limits and $191$163 million on pool policies without aggregate loss limits) at December 31, 2018.2019. If claim payments associated with a specific pool reach the aggregate loss limit, the remaining IIF within the pool would be cancelled and any remaining delinquencies under the pool would be removed from our delinquent inventory.
In connection with the GSEs' credit risk transferCRT programs, an insurance subsidiariessubsidiary of MGIC provideprovides 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 $88$279 million and $182 million as of June 30, 2019.
2020 and December 31, 2019, respectively.
MGIC Investment Corporation - Q2 20192020 | 4042
Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of MGIC Investment Corporation’s Consolidated Results of Operations for the three and six months ended June 30, 20192020 and 2018.2019.
Revenues
| | Revenues | Revenues | | | | | | | Revenues | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | (in millions) | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | (in millions) | | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Net premiums written | Net premiums written | | $ | 243.6 |
| | $ | 255.4 |
| | (5 | ) | | $ | 487.9 |
| | $ | 492.3 |
| | (1 | ) | Net premiums written | | $ | 221.4 |
| | $ | 243.6 |
| | (9 | ) | | $ | 467.4 |
| | $ | 487.9 |
| | (4 | ) |
| | | | | | |
|
| | | | | | | | | | | | |
|
| | | | | | |
Net premiums earned | Net premiums earned | | $ | 247.1 |
| | $ | 247.0 |
| | — |
| | $ | 496.9 |
| | $ | 479.1 |
| | 4 |
| Net premiums earned | | $ | 243.6 |
| | $ | 247.1 |
| | (1 | ) | | $ | 504.5 |
| | $ | 496.9 |
| | 2 |
|
Investment income, net of expenses | Investment income, net of expenses | | 42.4 |
| | 34.5 |
| | 23 |
| | 83.0 |
| | 66.6 |
| | 25 |
| Investment income, net of expenses | | 39.7 |
| | 42.4 |
| | (6 | ) | | 81.0 |
| | 83.0 |
| | (2 | ) |
Net realized investment gains (losses) | Net realized investment gains (losses) | | 0.3 |
| | (1.9 | ) | | N/M |
| | (0.2 | ) | | (2.2 | ) | | N/M |
| Net realized investment gains (losses) | | 6.7 |
| | 0.3 |
| | N/M |
| | 8.6 |
| | (0.2 | ) | | N/M |
|
Other revenue | Other revenue | | 2.5 |
| | 2.4 |
| | 2 |
| | 4.3 |
| | 4.3 |
| | — |
| Other revenue | | 4.0 |
| | 2.5 |
| | 60 |
| | 6.8 |
| | 4.3 |
| | 57 |
|
Total revenues | Total revenues | | $ | 292.3 |
| | $ | 282.0 |
| | 4 |
| | $ | 584.0 |
| | $ | 547.8 |
| | 7 |
| Total revenues | | $ | 294.0 |
| | $ | 292.3 |
| | 1 |
| | $ | 600.9 |
| | $ | 584.0 |
| | 3 |
|
Net premiums written and earned
Comparative quarterly results
NPW decreased and NPE was flatdecreased for the three months ended June 30, 2019 from2020 compared with the prior year reflectingdue to lower premium rates on our insurance in force and an increase in the reduction for ceded premiums compareddue to the same perioddecrease in profit commission from our QSR Transactions. The decrease in profit commission was a result of prior year, whichhigher ceded losses incurred. These decreases to NPW and NPE were partially offset an increase in premiums from aby higher average insurance in force and a decrease in premium refunds from lower claim activity. Thean increase in ceded premiums was due to a non-recurring termination fee related to our 2015 QSR Transaction, premiums ceded under our Home Re Transactions, and a lower profit commission due to higher ceded losses. NPE also reflects lower premium rates on our IIF and an increase inaccelerated premiums from single premium policy cancellations when compared to the prior year.
Comparative year to date results
NPW decreased and NPE increased for the six months ended June 30, 2019 when compared to the prior year period. NPW and NPE reflect an increase in ceded premiums compared to the same period of the prior year, which offset an increase in premiums from higher average insurance in force and a decrease in premium refunds from lower claim activity. The increase in ceded premiums was due to a non-recurring termination fee related to our 2015 QSR Transaction, premiums ceded under our Home Re Transactions, and a higher percentage of our IIF covered by quota share reinsurance. The negative effect of higher ceded premiums and IIF having lower premium rates on our NPE was offset by an increase in premiums from single premium policy cancellations when compared to the prior year.cancellations.
Premium yieldyields
Premium yield (NPEis NPE divided by average IIF) forIIF during the second quarter of 2019 was 46.5 basis points (Q2 2018: 49.6 basis points)period and our premium yield for the six months ended June 30, 2019 was 46.9 basis points (YTD 2018: 48.5 basis points). Our premium yield is influenced by a number of key drivers, which have a varying impact from period to period.
drivers. The following table reconcilespresents the key drivers of our net premium yield for the three and six months ended June 30, 20192020 and from the respective prior year period.
|
| | | | | | | |
Premium yield | | |
(in basis points) | | Three Months Ended | | Six Months Ended |
Premium yield - June 30, 2018 | | 49.6 |
| | 48.5 |
|
Reconciliation: | | | | |
Change in premium rates | | (1.2 | ) | | (1.3 | ) |
Change in premium refunds and accruals | | 0.6 |
| | 0.5 |
|
Single premium policy persistency | | 0.8 |
| | 0.3 |
|
Reinsurance | | (3.3 | ) | | (1.1 | ) |
Premium yield - June 30, 2019 | | 46.5 |
| | 46.9 |
|
|
| | | | | | | | | | | |
Premium Yield | | | |
| | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in basis points) | | 2020 | 2019 | | 2020 | 2019 |
In force portfolio yield | (1 | ) | 48.1 |
| 52.2 |
| | 48.6 |
| 52.3 |
|
Premium refunds | | (0.3 | ) | (0.3 | ) | | (0.5 | ) | (0.4 | ) |
Accelerated earnings on single premium policies | | 5.9 |
| 2.1 |
| | 4.6 |
| 1.6 |
|
Total direct premium yield | | 53.7 |
| 54.0 |
| | 52.7 |
| 53.5 |
|
Ceded premiums earned, net of profit commission and assumed premiums | (2 | ) | (11.0 | ) | (7.5 | ) | | (8.1 | ) | (6.6 | ) |
Net premium yield | | 42.7 |
| 46.5 |
| | 44.6 |
| 46.9 |
|
Our(1) Total direct premiums earned, excluding premium refunds and accelerated premiums from single premium policy cancellations divided by average primary insurance in force.
(2) Assumed premiums include those from our participation in GSE CRT programs, of which the impact on the net premium yield declinedwas 0.7 bps at June 30, 2020 compared to 0.5 bps at June 30, 2019.
MGIC Investment Corporation - Q2 2020 | 43
Changes in our premium yields when compared to the respective prior year periods and reflectsreflect the following:
|
| |
In force Portfolio Yield |
Negative drivers: |
è |
| A larger percentage of our IIF from book years with lower premium rates due to a decline in premium rates in recent years resulting from pricing competition, insuring mortgages with lower risk characteristics, and pricing competition, and certain policies undergoing premium rate resets on their ten-year anniversaries, and the availability of reinsurance. |
Premium Refunds |
è
| Premium refunds adversely impact our premium yield and are primarily driven by claim activity and our estimate of refundable premiums on our delinquency inventory. |
Accelerated earnings on single premium policies |
è
| | more of an adverse impact from our reinsurance primarily due to the non-recurring termination fee on our 2015 QSR Transaction and ceded premiums under our Home Re Transactions. |
Positive drivers: |
è | | less of an adverse impact from premium refunds primarily due to lower claim activity, and |
è | | greaterGreater amounts of accelerated earned premium from cancellationscancellation of single premium policies prior to their estimated policy life, primarily due to increased refinancing activity. |
Ceded premiums earned, net of profit commission and assumed premiums |
è
| Ceded premiums earned, net of profit commission adversely impact our premium yield. Ceded premiums earned, net of profit commission, were primarily associated with the QSR Transactions and the Home Re Transactions. Assumed premiums consists primarily of premiums from GSE CRT programs. See “Reinsurance agreements “ below for further discussion on our reinsurance transactions. |
As discussed in our Risk Factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses,” the private mortgage insurance industry is highly competitive and premium rates have declined over the past several years. We expect our net premium yield to continue to decline in 2019, primarily due to lower averageas older insurance policies with higher premium rates on our IIF.run off or have their premium rates reset, and new insurance policies with lower premium rates are written.
MGIC Investment Corporation - Q2 2019 | 41
Reinsurance agreements
Quota share reinsurance
Our quota share reinsurance affects various lines of our statements of operations and therefore we believe it should be analyzed by reviewing its total effect on our pre-tax income, described as follows.
|
| | |
è | | We cede a fixed percentage of premiums on insurance covered by the agreements. |
è | | We receive the benefit of a profit commission through a reduction in the premiums we cede. The profit commission varies directly and inversely with the level of losses on a “dollar for dollar” basis and can be eliminated at loss levels significantly higher than we are currently experiencing.experienced in the first half of 2020. As a result, lower levels of ceded losses result in a higher profit commission and less benefit from ceded losses; higher levels of ceded losses result in more benefit from ceded losses and a lower profit commission (or for certain levels of losses we do not expect,accident year loss ratios, its elimination). |
è | | We receive the benefit of a ceding commission through a reduction in underwriting expenses equal to 20% of premiums ceded (before the effect of the profit commission). |
è | | We cede a fixed percentage of losses incurred on insurance covered by the agreements. |
The following table provides information related to our quota share reinsurance agreements for 2020 and 2019.
|
| | | | | | | | | | | | | | | | |
Quota Share Reinsurance |
| | | | | | | | |
| | As of and For the Three Months Ended June 30, | | As of and For the Six Months Ended June 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
|
Ceded premiums written and earned, net of profit commission | | $ | 61,357 |
| | $ | 36,525 |
| | $ | 88,203 |
| | $ | 64,689 |
|
% of direct premiums written | | 22 | % | | 13 | % | | 16 | % | | 12 | % |
% of direct premiums earned | | 20 | % | | 13 | % | | 15 | % | | 11 | % |
Profit commission | | $ | (1,231 | ) | | $ | 37,021 |
| | $ | 28,748 |
| | $ | 75,902 |
|
Ceding commissions | $ | 12,025 |
| | $ | 13,356 |
| | $ | 23,390 |
| | $ | 26,765 |
|
Ceded losses incurred | | $ | 38,982 |
| | $ | 3,440 |
| | $ | 44,786 |
| | $ | 5,116 |
|
Ceded RIF (in millions) | | $ | 12,292 |
| | $ | 10,212 |
| | $ | 12,292 |
| | $ | 10,212 |
|
Covered risk
The amount of our NIW, new risk written, IIF, and RIF subject to our QSR Transactions as shown in the following table will vary from period to period in part due to coverage limits that may be triggered depending on the mix of our risk written during the period. The 2019 QSR Transaction covering our 2019 NIW increased thresholds for risk written on loans with LTV ratios of 95% or greater and loans with DTI ratios greater than 45%, each when compared to our 2018 QSR Transaction.
|
| | | | | | | | | | | | |
Quota Share Reinsurance |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
NIW subject to QSR Transactions | | 73.5 | % | | 83.0 | % | | 72.9 | % | | 83.4 | % |
New Risk Written subject to QSR Transactions | | 85.2 | % | | 90.5 | % | | 83.8 | % | | 90.4 | % |
IIF subject to QSR Transactions | | 77.0 | % | | 78.2 | % | | 77.0 | % | | 78.2 | % |
RIF subject to QSR Transactions | | 81.3 | % | | 80.2 | % | | 81.3 | % | | 80.2 | % |
The NIW subject to quota share reinsurance increased fordecreased in the first six months ended June 30, 2019of 2020 when compared to the same period of the prior year primarily due to an increase in NIW with LTVs less than or equal to 85% and amortization terms less than or equal to 20 years, which are excluded from the increased threshold on risk written on loans with DTI ratios greater than 45% and a decrease inQSR Transactions.
As of June 30, 2020, the weighted average coverage percentage of our NIW with DTI ratios greater than 45%. In the first six months of 2018, the risk writtenQSR transactions was 21% based on loans with DTI ratios greater than 45% exceeded the threshold.RIF.
We terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and entered into an amended quota share reinsurance agreement with certain participants from the existing reinsurance panel that effectively reduces the quota share cede rate from 30% to 15% on the remaining eligible insurance. DuringThe lower cede rate reduced the weighted average coverage percentage but does not impact our determination of the amount of IIF or RIF subject to quota share reinsurance agreements. We
MGIC Investment Corporation - Q2 2020 | 44
incurred a $6.8 million termination fee in the second quarter of 2019 we incurred a termination fee of $6.8 million, which was paid in July to participants ofconjunction with the reinsurance panel that are not participating in the amended 2015 QSR Transaction. Under the amended terms we will generally receive a profit commission provided that the loss ratio on the covered loans remains below 68%.
The following table provides information related to our quota share reinsurance agreements for 2019 and 2018.
|
| | | | | | | | | |
Quota share reinsurance |
| | As of and For the Six Months Ended June 30, |
($ in thousands, unless otherwise stated) | | 2019 | | 2018 |
NIW subject to quota share reinsurance agreements | | 83 | % | | 75 | % |
IIF subject to quota share reinsurance agreements | | 78 | % | | 78 | % |
| | | | |
Statements of operations: | | | | |
Ceded premiums written and earned, net of profit commission | | $ | 64,689 |
| | $ | 54,468 |
|
% of direct premiums written | | 12 | % | | 10 | % |
% of direct premiums earned | | 11 | % | | 10 | % |
Profit commission | | 75,902 |
| | 71,958 |
|
Ceding commissions | | 26,765 |
| | 25,285 |
|
Ceded losses incurred | | 5,116 |
| | 4,053 |
|
| | | | |
Mortgage insurance portfolio: | |
| |
|
Ceded RIF (in millions) | | $ | 10,212 |
| | $ | 12,236 |
|
termination.
Excess-of-loss reinsurance
Our excess-of-loss reinsurance provides $634.4$426.5 million of loss coverage on an existing portfolio of inforce policies having an inforce date on or after July 1, 2016 and before April 1, 2019. As of June 30, 2019,2020, the aggregate exposed principal balances under the Home Re 2018-01 Ltd. and 2019-01 Ltd. transactions were approximately $6.6$4.8 billion and $7.1$4.6 billion, respectively, which take into account the mortgage insurance coverage percentage, net retained risk after quota share reinsurance, and the reinsurance inclusion percentage of the unpaid principal balance. We ceded premiums of $4.4 million and $9.1 million for the three and six months ended June 30, 2020, respectively and $4.5 million and $7.0 million for the three and six months ended June 30, 2019, respectively. The market volatility caused by the COVID-19 pandemic has caused a disruption in the market for new ILN transactions. Although new ILN transactions closed in the market in June and July 2020, we consider their structure and/or terms to be less attractive than prior ILN transactions.
We expectFor each of our outstanding ILN transactions, a “Trigger Event” has occurred because the reinsured principal balance of loans that we may enter into similar excess-of-losswere reported 60 or more days delinquent exceeded 4% of the total reinsured principal balance of loans under each transaction. While the “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions if capital market conditions remain favorable.will not be reduced by such principal payments.
Investment income
Comparative quarterly and year to date results
Net investment income in the second quarterthree and first six months ofended June 30, 2020 was $39.7 million and $81.0 million, respectively. Net investment income in the three and six months ended June 30, 2019 was $42.4 million and $83.0 million, respectively, up from $34.5 million and $66.6 million in the respective prior year periods.respectively. The increasesdecreases in investment income were due to lower investment yields, partially offset by an increase in the average balance of the investment portfolio along with higher investment yields over the periods.
portfolio.
MGIC Investment Corporation - Q2 2019 | 42
Losses and expenses
| | Losses and expenses | Losses and expenses | | | | | Losses and expenses | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | (In millions) | | 2019 | | 2018 | | 2019 | | 2018 | (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Losses incurred, net | Losses incurred, net | | $ | 21.8 |
| | $ | (13.5 | ) | | $ | 60.9 |
| | $ | 10.4 |
| Losses incurred, net | | $ | 217.4 |
| | $ | 21.8 |
| | $ | 278.3 |
| | $ | 60.9 |
|
Amortization of deferred policy acquisition costs | Amortization of deferred policy acquisition costs | | 2.8 |
| | 2.8 |
| | 5.2 |
| | 5.4 |
| Amortization of deferred policy acquisition costs | | 2.9 |
| | 2.8 |
| | 5.4 |
| | 5.2 |
|
Other underwriting and operating expenses, net | Other underwriting and operating expenses, net | | 43.0 |
| | 41.8 |
| | 88.9 |
| | 87.9 |
| Other underwriting and operating expenses, net | | 44.3 |
| | 43.0 |
| | 86.5 |
| | 88.9 |
|
Interest expense | Interest expense | | 13.6 |
| | 13.2 |
| | 26.8 |
| | 26.5 |
| Interest expense | | 12.9 |
| | 13.6 |
| | 25.9 |
| | 26.8 |
|
Total losses and expenses | Total losses and expenses | | $ | 81.2 |
| | $ | 44.3 |
| | $ | 181.8 |
| | $ | 130.2 |
| Total losses and expenses | | $ | 277.5 |
| | $ | 81.1 |
| | $ | 396.1 |
| | $ | 181.8 |
|
Losses incurred, net
As discussed in “Critical Accounting Policies” in our 20182019 10-K MD&A, and consistent with industry practices, we establish case loss reserves for future claims only foron delinquent loans that are currently delinquent. The terms “delinquent” and “default” are used interchangeably by us. We consider a loanwere reported to be delinquent when it isus as two or more payments past due. Loss
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 delinquentdelinquency inventory that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
IBNR reserves are established for estimated losses from delinquencies occurring prior to the close of an accounting period that have not yet been reported to us. IBNR reserves are established using estimated notices of delinquency, claim rates and claim severities.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment, and the current and future strength of local housing markets. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrower income and thus their ability to make mortgage payments, and a drop in housing values that could result in, among other things, greater losses on loans, and may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Historically, losses incurred have followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new notice activity and a lower cure rate.
As discussed in our Risk Factors 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” and “Because loss reserve estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves” the COVID-19 pandemic will negatively impact the number of delinquencies and our losses incurred, and the impact may be material.
Our estimates are also affected by any agreements we enter into regarding our claims paying
practices, such as the settlement agreements discussed in Note 5 – “Litigation and Contingencies” to our consolidated financial statements.practices. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment.
MGIC Investment Corporation - Q2 2020 | 45
Comparative quarterly results
Losses incurred, net in the second quarter of 20192020 were $21.8$217.4 million compared to ($13.5)$21.8 million in the prior year. The second quarter of 2020 was impacted by an increase wasin new delinquency notices as well as an increase in IBNR estimates due to a lower amountthe impacts of favorablethe COVID-19 pandemic, including unemployment resulting from initiatives intended to reduce the transmission of COVID-19. In the second quarter of 2020, we received 44,669 more new delinquency notices than we did in the same period last year. IBNR and other reserve estimates increased from $30 million at December 31, 2019 to $61 million at June 30, 2020. In the second quarter of 2020, our re-estimation of loss reserves on previously received delinquencies resulted in $10 million adverse loss reserve development, on previously received delinquencies. Duringcompared to favorable development in the second quarter of 2019 there was a $30 million reduction in losses incurred due to positive development on our primary loss reserves, before reinsurance, for previously received delinquent notices, compared to $70 million in the second quarter of 2018. Current year losses incurred declined due to a lower estimated claim rate on new notices when compared to the prior year.$31 million.
Comparative year to date results
Losses incurred, net in the six months ended June 30, 20192020 were $60.9$278.3 million compared to $10.4$60.9 million in the prior year period. The increase wasis due to lower favorable loss reserve development on previously received delinquenciesan increase in the current year period, which includesdelinquency inventory. The delinquency inventory increased by 39,298 in the recognitionsix months ended June 30, 2020, compared to a decrease of a probable loss of $23.5 million for litigation of our claims paying practices. Losses incurred on current year delinquencies declined primarily3,103 in the six months ended June 30, 2019 due to a lower estimated claim rate on new delinquent notices received comparedthe impacts of the COVID-19 pandemic, including unemployment resulting from initiatives intended to reduce the prior year.transmission of COVID-19.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Composition of losses incurred |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
Current year / New notices | | $ | 46.6 |
| | $ | 49.3 |
| | (5 | ) | | $ | 94.1 |
| | $ | 108.4 |
| | (13 | ) |
Prior year reserve development | | (24.8 | ) | | (62.7 | ) | | (61 | ) | | (33.2 | ) | | (98.0 | ) | | (66 | ) |
Losses incurred, net | | $ | 21.8 |
| | $ | (13.5 | ) | | 261 |
| | $ | 60.9 |
| | $ | 10.4 |
| | 486 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
Composition of losses incurred | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Current year / New notices | $ | 205.7 |
| | $ | 46.6 |
| | 342 |
| | $ | 265.5 |
| | $ | 94.1 |
| | 182 |
|
Prior year reserve development | 11.6 |
| | (24.8 | ) | | (147 | ) | | 12.8 |
| | (33.2 | ) | | (139 | ) |
Losses incurred, net | $ | 217.4 |
| | $ | 21.8 |
| | 897 |
| | $ | 278.3 |
| | $ | 60.9 |
| | 357 |
|
Loss ratio
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to net premiums earned. The increase in the loss ratio for the three and six months ended June 30, 20192020 compared to the respective prior year periods was primarily due to an increase in losses incurred net, offset in part by an increase in earned premiums.discussed above.
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Loss ratio | | 8.8 | % | | (5.4 | )% | | 12.3 | % | | 2.2 | % |
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Loss ratio | | 89.2 | % | | 8.8 | % | | 55.2 | % | | 12.3 | % |
New notice claim rate
New notice activity continues to bewas primarily driven by a sharp increase in delinquency notices received during the second quarter related to the COVID-19 pandemic and its related effects (including higher unemployment and the widespread introduction of loan forbearance plans as a mechanism for economic relief).
The number of loans insuredentering forbearance plans is unprecedented. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the
uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicers, and we believe represents only forbearances related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in 2008 andforbearance as of the prior whichmonth-end, the information provided by loan servicers may be more current. We expect our delinquency inventory to continue to experienceincrease as a cycle whereby many loans default, cure,result of the COVID-19 pandemic.
The decrease in the new notice claim rate for the three and re-default. This cycle, along withsix months ended June 30, 2020 is primarily due to the duration that defaults may ultimately remainincrease in new notices of delinquency reported to as being in a COVID-19 related forbearance plan. As of June 30, 2020 67% of our noticedelinquency inventory resultswere in significant judgment in establishing the estimated claim rate.such plans.
MGIC Investment Corporation - Q2 20192020 | 4346
|
| | | | | | | | | | | | |
New notice claim rate | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
New notices - 2008 and prior (1) | | 8,573 |
| | 9,031 |
| | 17,455 |
| | 19,680 |
|
New notices - 2009 and later | | 4,342 |
| | 3,128 |
| | 9,009 |
| | 7,102 |
|
Total | | 12,915 |
| | 12,159 |
| | 26,464 |
| | 26,782 |
|
Claim rate | | 8.0 | % | | 9.5 | % | | 8.0 | % | | 9.0 | % |
(1) previously delinquent % | | 94.0 | % | | 93.0 | % | | 94.0 | % | | 92.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
New notice claim rate | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
New notices - 2008 books and prior (1) | | 13,824 |
| | 24 | % | | 8,573 |
| | 66 | % | | 20,941 |
| | 30 | % | | 17,455 |
| | 66 | % |
New notices - 2009 books and later | | 43,760 |
| | 76 | % | | 4,342 |
| | 34 | % | | 49,041 |
| | 70 | % | | 9,009 |
| | 34 | % |
Total | | 57,584 |
| | 100 | % | | 12,915 |
| | 100 | % | | 69,982 |
| | 100 | % | | 26,464 |
| | 100 | % |
Claim rate | | 6.6 | % | | | | 8.0 | % | | | | 7.0 | % | | | | 8.0 | % | | |
(1) previously delinquent % for 2008 books and prior | | 79.8 | % | | | | 94.0 | % | | | | 84.9 | % | | | | 94.0 | % | | |
Claims severity
Factors that impact claim severity include:
|
| | |
è | | exposure to 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 time between default and claim filing generally increasing severity), and |
è | | curtailments. |
As discussed in Note 11 - “Loss Reserves,” the average time for servicers to process foreclosures has recently shortened. Therefore, we expectIn light of the uncertainty caused by the COVID-19 pandemic, the average number of missed payments at the time a claim is received and expected to be approximately 18 to 24 for new notices received and expect to receivewill increase in 2019, compared to an average of 37 missed payments at the claim received date for claims paid in 2018.2020. Our loss reserves estimates take into consideration trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend.
The majority of loans from 2005 through 2008 (which represent 58%28% of the loans in the delinquent inventory) are covered by master policy terms that, except under certain circumstances, do not limit the number of years that an insured can include interest when filing a claim. Under our current master policy terms, an insured can include accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the insured must comply with its obligations under the terms of the applicable master policy.
| | Claims severity trend for claims paid during the period | Period | Period | | Average exposure on claim paid | | Average claim paid | | % Paid to exposure | | Average number of missed payments at claim received date | Period | | Average exposure on claim paid | | Average claim paid | | % Paid to exposure | | Average number of missed payments at claim received date |
Q2 2020 | | Q2 2020 | | 44,905 |
| | 42,915 |
| | 95.6 | % | | 32 |
|
Q1 2020 | | Q1 2020 | | 46,247 |
| | 47,222 |
| | 102.1 | % | | 33 |
|
Q4 2019 | | Q4 2019 | | 46,076 |
| | 46,302 |
| | 100.5 | % | | 34 |
|
Q3 2019 | | Q3 2019 | | 42,821 |
| | 44,388 |
| | 103.7 | % | | 35 |
|
Q2 2019 | Q2 2019 | | $ | 46,950 |
| | $ | 46,883 |
| | 99.9 | % | | 34 |
| Q2 2019 | | 46,950 |
| | 46,883 |
| | 99.9 | % | | 34 |
|
Q1 2019 | Q1 2019 | | 42,277 |
| | 43,930 |
| | 103.9 | % | | 35 |
| Q1 2019 | | 42,277 |
| | 43,930 |
| | 103.9 | % | | 35 |
|
Q4 2018 | Q4 2018 | | 45,366 |
| | 47,980 |
| | 105.8 | % | | 35 |
| Q4 2018 | | 45,366 |
| | 47,980 |
| | 105.8 | % | | 35 |
|
Q3 2018 | Q3 2018 | | 43,290 |
| | 47,230 |
| | 109.1 | % | | 35 |
| Q3 2018 | | 43,290 |
| | 47,230 |
| | 109.1 | % | | 35 |
|
Q2 2018 | Q2 2018 | | 44,522 |
| | 50,175 |
| | 112.7 | % | | 38 |
| Q2 2018 | | 44,522 |
| | 50,175 |
| | 112.7 | % | | 38 |
|
Q1 2018 | | 45,597 |
| | 51,069 |
| | 112.0 | % | | 38 |
| |
Q4 2017 | | 44,437 |
| | 49,177 |
| | 110.7 | % | | 36 |
| |
Q3 2017 | | 43,313 |
| | 46,389 |
| | 107.1 | % | | 35 |
| |
Q2 2017 | | 44,747 |
| | 49,105 |
| | 109.7 | % | | 35 |
| |
Q1 2017 | | 44,238 |
| | 49,110 |
| | 111.0 | % | | 35 |
| |
| | | | | | | | | | | | | | | | | | |
Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and commutations of pools of NPLs. | |
Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and/or commutations of policies. | | Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and/or commutations of policies. |
The decrease in the average claim paid and the average claim paid as a percentage of exposure, for the 2nd quarter of 2020, was primarily related to favorable loss mitigation on claims resolved during the quarter.
In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or severity could have a material impact on reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of June 30, 2019,2020, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the reserve amount by approximately +/- $11$40 million. A 1 percentage point increase/decrease in the average claim rate reserve factor would change the reserve amount by approximately +/- $17$13 million.
See Note 11 – “Loss Reserves” to our consolidated financial statements for a discussion of our losses incurred and claims paying practices (including curtailments).
MGIC Investment Corporation - Q2 20192020 | 4447
The length of time a loan is in the delinquent inventory (see Note 11- “Loss Reserves,” table 11.4) 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. | | Delinquent inventory - number of payments delinquent | |
Delinquency inventory - number of payments delinquent | | Delinquency inventory - number of payments delinquent |
| | | June 30, 2020 | | June 30, 2020 | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
| | June 30, 2019 | | December 31, 2018 | | June 30, 2018 | | Non-Forbearance | | Forbearance | | Total | | Total | | Total |
3 payments or less | 3 payments or less | 14,071 |
| | 15,519 |
| | 14,178 |
| 3 payments or less | 10,582 |
| | 41,295 |
| | 51,877 |
| | 14,895 |
| | 14,071 |
|
4-11 payments | 4-11 payments | 8,194 |
| | 8,842 |
| | 11,429 |
| 4-11 payments | 6,003 |
| | 5,023 |
| | 11,026 |
| | 8,519 |
| | 8,194 |
|
12 payments or more (1) | 12 payments or more (1) | 7,530 |
| | 8,537 |
| | 10,430 |
| 12 payments or more (1) | 6,057 |
| | 366 |
| | 6,423 |
| | 6,614 |
| | 7,530 |
|
Total | Total | 29,795 |
| | 32,898 |
| | 36,037 |
| Total | 22,642 |
| | 46,684 |
| | 69,326 |
| | 30,028 |
| | 29,795 |
|
| | | | | | | | | | | | | | | | |
3 payments or less | 3 payments or less | 47 | % | | 47 | % | | 39 | % | 3 payments or less | 47 | % | | 89 | % | | 75 | % | | 50 | % | | 47 | % |
4-11 payments | 4-11 payments | 27 | % | | 27 | % | | 32 | % | 4-11 payments | 26 | % | | 10 | % | | 16 | % | | 28 | % | | 27 | % |
12 payments or more | 12 payments or more | 26 | % | | 26 | % | | 29 | % | 12 payments or more | 27 | % | | 1 | % | | 9 | % | | 22 | % | | 26 | % |
Total | Total | 100 | % | | 100 | % | | 100 | % | Total | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| |
(1) | Approximately 35%33%, 38%33%, and 41%35% of the primary delinquent inventory with 12 payments or more delinquent has at least 36 payments delinquent as of June 30, 2020, December 31, 2019, December 31, 2018, and June 30, 20182019, respectively. |
Net losses and LAE paid
Net losses and LAE paid in the three and six months ended June 30, 20192020 declined 54%22% and 43%20%, respectively compared to the same periodsperiod in the prior year due to lower claim activity on our primary businessbusiness.
Due to the foreclosure moratoriums and NPL settlement activitypayment forbearance plans in place under the CARES Act, net losses and LAE paid are expected to decrease in the prior year.short term. We expect net losses and LAE paid to increase, however, the magnitude and timing are uncertain.
The following table presents our net losses and LAE paid for the three and six months ended June 30, 20192020 and 2018.2019.
| | Net losses and LAE paid | Net losses and LAE paid | | | | | Net losses and LAE paid | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | (In millions) | | 2019 | | 2018 | | 2019 | | 2018 | (In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Total primary (excluding settlements) | Total primary (excluding settlements) | | $ | 52 |
| | $ | 75 |
| | $ | 104 |
| | $ | 155 |
| Total primary (excluding settlements) | | $ | 29 |
| | $ | 52 |
| | $ | 71 |
| | $ | 104 |
|
Claims paying practices and NPL settlements (1) | | — |
| | 14 |
| | — |
| | 21 |
| |
Pool | Pool | | — |
| | 1 |
| | 1 |
| | 3 |
| Pool | | — |
| | — |
| | 1 |
| | 1 |
|
Direct losses paid | Direct losses paid | | 52 |
| | 90 |
| | 105 |
| | 179 |
| Direct losses paid | | 29 |
| | 52 |
| | 72 |
| | 105 |
|
Reinsurance | Reinsurance | | (2 | ) | | (3 | ) | | (5 | ) | | (14 | ) | Reinsurance | | (2 | ) | | (2 | ) | | (3 | ) | | (5 | ) |
Net losses paid | Net losses paid | | 50 |
| | 87 |
| | 100 |
| | 165 |
| Net losses paid | | 27 |
| | 50 |
| | 69 |
| | 100 |
|
LAE | LAE | | 5 |
| | 4 |
| | 12 |
| | 8 |
| LAE | | 5 |
| | 5 |
| | 9 |
| | 12 |
|
Net losses and LAE paid | Net losses and LAE paid | | $ | 55 |
| | $ | 91 |
| | 112 |
| | 173 |
| Net losses and LAE paid | | $ | 32 |
| | $ | 55 |
| | 78 |
| | $ | 112 |
|
Reinsurance terminations | Reinsurance terminations | | (14 | ) | | (2 | ) | | (14 | ) | | (2 | ) | Reinsurance terminations | | — |
| | (14 | ) | | — |
| | (14 | ) |
Net losses and LAE paid | Net losses and LAE paid | | $ | 41 |
| | $ | 89 |
| | $ | 98 |
| | $ | 171 |
| Net losses and LAE paid | | $ | 32 |
| | $ | 41 |
| | $ | 78 |
| | $ | 98 |
|
| |
| See Note 11 - “Loss Reserves” for additional information on our settlements of disputes for claims paying practices and commutations of NPLs. |
Primary claims paid for the top 15 jurisdictions (based on 20192020 losses paid) and all other jurisdictions for the three and six months ended June 30, 20192020 and 20182019 appears in the following table.
|
| | | | | | | | | | | | | | | | | |
Paid losses by jurisdiction | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Florida * | | $ | 3 |
| | $ | 7 |
| | $ | 10 |
| | $ | 15 |
|
New York * | | 3 |
| | 6 |
| | 8 |
| | 14 |
|
New Jersey * | | 2 |
| | 6 |
| | 6 |
| | 12 |
|
Illinois * | | 2 |
| | 4 |
| | 6 |
| | 7 |
|
Maryland | | 2 |
| | 3 |
| | 5 |
| | 5 |
|
Puerto Rico * | | 1 |
| | 2 |
| | 4 |
| | 6 |
|
Pennsylvania * | | 1 |
| | 2 |
| | 3 |
| | 5 |
|
California | | 1 |
| | 2 |
| | 2 |
| | 2 |
|
Ohio * | | 1 |
| | 1 |
| | 2 |
| | 3 |
|
Massachusetts | | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Virginia | | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Texas | | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Michigan | | 1 |
| | 1 |
| | 1 |
| | 2 |
|
Connecticut * | | 1 |
| | 1 |
| | 1 |
| | 3 |
|
Indiana * | | 1 |
| | 1 |
| | 1 |
| | 1 |
|
All other jurisdictions | | 7 |
| | 13 |
| | 16 |
| | 23 |
|
Total primary (excluding settlements) | $ | 29 |
| | $ | 52 |
| | $ | 71 |
| | 104 |
|
|
| | | | | | | | | | | | | | | | | |
Paid losses by jurisdiction | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In millions) | | 2019 | | 2018 | | 2019 | | 2018 |
Florida | | $ | 7 |
| | $ | 9 |
| | $ | 15 |
| | $ | 15 |
|
New York | | 6 |
| | 8 |
| | 14 |
| | 18 |
|
New Jersey | | 6 |
| | 12 |
| | 12 |
| | 26 |
|
Illinois | | 4 |
| | 6 |
| | 7 |
| | 11 |
|
Puerto Rico | | 2 |
| | 2 |
| | 6 |
| | 3 |
|
Maryland | | 3 |
| | 5 |
| | 5 |
| | 10 |
|
Pennsylvania | | 2 |
| | 3 |
| | 5 |
| | 6 |
|
Ohio | | 1 |
| | 2 |
| | 3 |
| | 4 |
|
Connecticut | | 1 |
| | 2 |
| | 3 |
| | 4 |
|
California | | 2 |
| | 4 |
| | 2 |
| | 6 |
|
Virginia | | 1 |
| | 2 |
| | 2 |
| | 4 |
|
Texas | | 1 |
| | 2 |
| | 2 |
| | 3 |
|
Massachusetts | | 1 |
| | 2 |
| | 2 |
| | 4 |
|
Michigan | | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Georgia | | 1 |
| | 1 |
| | 2 |
| | 3 |
|
All other jurisdictions | | 13 |
| | 14 |
| | 22 |
| | 36 |
|
Total primary (excluding settlements) | $ | 52 |
| | $ | 75 |
| | $ | 104 |
| | 155 |
|
MGIC Investment Corporation - Q2 2020 | 48
Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed
The primary average claim paid for the top 5 states (based on 20192020 losses paid) for the three and six months ended June 30, 20192020 and 20182019 appears in the following table.
|
| | | | | | | | | | | | | | | | |
Primary average claim paid | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Florida* | $ | 65,399 |
| | $ | 61,281 |
| | $ | 66,667 |
| | $ | 58,893 |
|
New York* | 108,858 |
| | 96,747 |
| | 108,975 |
| | 97,145 |
|
New Jersey* | 90,028 |
| | 90,885 |
| | 79,986 |
| | 92,096 |
|
Illinois* | 45,430 |
| | 47,734 |
| | 39,917 |
| | 44,412 |
|
Puerto Rico* | 38,883 |
| | 51,337 |
| | 43,174 |
| | 47,406 |
|
All other jurisdictions | 35,896 |
| | 39,284 |
| | 34,169 |
| | 40,471 |
|
All jurisdictions | 46,883 |
| | 50,175 |
| | 45,358 |
| | 50,632 |
|
|
| | | | | | | | | | | | | | | | |
Primary average claim paid | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Florida * | $ | 52,669 |
| | $ | 65,399 |
| | $ | 62,345 |
| | $ | 66,667 |
|
New York * | 101,164 |
| | 108,858 |
| | 108,762 |
| | 108,975 |
|
New Jersey * | 97,622 |
| | 90,028 |
| | 101,958 |
| | 79,986 |
|
Illinois * | 40,017 |
| | 45,430 |
| | 42,455 |
| | 39,917 |
|
Maryland | 54,163 |
| | 75,878 |
| | 64,103 |
| | 60,180 |
|
All other jurisdictions | 34,527 |
| | 33,931 |
| | 34,535 |
| | 33,591 |
|
All jurisdictions | 42,915 |
| | 46,883 |
| | 45,394 |
| | 45,358 |
|
Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
MGIC Investment Corporation - Q2 2020 | 49
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.
MGIC Investment Corporation - Q2 2019 | 45
The primary average RIF on delinquent loans at June 30, 2019,2020, December 31, 20182019 and June 30, 20182019 and for the top 5 jurisdictions (based on 20192020 losses paid) appears in the following table.
| | Primary average RIF - delinquent loans | | | June 30, 2019 | | December 31, 2018 | | June 30, 2018 | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Florida | Florida | $ | 53,333 |
| | $ | 53,371 |
| | $ | 55,039 |
| Florida | $ | 58,968 |
| | $ | 52,566 |
| | $ | 53,333 |
|
New York | New York | 72,057 |
| | 71,795 |
| | 71,933 |
| New York | 74,959 |
| | 72,188 |
| | 72,057 |
|
New Jersey | New Jersey | 66,284 |
| | 65,521 |
| | 66,465 |
| New Jersey | 68,520 |
| | 64,444 |
| | 66,284 |
|
Illinois | Illinois | 40,339 |
| | 39,753 |
| | 40,505 |
| Illinois | 44,829 |
| | 38,740 |
| | 40,339 |
|
Puerto Rico | 34,704 |
| | 35,420 |
| | 36,569 |
| |
Maryland | | Maryland | 71,298 |
| | 64,028 |
| | 63,484 |
|
All other jurisdictions | All other jurisdictions | 41,798 |
| | 41,331 |
| | 41,508 |
| All other jurisdictions | 54,405 |
| | 41,145 |
| | 40,631 |
|
All jurisdictions | All jurisdictions | 44,915 |
| | 44,584 |
| | 45,302 |
| All jurisdictions | 56,236 |
| | 45,028 |
| | 44,915 |
|
The primary average RIF on all loans was $51,791, $51,085,$53,713, $52,995, and $50,075$51,791 at June 30, 2019,2020, December 31, 2018,2019, and June 30, 2018,2019, respectively.
Loss reserves
Our primary delinquency rate at June 30, 20192020 was 2.80%6.35% (YE 2018: 3.11%2019: 2.78%, June 30, 2018: 3.49%2019: 2.80%). Our primary delinquent inventory was 29,79569,326 loans at June 30, 2019,2020, representing a decreasean increase of 9%131% from December 31, 20182019 and 17%133% from June 30, 2018.2019. The reductionincrease in our primary delinquentdelinquency inventory is primarily due to the resultadverse economic impact of the total numberCOVID-19 pandemic. As of delinquent loans: (1) that have cured; (2) for which claim payments have been made; or (3) that have resulted in rescission, claim denial, or removal fromJune 30, 2020 67% of our delinquency inventory duewere reported to settlements of claims paying disputes or commutations of coverage of pools of NPLs, collectively, exceeding the total number of new delinquencies on insured loans.us as subject to COVID-19 related forbearance plans. In recent periods, we have experienced improved cure rates anda decline in the number of delinquencies in inventory with twelve or more missed payments has been declining.payments. Generally, a defaulted loan with fewer missed payments is less likely to result in a claim. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan’s delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time.
MGIC Investment Corporation - Q2 2020 | 50
The gross reserves at June 30, 2019,2020, December 31, 2018,2019, and June 30, 20182019 appear in the table below.
| | Gross reserves | | | | June 30, 2019 | December 31, 2018 | June 30, 2018 | | | June 30, 2020 | December 31, 2019 | June 30, 2019 |
Primary: | Primary: | | | | | | | | Primary: | | | | | | | |
Direct loss reserves (in millions) | Direct loss reserves (in millions) | | $ | 537 |
| | $ | 610 |
| | $ | 746 |
| | Direct loss reserves (in millions) | | $ | 677 |
| | $ | 490 |
| | $ | 537 |
| |
IBNR and LAE | IBNR and LAE | | 73 |
| | 50 |
| | 53 |
| | IBNR and LAE | | 110 |
| | 56 |
| | 73 |
| |
Total primary loss reserves | Total primary loss reserves | | $ | 610 |
| | $ | 660 |
| | $ | 799 |
| | Total primary loss reserves | | $ | 787 |
| | $ | 546 |
| | $ | 610 |
| |
| | | | | | | | | | | | | | | | |
Ending delinquent inventory | Ending delinquent inventory | | | 29,795 |
| | 32,898 |
| | 36,037 |
| Ending delinquent inventory | | | 69,326 |
| | 30,028 |
| | 29,795 |
|
Percentage of loans delinquent (delinquency rate) | Percentage of loans delinquent (delinquency rate) | | | 2.80 | % | | 3.11 | % | | 3.49 | % | Percentage of loans delinquent (delinquency rate) | | | 6.35 | % | | 2.78 | % | | 2.80 | % |
Average total primary loss reserves per delinquency | Average total primary loss reserves per delinquency | | | $ | 19,684 |
| | $ | 20,077 |
| | $ | 22,178 |
| Average total primary loss reserves per delinquency | | | $ | 11,357 |
| | $ | 18,171 |
| | $ | 19,684 |
|
Primary claims received inventory included in ending delinquent inventory | Primary claims received inventory included in ending delinquent inventory | | | 630 |
| | 809 |
| | 827 |
| Primary claims received inventory included in ending delinquent inventory | | | 247 |
| | 538 |
| | 630 |
|
| | | | | | | | | | | | | | | | |
Pool (1): | Pool (1): | | |
| | |
| | |
| | Pool (1): | | |
| | |
| | |
| |
Direct loss reserves (in millions): | Direct loss reserves (in millions): | | |
| | | | | | Direct loss reserves (in millions): | | |
| | | | |
| |
With aggregate loss limits | With aggregate loss limits | | $ | 9 |
| | $ | 10 |
| | $ | 9 |
| | With aggregate loss limits | | $ | 7 |
| | $ | 7 |
| | $ | 9 |
| |
Without aggregate loss limits | Without aggregate loss limits | | 2 |
| | 3 |
| | 4 |
| | Without aggregate loss limits | | 3 |
| | 2 |
| | 2 |
| |
Total pool direct loss reserves | Total pool direct loss reserves | | $ | 11 |
| | $ | 13 |
| | $ | 13 |
| | Total pool direct loss reserves | | $ | 10 |
| | $ | 9 |
| | $ | 11 |
| |
| | | | | | | | | | | | | | | | |
Ending default inventory: | Ending default inventory: | | |
| | |
| | |
| | Ending default inventory: | | |
| | |
| | |
| |
With aggregate loss limits | With aggregate loss limits | | | 432 |
| | 595 |
| | 779 |
| With aggregate loss limits | | | 457 |
| | 430 |
| | 432 |
|
Without aggregate loss limits | Without aggregate loss limits | | | 209 |
| | 264 |
| | 288 |
| Without aggregate loss limits | | | 248 |
| | 223 |
| | 209 |
|
Total pool ending delinquent inventory | Total pool ending delinquent inventory | | | 641 |
| | 859 |
| | 1,067 |
| Total pool ending delinquent inventory | | | 705 |
| | 653 |
| | 641 |
|
Pool claims received inventory included in ending delinquent inventory | Pool claims received inventory included in ending delinquent inventory | | | 19 |
| | 24 |
| | 49 |
| Pool claims received inventory included in ending delinquent inventory | | | 5 |
| | 11 |
| | 19 |
|
Other gross reserves (in millions) | | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | |
Other gross reserves (2) (in millions) | | Other gross reserves (2) (in millions) | | $ | — |
| | $ | — |
| | $ | 1 |
| |
| |
(1) | Since a number of our pool policies include aggregate loss limits and/or deductibles, we do not disclose an average direct reserve per delinquency for our pool business. |
| |
(2) | Other Gross Reserves includes direct and assumed reserves that are not included within our primary or pool loss reserves. |
The primary delinquency inventory for the top 15 jurisdictions (based on 2020 losses paid) at June 30, 2020, December 31, 2019 and June 30, 2019 appears in the following table.
|
| | | | | | | | | | | | | | | | |
Primary delinquency inventory by jurisdiction |
| | Non-Forbearance | | Forbearance | | Total | | Total | | Total |
| | June 30, 2020 | | June 30, 2020 | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Florida * | | 1,911 |
| | 5,697 |
| | 7,608 |
| | 2,504 |
| | 2,497 |
|
New York * | | 1,373 |
| | 1,600 |
| | 2,973 |
| | 1,634 |
| | 1,692 |
|
New Jersey * | | 831 |
| | 1,788 |
| | 2,619 |
| | 992 |
| | 986 |
|
Illinois * | | 1,324 |
| | 2,498 |
| | 3,822 |
| | 1,749 |
| | 1,610 |
|
Maryland | | 592 |
| | 1,228 |
| | 1,820 |
| | 796 |
| | 785 |
|
Puerto Rico * | | 925 |
| | 1,601 |
| | 2,526 |
| | 1,122 |
| | 1,257 |
|
Pennsylvania * | | 1,319 |
| | 2,041 |
| | 3,360 |
| | 1,755 |
| | 1,769 |
|
California | | 1,039 |
| | 3,703 |
| | 4,742 |
| | 1,213 |
| | 1,178 |
|
Ohio * | | 1,127 |
| | 1,698 |
| | 2,825 |
| | 1,498 |
| | 1,449 |
|
Massachusetts | | 447 |
| | 573 |
| | 1,020 |
| | 544 |
| | 525 |
|
Virginia | | 436 |
| | 1,251 |
| | 1,687 |
| | 580 |
| | 586 |
|
Texas | | 1,425 |
| | 3,936 |
| | 5,361 |
| | 2,251 |
| | 2,136 |
|
Michigan | | 706 |
| | 1,537 |
| | 2,243 |
| | 921 |
| | 932 |
|
Connecticut * | | 403 |
| | 656 |
| | 1,059 |
| | 506 |
| | 468 |
|
Indiana * | | 602 |
| | 659 |
| | 1,261 |
| | 843 |
| | 880 |
|
All other jurisdictions | | 8,182 |
| | 16,218 |
| | 24,400 |
| | 11,120 |
| | 11,045 |
|
Total | | 22,642 |
| | 46,684 |
| | 69,326 |
| | 30,028 |
| | 29,795 |
|
MGIC Investment Corporation - Q2 20192020 | 4651
Hurricane activity
2017 hurricanes. Hurricane activity primarily impacting Texas, Florida, and Puerto Rico in the third quarter of 2017 increased the number of new notices of delinquency reported to us in the fourth quarter of 2017. Consistent with our analysis and past experience, the majority of the delinquent notices in the hurricane affected areas that we estimated to be caused by the hurricanes have cured and did not result in a material increase in our incurred losses or losses paid. Paid losses on all loans in those jurisdictions were impacted in part because foreclosure moratoriums in the Texas and Florida IADAs through December 31, 2017 and Puerto Rico through May 31, 2018, impacted all delinquent loans in those areas, including those not affected by hurricanes. For those notices we estimated to be caused by the hurricanes, we established our loss reserves with a lower estimated claim rate than the claim rate we applied to other notices in our delinquent inventory. When excluding the impact of those notices we estimated to be caused by the hurricanes, the average total primary loss reserves per delinquency was approximately $24,000 at June 30, 2018.
See our risk factors titled “Our financial results may be adversely impacted by natural disasters; certain hurricanes may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs.” and “Downturns in the domestic economy or declines in the value of borrowers’ homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns” for factors that could cause our actual results to differ from our expectations expressed in this paragraph.
The primary delinquent inventory for the top 15 jurisdictions (based on 2019 losses paid) at June 30, 2019, December 31, 2018 and June 30, 2018 appears in the following table.
|
| | | | | | | | | |
Primary delinquent inventory by jurisdiction |
| June 30, 2019 | | December 31, 2018 | | June 30, 2018 |
Florida* | 2,497 |
| | 2,853 |
| | 4,101 |
|
New York* | 1,692 |
| | 1,855 |
| | 2,034 |
|
New Jersey* | 986 |
| | 1,151 |
| | 1,318 |
|
Illinois* | 1,610 |
| | 1,781 |
| | 1,797 |
|
Puerto Rico* | 1,257 |
| | 1,503 |
| | 2,377 |
|
Maryland | 785 |
| | 842 |
| | 876 |
|
Pennsylvania* | 1,769 |
| | 1,929 |
| | 2,049 |
|
Ohio* | 1,449 |
| | 1,627 |
| | 1,648 |
|
Connecticut* | 468 |
| | 480 |
| | 505 |
|
California | 1,178 |
| | 1,260 |
| | 1,236 |
|
Virginia | 586 |
| | 588 |
| | 627 |
|
Texas | 2,136 |
| | 2,369 |
| | 2,682 |
|
Massachusetts | 525 |
| | 596 |
| | 629 |
|
Michigan | 932 |
| | 1,041 |
| | 1,032 |
|
Georgia | 1,112 |
| | 1,220 |
| | 1,252 |
|
All other jurisdictions | 10,813 |
| | 11,803 |
| | 11,874 |
|
Total | 29,795 |
| | 32,898 |
| | 36,037 |
|
Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
MGIC Investment Corporation - Q2 2019 | 47
The primary delinquentdelinquency inventory by policy year at June 30, 2019,2020, December 31, 20182019 and June 30, 20182019 appears in the following table.
| | Primary delinquent inventory by policy year | |
Primary delinquency inventory by policy year | | Primary delinquency inventory by policy year |
| | | Non-Forbearance | | Forbearance | | Total | | Total | | Total |
| | June 30, 2019 | | December 31, 2018 | | June 30, 2018 | | June 30, 2020 | | June 30, 2020 | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Policy year: | Policy year: | | | | | | Policy year: | | | | | | | | | |
2004 and prior | 2004 and prior | 5,451 |
| | 6,061 |
| | 6,949 |
| 2004 and prior | 3,140 |
| | 1,240 |
| | 4,380 |
| | 4,686 |
| | 5,451 |
|
2004 and prior % | 2004 and prior % | 18 | % | | 18 | % | | 19 | % | 2004 and prior % | 14 | % | | 3 | % | | 6 | % | | 16 | % | | 18 | % |
2005 | 2005 | 3,029 |
| | 3,340 |
| | 3,893 |
| 2005 | 1,982 |
| | 869 |
| | 2,851 |
| | 2,799 |
| | 3,029 |
|
2006 | 2006 | 4,780 |
| | 5,299 |
| | 5,987 |
| 2006 | 3,262 |
| | 1,773 |
| | 5,035 |
| | 4,582 |
| | 4,780 |
|
2007 | 2007 | 7,429 |
| | 8,702 |
| | 9,837 |
| 2007 | 4,561 |
| | 4,358 |
| | 8,919 |
| | 7,096 |
| | 7,429 |
|
2008 | 2008 | 1,934 |
| | 2,369 |
| | 2,688 |
| 2008 | 1,170 |
| | 1,602 |
| | 2,772 |
| | 1,798 |
| | 1,934 |
|
2005 - 2008 % | 2005 - 2008 % | 58 | % | | 60 | % | | 62 | % | 2005 - 2008 % | 48 | % | | 18 | % | | 28 | % | | 54 | % | | 59 | % |
2009 | 2009 | 154 |
| | 172 |
| | 204 |
| 2009 | 87 |
| | 104 |
| | 191 |
| | 148 |
| | 154 |
|
2010 | 2010 | 115 |
| | 121 |
| | 151 |
| 2010 | 70 |
| | 49 |
| | 119 |
| | 115 |
| | 115 |
|
2011 | 2011 | 156 |
| | 159 |
| | 193 |
| 2011 | 90 |
| | 125 |
| | 215 |
| | 143 |
| | 156 |
|
2012 | 2012 | 245 |
| | 312 |
| | 386 |
| 2012 | 165 |
| | 349 |
| | 514 |
| | 231 |
| | 245 |
|
2013 | 2013 | 502 |
| | 592 |
| | 689 |
| 2013 | 336 |
| | 876 |
| | 1,212 |
| | 521 |
| | 502 |
|
2014 | 2014 | 1,021 |
| | 1,264 |
| | 1,272 |
| 2014 | 673 |
| | 1,836 |
| | 2,509 |
| | 1,101 |
| | 1,021 |
|
2015 | 2015 | 1,292 |
| | 1,418 |
| | 1,447 |
| 2015 | 933 |
| | 3,109 |
| | 4,042 |
| | 1,388 |
| | 1,292 |
|
2016 | 2016 | 1,393 |
| | 1,459 |
| | 1,449 |
| 2016 | 1,093 |
| | 5,050 |
| | 6,143 |
| | 1,578 |
| | 1,393 |
|
2017 | 2017 | 1,476 |
| | 1,282 |
| | 860 |
| 2017 | 1,383 |
| | 7,112 |
| | 8,495 |
| | 1,989 |
| | 1,476 |
|
2018 | 2018 | 772 |
| | 348 |
| | 32 |
| 2018 | 1,376 |
| | 8,106 |
| | 9,482 |
| | 1,521 |
| | 772 |
|
2019 | 2019 | 46 |
| | — |
| | — |
| 2019 | 1,556 |
| | 9,065 |
| | 10,621 |
| | 332 |
| | 46 |
|
2020 | | 2020 | 765 |
| | 1,061 |
| | 1,826 |
| | — |
| | — |
|
2009 and later % | 2009 and later % | 24 | % | | 22 | % | | 19 | % | 2009 and later % | 38 | % | | 79 | % | | 66 | % | | 30 | % | | 23 | % |
| | | | | | | | | | | | | | | | |
Total | Total | 29,795 |
| | 32,898 |
| | 36,037 |
| Total | 22,642 |
| | 46,684 |
| | 69,326 |
| | 30,028 |
| | 29,795 |
|
We expect that delinquencies will increase from their current level as a result of the COVID-19 pandemic, including as a result of the increase in unemployment associated with initiatives intended to reduce the transmission of COVID-19. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicers, and we believe represents only forbearances related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current.
The delinquent inventory as of June 30, 2018 included delinquencies from hurricane impacted areas, of which a majority had cured as of December 31, 2018.
The losses we have incurred on our 2005 through 2008 books have exceeded our premiums from those books. Although uncertainty remains with respect to the ultimate losses we may experience on those books, as we continue to write new insurance, those books have become a smaller percentage of our total mortgage insurance portfolio. Our 2005 through 2008 books represented approximately 13% and 15% of our total primary RIF at June 30, 2019 and December 31, 2018, respectively. Approximately 40% and 39% of the remaining primary RIF on our 2005 through 2008 books of business benefited from HARP as of June 30, 2019 and December 31, 2018, respectively.
On our primary business, the highest claim frequency years have typically been the third and fourth year after loan origination. However, the pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Deteriorating economic conditions can result in increasing claims following a period of declining claims. As of June 30, 2019, 49%2020, 53% of our primary RIF was written subsequent to December 31, 2017, 65% of our primary RIF was written
subsequent to December 31, 2016, 64%and 76% of our primary RIF was written subsequent to December 31, 2015, and 74% of our primary RIF was written subsequent to December 31, 2014.2015.
Underwriting and other expenses, net
Underwriting and other expenses includes items such as employee compensation costs, fees for professional services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions.
Underwriting and other expenses, net for the three months ended June 30, 2020 were $44.3 million, a slight increase from $43.0 million in the prior year period primarily due to increases in equipment and software expense and professional services. Underwriting and other expenses, net, for the six months ended June 30, 20192020 were $43.0$86.5 million andcompared with $88.9 million, respectively, increases from $41.8 million and $87.9 million in the respectivesame period in the prior year, periods primarily due to decreases in professional services and employee compensation costs, including compensation for stock grants, partially offset by increases in benefitsequipment and software expenses.
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Underwriting expense ratio | | 17.6 | % | | 16.4 | % | | 18.3 | % | | 17.9 | % |
MGIC Investment Corporation - Q2 2020 | 52
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Underwriting expense ratio | | 20.1 | % | | 17.6 | % | | 18.6 | % | | 18.3 | % |
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 NPW. The underwriting expense ratio in the three months ended June 30, 2020 increased due to increase in underwriting expenses and a decrease in NPW compared with the same period the prior year. The underwriting expense in the six months ended June 30, 20192020 increased slightly due to a slight decrease in NPW compared towith the respectivesame period the prior year, periods. The increasespartially offset by a slight decrease in the ratio for the three and six months ended June 30, 2019 were primarily due to decreases in NPW when compared to the same periods in the prior year.underwriting expenses.
Provision for income taxes and effective tax rate
| | Income tax provision and effective tax rate | Income tax provision and effective tax rate | Income tax provision and effective tax rate | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except rate) | | 2019 | | 2018 | | 2019 | | 2018 | |
(In millions, except rate) | | (In millions, except rate) | | 2020 | | 2019 | | 2020 | | 2019 |
Income before tax | Income before tax | | $ | 211.2 |
| | $ | 237.5 |
| | $ | 402.1 |
| | $ | 417.5 |
| Income before tax | | $ | 16.5 |
| | $ | 211.2 |
| | $ | 204.7 |
| | $ | 402.1 |
|
Provision for income taxes | Provision for income taxes | | $ | 43.4 |
| | $ | 50.7 |
| | $ | 82.4 |
| | $ | 87.1 |
| Provision for income taxes | | $ | 2.4 |
| | $ | 43.4 |
| | $ | 40.9 |
| | $ | 82.4 |
|
Effective tax rate | Effective tax rate | | 20.5 | % | | 21.3 | % | | 20.5 | % | | 20.9 | % | Effective tax rate | | 14.8 | % | | 20.5 | % | | 20.0 | % | | 20.5 | % |
The difference between our statutory tax rate of 21% and our effective tax rate of 14.8% for the 3 months ended June 30, 2020 was due to an underwriting loss and the benefits of tax preferenced securities. The difference between our statutory tax rate of 21% and our effective tax rate of 20.5% for the 3 months ended June 30, 2019 was primarily due to the benefits of tax preferenced securities.
The difference between our statutory tax rate of 21% and our effective rate of 20.0% and 20.5% for the first six months of 2020 and 2019, respectively, was primarily due to the benefits of tax preferenced securities.
MGIC Investment Corporation - Q2 20192020 | 4853
Balance Sheet Review
Total assets, liabilities, and shareholders’ equity
As of June 30, 2019,2020, total assets were $6.1$6.6 billion, an increase of $378 million,from $6.2 billion at December 31, 2019, and total liabilities were $2.0$2.2 billion, down $76 million, each whenan increase compared to $1.9 billion at December 31, 2018.2019. Shareholders’ equity increased approximately $454 million$0.1 billion primarily due to net income in the first six months of 2019 and an increase in the fair value of our investment portfolio,2020, partially offset in part by repurchases of our common stock.stock and dividends paid.
The following sections mainly focus on our cash and cash equivalents, investments deferred income taxes, net, and loss reserves as these reflect the major developments in our assets and liabilities since December 31, 2018.2019.
Consolidated balance sheets - Assets
as of June 30, 20192020 (In thousands)
| | ● | Cash and cash equivalents | $ | 225,183 |
| Cash and cash equivalents | $ | 371,393 |
|
● | Investments | 5,512,037 |
| Investments | 5,883,315 |
|
● | Premiums receivable | 57,492 |
| Premiums receivable | 54,028 |
|
● | Deferred income taxes, net | 20,932 |
| Other assets | 265,852 |
|
● | Other assets | 239,893 |
| |
Cash and cash equivalents (including restricted) - Our cash and cash equivalents balance increased to $225$371 million as of June 30, 2019,2020, from $155$169 million as of December 31, 2018,2019, as net cash generated from operating activities was only partly offset by net cash used in investing and financing activities.
Deferred income taxes, net - The decrease in our deferred income taxes, net, to $21 million as of June 30, 2019, from $69 million as of December 31, 2018, was primarily due to the tax effect of unrealized gains generated by the investment portfolio during the first six months of 2019.
Consolidated balance sheets - Liabilities and equity
as of June 30, 20192020 (In thousands)
| | ● | Loss reserves | $ | 621,902 |
| Loss reserves | $ | 797,396 |
|
● | Unearned premiums | 400,999 |
| Unearned premiums | 343,229 |
|
● | Long-term debt | 832,162 |
| Long-term debt | 833,315 |
|
● | Other liabilities | 164,809 |
| Other liabilities | 217,293 |
|
● | Shareholders’ equity | 4,035,665 |
| Shareholders’ equity | 4,383,355 |
|
Loss reserves - Our loss reserves include: (1) reserves representinginclude estimates of losses and settlement expenses on reported delinquencies(1) loans in our delinquency inventory (known as case reserves), (2) IBNR, and (2) IBNR.(3) LAE reserves. Our gross reserves are reduced by reinsurance recoverable on our estimated losses and settlement expenses to calculate a net reserve balance. The net reserve balance decreasedincreased by 6%38% to $604$734 million as of June 30, 2019,2020, from $641$534 million as of December 31, 2018.2019. Reinsurance recoverables on our estimated losses and settlement expenses were $18$63 million and $33$22 million as of June 30, 20192020 and December 31, 2018,2019, respectively. The overall decreaseincrease in our net loss reserves during the first six months of 20192020 was due to a higher levelan increase in new delinquency notices as well as IBNR, each due to the impacts of losses paid relative to losses incurred.the COVID-19 pandemic.
MGIC Investment Corporation - Q2 20192020 | 4954
Investment portfolio
The average duration and investment yield of our investment portfolio as of June 30, 2019,2020, December 31, 2018,2019, and June 30, 20182019 are shown in the table below.
| | Portfolio duration and embedded investment yield | | | | June 30, 2019 | | December 31, 2018 | | June 30, 2018 | | | June 30, 2020 | | December 31, 2019 | | June 30, 2019 |
Duration (in years) | Duration (in years) | | 4.0 | | 4.1 | | 4.2 | Duration (in years) | | 4.0 | | 3.9 | | 4.0 |
Pre-tax yield (1) | Pre-tax yield (1) | | 3.2% | | 3.1% | | 2.9% | Pre-tax yield (1) | | 2.8% | | 3.1% | | 3.2% |
After-tax yield (1) | After-tax yield (1) | | 2.6% | | 2.6% | | 2.4% | After-tax yield (1) | | 2.3% | | 2.5% | | 2.6% |
| |
(1) | Embedded investment yield is calculated on a yield-to-worst basis. |
The security ratings of our fixed income investments as of June 30, 2019,2020, December 31, 2018,2019, and June 30, 20182019 are shown in the following table.
| | Fixed income security ratings | | | Security Ratings (1) | | Security Ratings (1) |
Period | Period | AAA | AA | A | BBB | Period | AAA | AA | A | BBB |
June 30, 2020 | | June 30, 2020 | 24% | 20% | 34% | 21% |
December 31, 2019 | | December 31, 2019 | 21% | 20% | 34% | 24% |
June 30, 2019 | June 30, 2019 | 21% | 22% | 33% | 24% | June 30, 2019 | 21% | 22% | 33% | 24% |
December 31, 2018 | 19% | 23% | 33% | 25% | |
June 30, 2018 | 21% | 24% | 35% | 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 utilized; otherwise the lowest rating is utilized. |
Off-Balance Sheet Arrangements
Home Re 2018-1 Ltd. and Home Re 2019-1 Ltd. are special purpose variable interest entities that are not consolidated in our consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. See Note 4 - “Reinsurance,” to our consolidated financial statements for additional information.
MGIC Investment Corporation - Q2 20192020 | 5055
Liquidity and Capital Resources
Consolidated Cash Flow Analysis
We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our insurance operations and income earned on our investment portfolio, less amounts paid for claims, interest expense and operating expenses, (2) investing cash flows related to the purchase, sale and maturity of investments and purchases of property and equipment and (3) financing cash flows generally from activities that impact our capital structure, such as changes in debt and shares outstanding.outstanding, and dividend payouts. The following table summarizes our consolidated cash flows from operating, investing and financing activities:
| | Summary of consolidated cash flows | | | | Six Months Ended June 30, | | | Six Months Ended June 30, |
(In thousands) | (In thousands) | | 2019 | | 2018 | (In thousands) | | 2020 | | 2019 |
Total cash provided by (used in): | Total cash provided by (used in): | | | | | Total cash provided by (used in): | | | | |
Operating activities | Operating activities | | $ | 281,611 |
| | $ | 262,593 |
| Operating activities | | $ | 420,125 |
| | $ | 281,611 |
|
Investing activities | Investing activities | | (169,233 | ) | | (62,418 | ) | Investing activities | | (47,466 | ) | | (169,233 | ) |
Financing activities | Financing activities | | (42,233 | ) | | (108,132 | ) | Financing activities | | (170,322 | ) | | (42,233 | ) |
Increase in cash and cash equivalents and restricted cash and cash equivalents | Increase in cash and cash equivalents and restricted cash and cash equivalents | | $ | 70,145 |
| | $ | 92,043 |
| Increase in cash and cash equivalents and restricted cash and cash equivalents | | $ | 202,337 |
| | $ | 70,145 |
|
Net cash provided by operating activities for the six months ended June 30, 20192020 increased compared to the same period of 20182019 primarily due to a lower level of losses paid, net, partially offset by decreases in investment income and an increase in net premiums written, offset in part by an increase in tax payments.written.
Net cash used in investing activities for the six months ended June 30, 20192020 primarily reflects purchases of fixed income and equity securities in an amount that exceeded our proceeds fromduring the period partially offset by sales and maturities of fixed income and equity securities during the period as cash from operations was available for additional investment.
Net cash used in investing activities for the six months ended June 30, 20182019 reflects purchases of fixed income securities in an amount that exceeded our proceeds from the sales and maturities of fixed income securities during the period as cash from operations was available for additional investment, as well as, amounts spent on property and equipment.investment.
Net cash used in financing activities for the six months ended June 30, 2020 and June 30, 2019 primarily reflects the cash settlement of share repurchase transactions executed at the end of the fourth quarter of 2018, share repurchases during the period and payment of withholding taxes related to share-based compensation net share settlement.
Net cash used in financing activities for the six months ended June 30, 2018 reflects share repurchases and the payment of withholding taxes related to share-based compensation net share settlement. Net cash used in financing activities for six months ended June 30, 2020 also includes cash dividends paid to shareholders.
Capitalization
Debt - holding company
As of June 30, 2019,2020, our holding company’s debt obligations were $814.5$815 million in aggregate principal consisting of our
5.75% Notes and 9% Debentures. MGIC’s ownership of $132.7 million of our holding company’s 9% Debentures is eliminated in
consolidation, but they remain outstanding obligations owed by our holding company to MGIC.
Liquidity analysis - holding company
As of June 30, 2019,2020, we had approximately $333$529.6 million in cash and investments at our holding company. These resources are maintained primarily to service our debt interest expense, pay debt maturities, repurchase shares, pay dividends to shareholders, and to settle intercompany obligations. While these assets are held, we generate investment income that serves to offset a portion of our interest expense. Investment income and the payment of dividends from our insurance subsidiaries are the principal sources of holding company cash inflow. MGIC is the principal source of dividends, and their payment is restricted by insurance regulation. See Note 14 - “Statutory Information” to our consolidated financial statement for additional information about MGIC’s dividend restrictions. The payment of dividends from MGIC is also influenced by our view of the appropriate level of PMIERs Available Assets to maintain an excess over Minimum Required Assets. Other sources of holding company liquidity include raising capital in the public markets. The ability to raise capital in the public markets is subject to prevailing market conditions, investor demand for the securities to be issued, and our deemed creditworthiness.
In light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases and did not repurchase any shares in the second quarter of 2019 we used $25 million of holding company cash to repurchase shares and 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, privately negotiated acquisitions or other transactions.2020. See “Overview - Capital” of this MD&A for a discussion of the additional share repurchase program authorized in March 2019.January 2020.
In the second quarter of 2020 we used $21 million to pay cash dividends to shareholders. On July 30, 2020, our Board of Directors declared a quarterly cash dividend of $0.06 per common share to shareholders of record on August 11, 2020, payable on August 28, 2020.
In the first six months of 2019,2020, our holding company cash and investments increased by $85$205 million to $333$530 million as of June 30, 2019.2020.
CashSignificant cash and investments inflows during the first six months:
$140390 million of dividends received from MGIC and
$8 million of investment income, and
$4 million of other inflows.income.
CashSignificant cash outflows during the first six months:
$120 million of share repurchase transactions,
$42 million in cash dividends paid to shareholders, and
$30 million of interest payments on our 5.75% Notes and 9% Debentures,
$25 million of share repurchase transactions,
$12 million for share repurchase transactions in 2018 that settled in the first quarter of 2019.
We expectMGIC did not pay a dividend during the second quarter. Future dividend payments from MGIC to continue to paythe holding company will be determined on a quarterly dividends of at leastbasis, in consultation with the $70 million amount paid in eachboard, and after considering any updated estimates about the length and severity of the first and second quarterseconomic impacts of 2019, subject to approval by MGIC’s board of directors and non-disapproval by the OCI.COVID-19 pandemic
MGIC Investment Corporation - Q2 20192020 | 5156
on our business. We ask the Wisconsin OCI not to object before MGIC pays dividends to the holding company. Under the PMIERS guidance, any dividend paid by MGIC to our holding company, through March 31, 2021, requires GSE approval.
The net unrealized gains on our holding company investment portfolio were approximately $2.3$2.6 million at June 30, 20192020 and the portfolio had a modified duration of approximately 1.81.7 years.
Subject to certain limitations and restrictions, holders of each of the 9% Debentures may convert their notes into shares of our common stock at their option prior to certain dates under the terms of their issuance, in which case our corresponding obligation will be eliminated.
See Note 7 – “Debt” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20182019 for additional information about the conversion terms of our 9% Debentures and the terms of our indebtedness, including our option to defer interest on our 9% Debentures. The description in Note 7 - “Debt” to our consolidated financial statements in our Annual Report on Form 10-K is qualified in its entirety by the terms of the notes and debentures.
Although not anticipated in the near term, we may also contribute funds to our insurance operations to comply with the PMIERs or the State Capital Requirements. See “Overview - Capital” above for a discussion of these requirements. See discussion of our non-insurance contract underwriting services in Note 5 – “Litigation and Contingencies” to our consolidated financial statements for other possible uses of holding company resources.
Debt at subsidiaries
MGIC is a member of the FHLB, which provides MGIC access to an additional source of liquidity via a secured lending facility. MGIC has $155.0borrowed $155 million of debt outstanding in the form of a fixed rate advance from the FHLB. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of 1.91%. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose fair value is maintained at a minimum of 102% of the outstanding principal balance. MGIC provided eligible collateral from its investment portfolio.
Capital Adequacy
PMIERs
As of June 30, 2019,2020, MGIC’s Available Assets under the PMIERs totaled approximately $4.4$4.5 billion, an excess of approximately $1.1 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 Available Assets will allow MGIC to remain in compliance with the PMIERs financial requirements, including, we believe, to the extent they are revised.requirements. Our reinsurance transactions provided an aggregate of approximately $1.3$1.2 billion of PMIERs capital credit under the PMIERs as of June 30, 2019.2020. Refer to Note 4 - “Reinsurance” to our consolidated financial statements for additional information on our QSR and Home Re Transactions.
We anticipate an increase to our delinquency inventory due to the impacts of the COVID-19 pandemic. The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases. For delinquent loans whose initial missed payment occurred on or after March 1, 2020 and prior to January 1, 2021 (the "COVID-19 Crisis Period"), the Minimum Required Assets are generally reduced by 70% for at least three months. The 70% reduction will continue, or be newly applied, for delinquent loans that are subject to a forbearance plan that is granted in response to continuously complya financial hardship related to COVID-19, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. Under the PMIERs, through our operational activities or througha forbearance plan on a loan with an initial missed payment occurring during the contribution of funds from our holding company,COVID-19 Crisis Period is assumed to have been granted in response to a financial hardship related to COVID-19. Loans considered to be subject to demands ona forbearance plan include those that are in a repayment plan or loan modification trial period following the holding company's resources,forbearance plan.
We expect the GSEs and servicers will provide us with information about the forbearance status for nearly all of the loans in our delinquency inventory. The forbearance information provided by the GSEs will be with respect to delinquent loans in forbearance as outlined above. of the prior month-end, while the information provided by loan servicers may be more current. As a result, in some cases, there may be a delay in our ability to take advantage of the 70% reduction.
Refer to “Overview - Capital - GSEs” and 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” of this MD&A for further discussion of PMIERs.
Risk-to-capital
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. While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1.
Risk-to-capital
We compute our risk-to-capital ratio on a separate company statutory basis, as well as on a combined insurance operation basis. The risk-to-capital ratio is our net RIF divided by our policyholders’ position. Our net RIF includes both primary and pool risk in force and excludes risk on policies that are currently in default and for which loss reserves have been established, and those covered by reinsurance. The risk amount includes pools of loans with contractual aggregate loss limits and without these limits. Policyholders’ position consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve, and a portion of the reserves for unearned premiums. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to the contingency reserve of approximately 50% of net earned premiums. These contributions
MGIC Investment Corporation - Q2 2020 | 57
must generally be maintained for a period of ten years. However, with regulatory approval a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net earned premiums in a calendar year.
MGIC’s separate company risk-to-capital calculation is shown in the table below.
|
| | | | | | | | | |
Risk-to-capital - MGIC separate company |
(In millions, except ratio) | | June 30, 2019 | | December 31, 2018 |
RIF - net (1) | | $ | 43,391 |
| | $ | 34,502 |
|
Statutory policyholders’ surplus | | 1,633 |
| | 1,682 |
|
Statutory contingency reserve | | 2,670 |
| | 2,138 |
|
Statutory policyholders’ position | | $ | 4,303 |
| | $ | 3,820 |
|
Risk-to-capital | | 10.1:1 |
| | 9.0:1 |
|
| |
(1)
| RIF – net, as shown in the table above is net of reinsurance and exposure on policies currently delinquent for which loss reserves have been established. |
Our combined insurance companies’ risk-to-capital calculation is shown in the table below.
| | Risk-to-capital - Combined insurance companies | |
Risk-to-capital - MGIC separate company | | Risk-to-capital - MGIC separate company |
(In millions, except ratio) | (In millions, except ratio) | | June 30, 2019 | | December 31, 2018 | (In millions, except ratio) | | June 30, 2020 | | December 31, 2019 |
RIF - net (1) | RIF - net (1) | | $ | 43,488 |
| | $ | 40,239 |
| RIF - net (1) | | $ | 42,406 |
| | $ | 44,338 |
|
Statutory policyholders’ surplus | Statutory policyholders’ surplus | | 1,634 |
| | 1,683 |
| Statutory policyholders’ surplus | | 1,246 |
| | 1,619 |
|
Statutory contingency reserve | Statutory contingency reserve | | 2,729 |
| | 2,443 |
| Statutory contingency reserve | | 3,168 |
| | 2,963 |
|
Statutory policyholders’ position | Statutory policyholders’ position | | $ | 4,363 |
| | $ | 4,126 |
| Statutory policyholders’ position | | $ | 4,415 |
| | $ | 4,582 |
|
Risk-to-capital | Risk-to-capital | | 10.0:1 |
| | 9.8:1 |
| Risk-to-capital | | 9.6:1 |
| | 9.7:1 |
|
| |
(1) | RIF – net, as shown in the table above is net of reinsurance and exposure on policies currently delinquent ($2.14.0 billion at June 30, 20192020 and $1.6$1.5 billion at December 31, 2018)2019) for which loss reserves have been established. |
Our combined insurance companies’ risk-to-capital calculation is shown in the table below.
|
| | | | | | | | | |
Risk-to-capital - Combined insurance companies |
(In millions, except ratio) | | June 30, 2020 | | December 31, 2019 |
RIF - net (1) | | $ | 42,715 |
| | $ | 44,550 |
|
Statutory policyholders’ surplus | | 1,250 |
| | 1,619 |
|
Statutory contingency reserve | | 3,230 |
| | 3,021 |
|
Statutory policyholders’ position | | $ | 4,480 |
| | $ | 4,640 |
|
Risk-to-capital | | 9.5:1 |
| | 9.6:1 |
|
| |
(1) | RIF – net, as shown in the table above, is net of reinsurance and exposure on policies currently delinquent ($4.0 billion at June 30, 2020 and $1.5 billion December 31, 2019) for which loss reserves have been established. |
MGIC Investment Corporation - Q2 2019 | 52
The increasesdecrease in MGIC's risk-to-capital and our combined insurance companies’ risk-to-capitalrisk to capital in the first six months of 2019 were2020 was due to an increasea decreases in the statutory policyholders’ position, and our RIF, net of reinsurance, partially offset by an increasereinsurance. The decrease in statutory policyholders’policyholder’s position is primarily due to an increase in statutory contingency reserves. Our RIF, net of reinsurance, increaseddividends paid to our holding company in the first sixthree months of 2019, due to an increase in our IIF and a reduction in our ceded RIF under our 2015 QSR Transaction. MGIC’s risk-to-capital ratio also increased due2020 of $390 million. For additional information on dividends paid from MGIC to the commutationholding company refer to “Overview - Capital” of an affiliate reinsurance agreement. Our risk-to-capital ratio will increase if the percentage increase in net insured risk exceeds the percentage increase in capital.this MD&A”
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 | | Rating | | Outlook |
Moody’s Investor Services | | Baa2Baa1 | | Stable |
Standard and Poor’s Rating Services | | BBB+ | | StableNegative |
A.M. Best | | A- | | Stable |
Standard and Poor's revised its outlook for the U.S. Mortgage Insurers market segment to "negative,” due to the risks associated with the COVID-19 pandemic. A.M. Best revised its outlook for the U.S. Mortgage Insurers market segment to "negative," but did not change MGIC's or MAC’s outlook at that time. For further information about the importance of MGIC’s ratings, see our risk factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.”
|
| | | | |
MAC financial strength ratings |
Rating Agency | | Rating | | Outlook |
A.M. Best | | A- | | Stable |
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Contractual Obligations
The following table summarizes, as of June 30, 2019,2020, the approximate future payments under our contractual obligations and estimated claim payments on established loss reserves.
| | Contractual obligations | | | | Payments due by period | | | Payments due by period |
(In millions) | (In millions) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | (In millions) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Long-term debt obligations | Long-term debt obligations | | $ | 1,975.4 |
| | $ | 51.1 |
| | $ | 101.1 |
| | $ | 664.7 |
| | $ | 1,158.5 |
| Long-term debt obligations | | $ | 1,924.0 |
| | $ | 50.6 |
| | $ | 254.9 |
| | $ | 483.5 |
| | $ | 1,135.0 |
|
Operating lease obligations | Operating lease obligations | | 2.3 |
| | 1.2 |
| | 1.0 |
| | 0.1 |
| | — |
| Operating lease obligations | | 1.7 |
| | 0.9 |
| | 0.8 |
| | — |
| | — |
|
Purchase obligations | Purchase obligations | | 7.8 |
| | 5.4 |
| | 2.1 |
| | 0.3 |
| | — |
| Purchase obligations | | 28.0 |
| | 17.1 |
| | 10.4 |
| | 0.5 |
| | — |
|
Other long-term liabilities | Other long-term liabilities | | 621.9 |
| | 233.2 |
| | 282.3 |
| | 106.4 |
| | — |
| Other long-term liabilities | | 797.4 |
| | 299.0 |
| | 362.0 |
| | 136.4 |
| | — |
|
Total | Total | | $ | 2,607.4 |
| | $ | 290.9 |
| | $ | 386.5 |
| | $ | 771.5 |
| | $ | 1,158.5 |
| Total | | $ | 2,751.1 |
| | $ | 367.6 |
| | $ | 628.1 |
| | $ | 620.4 |
| | $ | 1,135.0 |
|
Our long-term debt obligations as of June 30, 20192020 include their related interest and are discussed in Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” above. Our operating lease obligations include operating leases on certain office space, data processing equipment and autos, as discussed in Note 16 – “Leases” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Purchase obligations consist primarily of agreements to purchase items related to our corporate headquarters update and continued investment in our information technology infrastructure in the normal course of business.
Our other long-term liabilities represent the case and LAE loss reserves established to recognize the liability for losses and LAE related to existing delinquenciesdelinquency inventory on insured mortgage loans. The timing of the future claim payments associated with the established case loss reserves was determined primarily based on two key assumptions: the length of time it takes for a notice of delinquency to develop into a received claim and the length of time it takes for a received claim to be ultimately paid. The future claim payment periods are estimated based on historical experience, and could emerge differently than this estimate, in part, due to uncertainty regarding the impact of certain factors, such as impacts from the COVID-19 pandemic, loss mitigation protocols established by servicers and changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation process.
See Note 11 – “Loss Reserves” to our consolidated financial statements. In accordance with GAAP for the mortgage insurance industry, we establish case loss reserves only for delinquent loans.loans that were reported to us as two payments past due and have not become current or resulted in a claim payment. Because our reserving method does not take account of the impact of future losses that could occur from loans that are not delinquent, our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our consolidated financial statements or in the table above.
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Forward Looking Statements and Risk Factors
General: Our business, results of operations, and financial condition could be affected by the risk factors referred to under “Location of Risk Factors” below. These risk factors are an integral part of Management’s Discussion and Analysis.
These 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. Among others, statements that include words such as we “believe,” “anticipate” or “expect,” or words of similar import, are forward looking statements. These risk factors, including the discussion of the impact of the COVID-19 pandemic, speak only as of the date of this press release and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. We are not undertaking any obligation to update any forward looking statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking 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.
While we communicate with security analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report, and such reports are not our responsibility.
Location of Risk Factors: The risk factors are in Item 1 A of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as supplemented by Part II, Item 1 A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019,2020, and by Part II, Item 1A1 A of this Quarterly Report on Form 10-Q. The risk factors in the 10-K, as supplemented by thisthose 10‑QQs and through updating of various statistical and other information, are reproduced in Exhibit 99 to this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio is essentially a fixed income portfolio and is exposed to market risk. Important drivers of the market risk are credit spread risk and interest rate risk.
Credit spread risk is the risk that we will incur a loss due to adverse changes in credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks.
We manage credit risk via our investment policy guidelines which primarily place our investments in investment grade securities and limit the amount of our credit exposure to any one issue, issuer and type of instrument. Guideline and investment portfolio detail is available in "Business – Section C, Investment Portfolio" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
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 June 30, 2019,2020, the modified duration of our fixed income investment portfolio was 4.0 years, which means that an instantaneous parallel shift in the yield curve of 100 basis points would result in a change of 4.0% 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. See Note 7 – “Investments” to our consolidated financial statements for additional disclosure surrounding our investment portfolio.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer concluded that such controls and procedures were effective as of the end of such period. There was no change in our internal control over financial reporting that occurred during the second quarter of 20192020 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Certain legal proceedings arising in the ordinary course of business may be filed or pending against us from time to time. For information about such legal proceedings, you should review our risk factor titled “We are involved in legal proceedings and are subject to the risk of additional legal proceedings in the future” in Item 1A.
Exhibit 99.
Item 1 A. Risk Factors
With the exception of the changes described and set forth below, there have been no material changes in our risk factors from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as supplemented by Part II, Item I A of our Quarterly Report on Form 10-Q for the Quarter ended March 31, 2019.2020. The risk factors in the 10-K, as supplemented by that 10-Q and this 10-Q, and through updating of various statistical and other information, are reproduced in their entirety in Exhibit 99 to this Quarterly Report on Form 10‑Q.
The COVID-19 pandemic may continue to materially impact our financial results and may also materially impact our business, liquidity and financial condition.
The COVID-19 pandemic had a material impact on our second quarter 2020 financial results. While uncertain, the future impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may also be material. We expect that unemployment and economic uncertainty resulting from measures to reduce the transmission of COVID-19 (including previous "shelter-in-place" restrictions and continuing limitations on business), as well as COVID-19‑related illnesses and deaths, will negatively impact our business. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the resulting level of unemployment, and the impact of past and future government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by Fannie Mae and Freddie Mac (the "GSEs") (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by COVID-19.
The COVID-19 pandemic has impacted and may continue to impact our business in various ways, including the following:
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• | Our incurred losses will increase as the number of insured mortgage delinquencies increase. We establish case reserves for insurance losses when delinquency notices are received on loans that are two or more payments past due and for loans we estimate are delinquent prior to the close of the accounting period but for which delinquency notices have not yet been reported to us (this is often referred to as “IBNR”). For information about our loss reserving methodology, see our risk factors titled "Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses or risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods," and "Because loss reserve |
estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves."
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• | We will be required to maintain more capital under the private mortgage insurer eligibility requirements ("PMIERs") of the GSEs, which generally require more capital to be held for delinquent loans than for performing loans and require more capital to be held as the number of payments missed on delinquent loans increase. For more information about the capital requirements of the PMIERs, 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." |
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• | Over time, as the number of delinquencies increases, the number of claims that we must pay is likely to increase. For more information, see our risk factor titled "Downturns in the domestic economy or declines in the value of borrowers' homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns." |
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• | If the number of purchase and/or refinance mortgage originations decreases, the number of mortgages available for us to insure in the near term may decrease. For more information, see our risk factor titled "If the volume of low down payment home mortgage originations declines, the amount of insurance that we write could decline." |
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• | Our access to the markets for excess of loss reinsurance through insurance-linked notes transactions and for quota share reinsurance may be limited and the terms under which we are able to secure such reinsurance may be less attractive than the terms of our previous transactions. For more information, see our risk factor titled "Reinsurance may not always be available or affordable." |
Our access to the capital markets may be limited and the terms under which we may access the capital markets may be less attractive than the terms of our previous transactions.
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• | Receipt of a portion of our premiums may be delayed. For more information, see our risk factor titled "We are susceptible to disruptions in the servicing of mortgage loans that we insure and we rely on third-party reporting for information regarding the mortgage loans we insure." |
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• | Our operations may be impacted if our management or other employees are unable to perform their duties as a result of COVID-19-related illnesses. For more information, see our risk factor titled "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." |
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Downturns in the domestic economy or declines in the value of borrowers’ homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.
Losses result from events that reduce a borrower’s ability or willingness to continue to make mortgage payments, such as unemployment, health issues, family status, and whether the home of a borrower who defaults on his mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. In general, favorable economic conditions reduce the likelihood that borrowers will lack sufficient income to pay their mortgages and also favorably affect the value of homes, thereby reducing and in some cases even eliminating a loss from a mortgage default. A deterioration in economic conditions, including an increase in unemployment, generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect home prices, which in turn can influence the willingness of borrowers with sufficient resources to make mortgage payments to do so when the mortgage balance exceeds the value of the home. Home prices may decline even absent a deterioration in economic conditions due to declines in demand for homes, which in turn may result from changes in buyers’ perceptions of the potential for future appreciation, restrictions on and the cost of mortgage credit due to more stringent underwriting standards, higher interest rates generally, changes to the deductibility of mortgage interest for income tax purposes, decreases in the rate of household formations, or other factors.
The unemployment rate rose from 3.5% as of December 31, 2019, to 14.7% as of April 30, 2020. It was 11.1% as of June 30, 2020 and is expected by the Federal Reserve to be 9.3% as of December 31, 2020, and to remain elevated for some time. We expect the high levels of unemployment to result in an increasing number of loans in our delinquency inventory and an increasing number of insurance claims; however, the increases are difficult to predict given the uncertainty in the current market environment, including uncertainty about the length and severity of the COVID-19 pandemic; the length of time that measures intended to reduce the transmission of COVID-19 remain in place; effects of forbearance programs enacted by the GSEs, various states and municipalities; and effects of past and future stimulus programs, including those contained in the CARES Act. The programs contained in the CARES Act include, among many others:
Payment forbearance on federally-backed mortgages (including those delivered to or purchased by the GSEs) to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance allows for mortgage payments to be suspended for up to 360 days. Approximately 82% of our insurance in force that was written in 2019 and before was delivered to or purchased by the GSEs. While servicers of some non-GSE loans may not be required to offer forbearance to borrowers, we allow servicers to apply GSE loss mitigation programs to non-GSE loans. In addition, the Consumer Financial Protection Bureau ("CFPB") requires substantial loss mitigation efforts be made prior to servicers initiating foreclosure, therefore, servicers of non-GSE loans may have an incentive to offer forbearance or deferment.
For those mortgages that are not subject to forbearance, a suspension of foreclosures and evictions until at least August 31, 2020, on mortgages purchased or securitized by the GSEs.
Direct aid to individuals in the form of refundable tax credit rebates paid in April 2020.
"Paycheck Protection Program" to provide small businesses with funds to pay up to eight weeks of payroll costs, and certain other expenses.
Enhanced unemployment benefits, which expired July 31, 2020.
Increased flexibility under retirement plans.
The number of loans entering forbearance plans is unprecedented. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. The severity of losses associated with loans whose delinquencies do not cure will depend on economic conditions at that time, including home prices.
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 insurance in force and calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance agreements).
Based on our interpretation of the PMIERs, as of June 30, 2020, MGIC’s Available Assets totaled $4.5 billion, or $1.1 billion in excess of its Minimum Required Assets. MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs. In calculating these "Minimum Required Assets," the total credit for risk ceded under our reinsurance transactions is subject to a modest reduction. Our reinsurance transactions are discussed in our risk factor titled "The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring." Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future reinsurance transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit under
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the PMIERs, under certain circumstances, MGIC may terminate the reinsurance transactions, without penalty.
The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases. For delinquent loans whose initial missed payment occurred on or after March 1, 2020 and prior to January 1, 2021 (the "COVID-19 Crisis Period"), the Minimum Required Assets are generally reduced by 70% for at least three months. The 70% reduction will continue, or be newly applied, for delinquent loans that are subject to a forbearance plan that is granted in response to a financial hardship related to COVID-19, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. Under the PMIERs, a forbearance plan on a loan with an initial missed payment occurring during the COVID-19 Crisis Period is assumed to have been granted in response to a financial hardship related to COVID-19. Loans considered to be subject to a forbearance plan include those that are in a repayment plan or loan modification trial period following the forbearance plan.
We expect the GSEs and servicers will provide us with information about the forbearance status for nearly all of the loans in our delinquency inventory. The forbearance information provided by the GSEs will be with respect to delinquent loans in forbearance as of the prior month-end, while the information provided by loan servicers may be more current. As a result, in some cases, there may be a delay in our ability to take advantage of the 70% reduction.
It is possible that, despite reducing the Minimum Required Assets for certain delinquent loans by 70%, the increasing number of delinquent loans caused by the COVID-19 pandemic will cause our Available Assets to be less than our Minimum Required Assets. As of June 30, 2020, there were 69,326 loans in our delinquency inventory, of which 67% were reported to us as subject to a COVID-19 related forbearance plan. We are unable to predict the ultimate number of loans that will become delinquent as a result of the COVID-19 pandemic.
If our Available Assets are less than our Minimum Required Assets, then 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 business writings; the substantial majority of our 2019 NIW was 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 any portion of the PMIERs at any time.
There may be future implications for PMIERs based upon the proposed changes to the regulatory capital requirements for the GSEs. In May 2020, the FHFA re-proposed a capital rule for the GSEs that, if enacted, would increase the capital requirements of the GSEs. That increase may ultimately result in an increase in the Minimum Required Assets required to be held by mortgage insurers. The re-proposed capital rule included a framework for determining the capital relief allowed to the GSEs for loans with private mortgage insurance and it affords more capital relief to the GSEs when its counterparty is a more diversified entity. The proposed changes also decreased the GSEs' capital credit provided by credit risk transfer transactions, which could result in decreased PMIERs credit for existing or future reinsurance or insurance linked notes transactions entered into by MGIC. Further, any changes to the GSEs' capital and liquidity requirements resulting from the Treasury Housing Reform Plan could have future implications for PMIERs.
Our future operating results may be negatively impacted by the matters discussed in the rest of these risk factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets.
Should capital be needed by MGIC in the future, capital contributions from our holding company may not be available due to competing demands on holding company resources, including for repayment of debt.
Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses on risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods.
In accordance with accounting principles generally accepted in the United States, we establish case reserves for insurance losses and loss adjustment expenses only when notices of default on insured mortgage loans are received on loans that are two or more payments past due and for loans we estimate are in default but for which notices of default have not yet been reported to us by the servicers (this is often referred to as “IBNR”). Because our reserving method does not consider losses that could occur from loans that are not delinquent, such losses are not reflected in our financial statements, except in the case where a premium deficiency exists. A premium deficiency would be recorded if the present value of expected future losses and expenses exceeds the present value of expected future premiums and already established loss reserves on the applicable loans. As a result, future losses on loans that are not currently delinquent may have a material impact on future results as such losses emerge. As of June 30, 2020, we had established case reserves and reported losses incurred for 69,326 loans in our delinquency inventory and increased our IBNR reserve from $30 million at March 31, 2020 to $61 million at June 30, 2020. Though not reflected in our June 30, 2020 financial results, as of July 31, 2020, our delinquency inventory had decreased to
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68,206 loans. We expect that the number of loans in our delinquency inventory will increase from that level as a result of the COVID-19 pandemic, including as a result of high unemployment associated with initiatives intended to reduce the transmission of COVID-19. As a result, we expect our losses incurred to increase in future periods. The impact of the COVID-19 pandemic on the number of delinquencies and our losses incurred will be influenced by various factors, including those discussed in our risk factor titled "The impact of the COVID-19 pandemic on our business and financial condition may be material."
Because loss reserve estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves.
When we establish case reserves, we estimate the ultimate loss on delinquent loans by estimating the number of loans in our inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity. The estimated claim rate and claim severity represent our best estimates of what we will actually pay on the loans in default as of the reserve date and incorporate anticipated mitigation from rescissions and curtailments. The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be affected by several factors, including a change in regional or national economic conditions, the impact of past and future government actions (including the enactment of the CARES Act) and actions taken by the GSEs (including implementation of foreclosure moratoriums and mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce the transmission of COVID-19, and a change in the length of time loans are delinquent before claims are received. All else being equal, the longer a loan is delinquent before a claim is received, the greater the severity. In light of the uncertainty caused by the COVID-19 pandemic, including the impact of foreclosure moratoriums and forbearance programs, the average time it takes to receive a claim may increase. The change in economic conditions may include changes in unemployment, including prolonged unemployment as a result of the COVID-19 pandemic, affecting borrowers’ income and thus their ability to make mortgage payments, and changes in home prices, which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. The economic effects of the COVID-19 pandemic may be disproportionately concentrated in certain geographic regions. Information about the geographic dispersion of our insurance in force can be found in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q filed with the SEC. Changes to our claim rate and claim severity estimates could have a material impact on our future results, even in a stable economic environment. In addition, historically, losses incurred have followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new default notice activity and a lower cure rate.
The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a result any inadequacy could materially affect our financial condition and results of operations.
We set premiums at the time a policy is issued based on our expectations regarding likely performance of the insured risks over the long term. Our premiums are subject to approval by state regulatory agencies, which can delay or limit our ability to increase our premiums. In addition, our customized rate plans may delay our ability to increase our premiums on the NIW covered by such plans. Generally, we cannot cancel mortgage insurance coverage or adjust renewal premiums during the life of a mortgage insurance policy. As a result, higher than anticipated claims generally cannot be offset by premium increases on policies in force or mitigated by our non-renewal or cancellation of insurance coverage. The premiums we charge, the investment income we earn and the amount of reinsurance we carry may not be adequate to compensate us for the risks and costs associated with the insurance coverage provided to customers. An increase in the number or size of claims, compared to what we 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 a policy was written, we cannot adjust premiums to compensate for this and our returns may be lower than we assumed. For a discussion of the effect of the COVID-19 pandemic on the amount of capital we are required to hold, see our risk factor titled "We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility."
Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.
The private mortgage insurance industry is highly competitive and is expected to remain so. We believe we currently compete with other private mortgage insurers based on premium rates, underwriting requirements, financial strength (including based on credit or financial strength ratings), customer relationships, name recognition, reputation, strength of management teams and field organizations, the ancillary products and services provided to lenders and the effective use of technology and innovation in the delivery and servicing of our mortgage insurance products.
Our relationships with our customers, which may affect the amount of our NIW, could be adversely affected by a variety of factors, including if our premium rates are higher than those of our competitors, our underwriting requirements are more restrictive than those of our competitors, or our customers are dissatisfied with our claims-paying practices (including insurance policy rescissions and claim curtailments).
Much of the competition in the industry in the last few years has centered on pricing practices which have included: (i) reductions in standard filed rates; (ii) use of customized rate plans (typically lower than standard rates) that are made available to lenders that meet certain criteria; and (iii) use of a spectrum of filed rates
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to allow for formulaic, risk-based pricing that may be quickly adjusted within certain parameters (referred to as "risk-based pricing systems"). While our increased use of reinsurance over the past several years has helped to mitigate the negative effect of declining premium rates on our returns, refer to our risk factor titled "Reinsurance may not always be available or affordable" for a discussion of the risks associated with the availability of reinsurance.
In 2019, we introduced MiQ, our risk-based pricing system that establishes our premium rates based on more risk attributes than were considered in 2018. The widespread use of risk-based pricing systems by the private mortgage insurance industry makes it more difficult to compare our rates to those offered by our competitors. We may not be aware of industry rate changes until we observe that our volume of new insurance written ("NIW") has changed. In addition, business under customized rate plans is awarded by certain customers for only limited periods of time. As a result, our NIW may fluctuate more than it had in the past. Regarding the concentration of our new business, our top ten customers accounted for approximately 31% and 27% of our NIW, in each of the twelve months ended June 30, 2020 and 2019.
We monitor various competitive and economic factors while seeking to balance both profitability and market share considerations in developing our pricing strategies. Premium rates on NIW will change our premium yield (net premiums earned divided by the average insurance in force) over time as older insurance policies run off and new insurance policies with different premium rates are written. Our premium rates are subject to approval by state regulatory agencies, which can delay or limit our ability to change them outside of the parameters already approved. In addition, our customized rate plans may delay our ability to increase our premiums on the NIW covered by such plans.
There can be no assurance that our premium rates adequately reflect the risk associated with the underlying mortgage insurance policies. For additional information, see our risk factors titled “The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a result any inadequacy could materially affect our financial condition and results of operations" and "If our risk management programs are not effective in identifying, or adequate in controlling or mitigating, the risks we face, or if the models used in our businesses are inaccurate, it could have a material adverse impact on our business, results of operations and financial condition."
Certain of our competitors have access to capital at a lower cost than we do (including, through off-shore reinsurance vehicles, which are tax-advantaged). As a result, they may be able to achieve higher after-tax rates of return on their NIW compared to us, which could allow them to leverage reduced premium rates to gain market share, and they may be better positioned to compete outside of traditional mortgage insurance, including by participating in alternative forms of credit enhancement pursued by Fannie Mae and Freddie Mac (the "GSEs") discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance.insurance."
Alternatives to
The current private mortgage insurance include:
lenders using FHA, VA and other governmentinsurer eligibility requirements ("PMIERs") of each of the GSEs require a mortgage insurance programs,
investors usinginsurer to maintain a minimum amount of assets to support its insured risk, mitigation and credit risk transfer techniques other than private mortgage insurance,
lenders and other investors holding mortgagesas discussed in portfolio and self-insuring, and
lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio that has private mortgage insurance.
In 2018, Freddie Mac and Fannie Mae initiated programs with loan level mortgage default coverage provided by various (re)insurers that are not mortgage insurers governed by PMIERs, and that are not selected by the lenders. These programs compete with traditional private mortgage insurance and, due to differences in policy terms, they may offer premium rates that are below prevalent single premium lender paid mortgage insurance ("LPMI") rates. We participate in these programs from time to time. See our risk factor titled “Changes“We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility.” The PMIERs do not require an insurer to maintain minimum financial strength ratings; however, our financial strength ratings can affect us in the business practicesfollowing ways:
A downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by the GSEs federal legislation that changes their charters and/or our customers, potentially resulting in a restructuringdecrease in the amount of our NIW. Standard and Poor's recently revised its outlook, to "negative," for MGIC and other U.S. mortgage insurers due to the GSEs could reduce our revenues or increase our losses”risks associated with the COVID-19 pandemic. A.M. Best recently revised its outlook for a discussion of various business practices of the GSEs that may be changed, including through expansion or modification of these programs.
The GSEs (and other investors) have also used other forms of credit enhancement thatU.S. Private Mortgage Insurers market segment to "negative," but did not involve traditional private mortgage insurance, such as engaging in credit-linked note transactions executedchange MGIC's outlook at that time.
Our ability to participate in the capital markets, or using other formsnon-GSE residential mortgage-backed securities (RMBS) market (the size 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 31.1%which has been limited since 2008, but may grow in the first quarterfuture), could depend on our ability to maintain and improve our investment grade ratings for our insurance subsidiaries. We could be competitively disadvantaged with some market participants because the financial strength ratings of 2019, 30.5%our insurance subsidiaries are lower than those of some competitors. MGIC's financial strength rating from A.M. Best is A- (with a stable outlook), from Moody’s is Baa1 (with a stable outlook) and from Standard & Poor’s is BBB+ (with a negative outlook).
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• | Financial strength ratings may also play a greater role if the GSEs no longer operate in their current capacities, for example, due to legislative or regulatory action. In addition, although the PMIERs do not require minimum financial strength ratings, the GSEs consider financial strength ratings to be important when using forms of credit enhancement other than traditional mortgage insurance, as discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance." In addition, the final GSE capital rule, when enacted, may provide the GSEs more capital credit for transactions with higher rated counterparties. |
If we are unable to compete effectively in 2018 and 33.9% in 2017. In the past ten years, the FHA’s share has been as low as 30.5% in 2018 and as high as 66.8% in 2009. Factors that influence the FHA’s market share include relative rates and fees, underwriting guidelines and loan limits of the FHA, VA, private mortgage insurers and the GSEs; lenders' perceptions of legal risks under FHA versus GSE programs; flexibility for the FHA to establish new productscurrent or any future markets as a result of federal legislation and programs; returns expectedthe financial strength ratings assigned 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 cancelour insurance coverage under certain circumstances. We cannot predict how the factors that affect the FHA’s share ofsubsidiaries, our future new insurance written will change in the future.
The VA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was 23.4% in the first quarter of 2019, 22.9% in 2018 and 24.7% in 2017. In the past ten years, the VA’s share has been as low as 14.3% in 2009 and as high as 27.2% in 2016. We believe that the VA’s market share has generally been elevated in recent years because of an increase in the number of borrowers that are eligible for the VA’s program, which offers 100% loan-to-value ratio ("LTV") loans and charges a one-time funding fee that cancould be included in the loan amount, and because eligible borrowers have opted to use the VA program when refinancing their mortgages.negatively affected.
Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.
The GSEs’ charters generally require credit enhancementIn 2019, the substantial majority of our NIW was for a low down payment mortgage loan (a loan with an amount that exceeds 80% of a home’s value) in order for such loan to be eligible for purchase by the GSEs. Lenders generally have used private mortgage insurance to satisfy this credit enhancement requirement. (For information about GSE programs initiated in 2018 that provide loan level default coverage by various (re)insurers (which may include affiliates of private mortgage insurers), see our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance.") Because low down payment mortgagesloans purchased by the GSEs, have generally been insured with private mortgage insurance,therefore, the business practices of the GSEs greatly impact our business and they include:
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• | private mortgage insurer eligibility requirements of the GSEs,GSEs' PMIERs, the financial requirements of which are discussed in our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility,”
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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,”
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• | the capital and collateral requirements for participants in the GSEs' alternative forms of credit enhancement discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance," |
the level of private mortgage insurance coverage, subject to the limitations of the GSEs’ charters, when private mortgage insurance is used as the required credit enhancement on low down payment mortgages (the GSEs generally require a level of mortgage insurance coverage that is higher than the level of coverage required by their charters; any change in the required level of coverage will impact our new risk written),
the amount of loan level price adjustments and guaranty fees (which result in higher costs to borrowers) that the GSEs assess on loans that require private mortgage insurance,
whether the GSEs select or influence the mortgage lender’s selection of the mortgage insurer providing coverage,
the underwriting standards that determine which loans are eligible for purchase by the GSEs, which can affect the quality of the risk insured by the mortgage insurer and the availability of mortgage loans,
the terms on which mortgage insurance coverage can be canceled before reaching the cancellation thresholds established by law,
the programs established by the GSEs intended to avoid or mitigate loss on insured mortgages and the circumstances in which mortgage servicers must implement such programs,
the terms that the GSEs require to be included in mortgage insurance policies for loans that they purchase, including limitations on the rescission rights of mortgage insurers,
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• | the extent to which the GSEs intervene in mortgage insurers’ claims paying practices, rescission practices or rescission settlement practices with lenders, and |
the maximum loan limits of the GSEs compared to those of the FHA and other investors.
The Federal Housing Finance Agency (“FHFA”)FHFA has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorship may increase the likelihood that the business practices of the GSEs change, including through administrative action, in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation. In the past, members of Congress have introduced several bills intended to change the
business practicesIn September 2019, at the direction of the GSEs and the FHA; however, no legislation has been enacted.
In March 2019, President Trump, directed the U.S. Treasury Department to develop a plan, as soon as practicable, for("Treasury") released the “Treasury Housing Reform Plan” (the "Plan"). The Plan recommends administrative and legislative reforms for the housing finance system, (“Treasury Housing Reform Plan”), with such reforms intended to reduce taxpayer risk, expandachieve the private sector’s role, modernizegoals of ending the government housing programs, and achieve sustainable homeownership. The directive outlines numerous goals and objectives, including but not limited to, the end of conservatorshipconservatorships of the GSEs, increasedGSEs; increasing competition and participation ofby the private sector in the mortgage market including by authorizing the FHFA to approve additional guarantors of conventional mortgages in the secondary market, appropriate capitalsimplifying the qualified mortgage ("QM") rule of the CFPB, transferring risk to the private sector, and liquidity requirements foreliminating the "GSE Patch" (discussed below); establishing regulation of the GSEs that safeguards their safety and evaluationsoundness and minimizes the risks they pose to the financial stability of the United States; and providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. Also in September 2019, the Treasury and FHFA entered into a letter agreement that will allow the GSEs to remit less of their earnings to the government, which will help them rebuild their capital.
The impact of the Plan on private mortgage insurance is unclear. The Plan does not refer to mortgage insurance explicitly; however, it refers to a requirement for credit enhancement on high LTV ratio loans, which is a requirement of the current GSE Patch.charters. The Plan also indicates that the FHFA should continue to support efforts to expand credit risk transfer ("CRT") programs and should encourage the GSEs to continue to engage in a diverse mix of economically sensible CRT programs, including by increasing reliance on institution-level capital (presumably, as distinguished from capital obtained in the capital markets). For more information about CRT programs, see our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."
The current GSE Patch expands the definition of Qualified Mortgage (“QM”)QM under the Truth in Lending Act (Regulation Z) ("TILA") to include mortgages eligible to be purchased by the GSEs, even if the mortgages do not meet the DTIdebt-to-income ("DTI") ratio limit of 43% that is included in the standard QM definition.
Originating a QM may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay. The GSE Patch is scheduled to expire no later than January 2021. In July 2019, the CFPB released an Advanced Notice of Proposed Rulemaking on the QM definition. The director of the CFPB indicated that the CFPB would consider only a short-term extension of the GSE Patch. Approximately 30%21% and 24%22% of our NIW in the first half of 2020 and second quartersthe last half of 2019, respectively, was on loans with DTI ratios greater than 43%. However, it is possible that expiration of the GSE Patch will be delayed and that not all future loans with DTI ratios greater than 43% will be affected by a sunset of the GSE Patch, in part because the standard QM definition may be liberalized under the new rules.such expiration. In this regard, we note that in June 2020, the CFPB askedissued for comment, about whethera proposed definition of QM that would replace the use of the DTI ratio in the definition with a pricing threshold that would exclude from the definition of QM should retain a direct measureloan whose annual percentage rate exceeds the average prime offer rate for comparable loans by two percentage points or more. The CFPB proposed extending the expiration of a consumer’s personal finances (for example, DTI ratio); whether the definition should include an alternative method for assessing financial capacity; whether, ifGSE Patch until the QM definition retains a DTI ratio limit,effective date of the limit should remain 43% or be increased or decreased; and whether loans with DTI ratios above a prescribed limit should be given QM status if certain compensating factorsfinal rule. Comments are present.due on the proposed rule by September 8, 2020.
We may insure loans that do not qualify as QMs,QMs; however, we are unsure the extent to which lenders will make non-QM loans because they will not be entitled to the presumptions about
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compliance with the “ability to repay” rulesATR rule that the law allows with respect to QM loans. We are also unsure the extent to which lenders will purchase private mortgage insurance for loans that cannot be sold to the GSEs. Finally, certain lenders have suspended their non-QM lending due to COVID-19 pandemic-related concerns.
The rule that includes the QM definition that applies tofor loans insured by the FHA, which was issued by the Department of Housing and Urban Development (“HUD”) and that definition, is less restrictive than the CFPB’s current definition in certain respects, including that (i) it has no DTI ratio limit, and (ii) it allows the lenderlenders certain presumptions about compliance with the “ability to repay” requirementsATR rule on higher priced loans. It is possible that, in the future, lenders will prefer FHA-insured loans to loans insured by private mortgage insurance as a result of the FHA’s less restrictive QM definition.
However, in September 2019, HUD released its Housing Reform Plan and indicated that the FHA should refocus on its mission of providing housing finance support to low- and moderate-income families that cannot be fulfilled through traditional underwriting. In March 2019,addition, Treasury's Plan indicated that the President also directed the Secretary ofFHFA and HUD toshould develop and implement a plan that would recommend administrative and legislative reformsspecific understanding as to the programs HUD oversees,appropriate roles and overlap between the GSEs and FHA, including
with respect to the GSEs’ acquisitions of high LTV ratio loans and high DTI ratio loans.
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those of the FHA and the Government National Mortgage Association. As a result of the matters referred to above, it is uncertain what role the GSEs, FHA and private capital, including private mortgage insurance, will play in the residential housing finance system in the future. The timing and impact on our business of any resulting changes is uncertain. Most meaningfulMany of the proposed changes would require Congressional action to implement and it is difficult to estimate when Congressional action would be final and how long any associated phase-in period may last.
We are involvedReinsurance may not always be available or affordable.
As discussed in legal proceedingsour risk factor titled "The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and are subject to the risklikelihood of additional legal proceedings in the future.
Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine thatlosses occurring," we have the right to rescindin place quota share and excess of loss reinsurance transactions providing various amounts of coverage on 85% of our risk in force as of June 30, 2020. These reinsurance transactions enable us to earn higher returns on our business than we would without them because fewer Available Assets are required to be held under PMIERs. However, reinsurance may not always be available to us or available on similar terms, the loan. In our SEC reports, we referquota share reinsurance transactions subject us to insurance rescissionscounterparty credit risk, and denials of claims collectively as “rescissions” and variations of that term. In addition, our insurance policies generally provide that we can reduce or deny a claim if the servicer did not comply with its obligationsGSEs may change the credit they allow under the PMIERs for risk ceded under our insurance policy. We call such reduction of claims “curtailments.” In recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In 2018 and the first half of 2019, curtailments reduced our average claim paid by approximately 5.8% and 4.7%, respectively.
Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission, curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
When the insured disputes our right to rescind coverage or curtail claims, we generally engage in discussions in an attempt to settle the dispute.reinsurance transactions. If we are unable to reachobtain reinsurance for NIW, our returns may decrease absent an increase in premium rates. An increase in our premium rates may lead to a settlement,decrease in our NIW.
We have in place quota share reinsurance ("QSR") transactions with unaffiliated reinsurers that cover most of our insurance written from 2013 through 2021, and smaller portions of our insurance written prior to 2013 and from 2022 through 2025. As of June 30, 2020, the outcomeweighted average coverage percentage of our QSR transactions was 21%, based on risk in force. We also have in place reinsurance agreements that provide excess-of-loss reinsurance coverage for a dispute ultimately may be determined by legal proceedings.
Under ASC 450-20, until a liabilityportion of the risk associated with settlement discussionscertain mortgage insurance policies having an insurance coverage in force date on or legal proceedings becomes probableafter July 1, 2016 and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimate of our probable loss, including recording a probable loss of $23.5 million in the first quarter ofbefore April 1, 2019. Until settlement negotiations or legal proceedings for which we have recorded a probable loss are concluded, it is reasonably possible that we will record an additional loss. In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedingsThe transactions were entered into with insureds with respect to our claims paying practices. Although it is reasonably possible that when all of these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $289 million more than the amount of probable loss we have recorded. This estimate of maximum exposure is based upon currently available information and is subject to significant judgment, numerous assumptions andspecial purpose
knowninsurers that issued notes linked to the reinsurance coverage ("Insurance Linked Notes" or "ILNs"). The market volatility caused by the COVID-19 pandemic has caused a disruption in the market for new ILN transactions. Although new ILN transactions closed in the market in June and unknown uncertainties,July 2020, we consider their structures and/or terms to be less attractive than prior ILN transactions.
We are subject to comprehensive regulation and will include an amount for matters forother requirements, which we have recorded a probable loss until such mattersmay fail to satisfy.
We are concluded. We do not consider settlements concluded until any required GSE approval for such settlements is obtained. On August 2, 2019, we entered into an agreement to settle a claims paying practices dispute for which we previously had recognized a probable loss. There was no additional loss recognized as a result of entering into the agreement, as the settlement amount is in line with our original estimate of the probable loss. The agreement remains subject to GSE approval. The matters underlyingcomprehensive, detailed regulation, including by state insurance departments. Many of these regulations are designed for the estimate of maximum exposure will change from time to time. This estimateprotection of our maximum exposure does not include interest or consequential or exemplary damages.
insured policyholders and consumers, rather than for the benefit of investors. Mortgage insurers, including MGIC, have in the past been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act which is commonly known as RESPA,("RESPA"), and the notice provisions of the Fair Credit Reporting Act which is commonly known as FCRA.("FCRA"). While these proceedings in the aggregate havedid not resultedresult in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse effect on us. In addition, various regulators, includingTo the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of reliefextent that we are construed to make independent credit decisions in connection with alleged violationsour contract underwriting activities, we also could be subject to increased regulatory requirements under the Equal Credit Opportunity Act ("ECOA"), FCRA, and other laws. Under ECOA, examination may also be made of RESPA. Thewhether 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 law provisionslaws 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 many states prohibit payingthe insurance business, including payment for the referral of insurance business, premium rates and providediscrimination in pricing, and minimum capital requirements. The increased use, by the private mortgage insurance industry, of risk-based pricing systems that establish premium rates based on more attributes than previously considered may result in increased state and/or federal scrutiny of premium rates. For more information about state capital requirements, see our risk factor titled “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.” For information about regulation of data privacy, see our risk factor titled “We could be adversely affected if personal information on consumers that we maintain is improperly disclosed; and damage to, or interruption in, our information technology systems may disrupt our operations.” For more details about the various mechanisms to enforce this prohibition.ways in which our subsidiaries are regulated, see “Business - Regulation” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2019. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.
In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or results of operations.
The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring.
The Minimum Required Assets under the PMIERs are, in part, a function of the direct risk-in-force and the risk profile of the loans we insure, considering loan-to-value ratio, credit score, vintage, Home Affordable Refinance Program ("HARP") status and delinquency status; and whether the loans were insured under lender-paid mortgage insurance policies or other policies that are not subject to automatic termination consistent with the Homeowners Protection Act requirements for borrower paid mortgage insurance. Therefore, if our direct risk-in-force increases through increases in new insurance written, or if our mix of business changes to include loans with higher loan-to-value ratios or lower FICO scores, for example, or if we insure a higher percentage of loans under lender-paid mortgage insurance policies, all other things equal, we will be required to hold more Available Assets in order to maintain GSE eligibility.
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The minimum capital required by the risk-based capital framework contained in the exposure draft released by the NAIC in May 2016 would be, in part, a function of certain loan and economic factors, including property location, loan-to-value ratio and credit score; general underwriting quality in the market at the time of loan origination; the age of the loan; and the premium rate we charge. Depending on the provisions of the capital requirements when they are released in final form and become effective, our mix of business may affect the minimum capital we are required to hold under the new framework.
The percentage of our NIW from all single-premium policies (LPMI and BPMI, combined) has ranged from approximately 10% in 2013 to 19% in 2017 and was 17% in 2018 and 16% in the first half of 2019. Depending on the actual life of a single premium policy and its premium rate relative to that of a monthly premium policy, a single premium policy may generate more or less premium than a monthly premium policy over its life.
We have in place quota share reinsurance ("QSR") transactions with unaffiliated reinsurers that cover most of our insurance written from 2013 through 2019, and a portion of our insurance written prior to 2013. Although the transactions reduce our premiums, they have a lesser impact on our overall results, as losses ceded under the transactions reduce our losses incurred and the ceding commissions we receive reduce our underwriting expenses. The effect of the QSR transactions on the various components of pre-tax income will vary from period to period, depending on the level of ceded losses.
In 2018 and 2019, MGIC entered into reinsurance agreements that provide excess-of-loss reinsurance coverage for a portion of the risk associated with certain mortgage insurance policies having an insurance coverage in force date on or after July 1, 2016 and before April 1, 2019. The transactions were entered into with special purpose insurers that issued notes linked to the reinsurance coverage ("Insurance Linked Notes" or "ILNs"). We expect that we may enter into other ILN transactions if capital market conditions remain favorable.
In addition to the effect of reinsurance on our premiums, we expect a decline in our premium yield because an increasing percentage of our insurance in force is from recent book years whose premium rates have been trending lower.
Our ability to rescind insurance coverage became more limited for insurance we wrote beginning in mid-2012, which, as of June 30, 2019, represents approximately 84% of our flow, primary insurance in force. As a result of revised PMIERs requirements, we have revised our master policy and expect it to be effective for new insurance written beginning March 1, 2020, subject to state regulatory approvals. Our ability to rescind insurance coverage will become further limited for insurance we write under the new master policy, potentially resulting in higher losses than would be the case under our existing master policies.
From time to time, in response to market conditions, we change the types of loans that we insure and the requirements under which we insure them. We also change our underwriting guidelines, in part through aligning most of them with Fannie Mae and Freddie Mac for loans that receive and are processed in accordance with certain approval recommendations from a GSE automated underwriting system. We also make exceptions
to our underwriting requirements on a loan-by-loan basis and for certain customer programs. 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 June 30, 2019, mortgages with these characteristics in our primary risk in force included mortgages with LTV ratios greater than 95% (15.4%), loans with borrowers having FICO scores below 620 (2.1%), mortgages with borrowers having FICO scores of 620-679 (9.9%), mortgages with limited underwriting, including limited borrower documentation (1.9%), and mortgages with borrowers having DTI ratios greater than 45% (or where no ratio is available) (14.6%), each attribute as determined at the time of loan origination. An individual loan may have more than one of these attributes.
Beginning in 2017, the percentage of NIW that we have written on mortgages with LTV ratios greater than 95% and mortgages with DTI ratios greater than 45% has increased. In 2018, we started considering DTI ratios when setting our premium rates, and we changed our methodology for calculating DTI ratios for pricing and eligibility purposes to exclude the impact of mortgage insurance premiums. As a result of this change, loan originators may have changed the information they provide to us. Although we have changed our operational procedures to account for this, we cannot be sure that the DTI ratio we report for each loan beginning in late 2018 includes the related mortgage insurance premiums in the calculation. In addition, we expect to insure certain loans that would not have previously met our guidelines and to offer premium rates for certain loans lower than would have been offered under our previous methodology.
The widespread use of loan level 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") will make it more difficult to compare our premium rates to those offered by our competitors. We may not be aware of industry rate changes until we observe that our mix of new insurance written has changed and our mix may fluctuate more as a result.
If state or federal regulations or statutes are changed in ways that ease mortgage lending standards and/or requirements, or if lenders seek ways to replace business in times of lower mortgage originations, it is possible that more mortgage loans could be originated with higher risk characteristics than are currently being originated, such as loans with lower FICO scores and higher DTIs. Lenders could pressure mortgage insurers to insure such loans, which are expected to experience higher claim rates. Although we attempt to incorporate these higher expected claim rates into our underwriting and pricing models, there can be no assurance that the premiums earned and the associated investment income will be adequate to compensate for actual losses even under our current underwriting requirements. We do, however, believe that our insurance written beginning in the second half of 2008 will generate underwriting profits.
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Our holding company debt obligations materially exceed our holding company cash and investments.
At June 30,2019,30, 2020, we had approximately $333$530 million in cash and investments at our holding company and our holding company’s debt obligations were $815 million in aggregate principal amount, consisting of $425 million of 5.75% Senior Notes due in 2023 ("5.75% Notes") and $390 million of 9% Debentures due in 2063 (of which approximately $133 million was purchased, and is held, by MGIC, and is eliminated on the consolidated balance sheet). Annual debt service on the 5.75% Notes and 9% Debentures outstanding as of June 30, 2019,2020, is approximately $60 million (of which approximately $12 million will be paid to MGIC and will be eliminated on the consolidated statement of operations).
The 5.75% Senior Notes and 9% Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. The payment of dividends from our insurance subsidiaries which, other than investment income and raising capital in the public markets, is the principal source of our holding company cash inflow, is restricted by insurance regulation. In addition, through March 31, 2021, dividends paid by MGIC to our holding company require GSE approval. MGIC is the principal source of dividends, and in the first halfquarter of 20192020 and in 2018,the full year 2019, it paid a total of $140$390 million and $220$280 million, respectively, in dividends to our holding company. We expect MGIC to continue to pay quarterly dividends of at least the $70 million amount paid in the second quarter of 2019, subject to approval by its Board of Directors. We ask the OCI not to object before MGIC pays dividends.
Individends and, due to the uncertainty surrounding the COVID-19 pandemic, MGIC did not pay a dividend to the holding company in the second quarter of 20192020. Future dividend payments from MGIC to the holding company will be determined on a quarterly basis in consultation with the board of directors, and after considering any updated estimates about the length and severity of the economic impacts of the COVID-19 pandemic on our business.
In the first quarter of 2020 and in 2018,2019, we repurchased approximately 1.89.6 million and 16.08.7 million shares of our common stock, respectively, using approximately $25$120 million and $175$114 million of holding company resources, respectively. Since the endAs of the second quarter, through August 5, 2019,June 30, 2020, we repurchased approximately 1.8had $291 million shares for approximately $23 million. We mayof authorization remaining to repurchase up to an additional $177 million of our common stock through the end of 20202021 under a share repurchase program approved by our Board of Directors in the first quarter of 2019.January 2020. Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.time, and due to the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases. If any additional capital contributions to our subsidiaries were required, such contributions would decrease our holding company cash and investments. As described in our Current Report on Form 8-K filed on February 11, 2016, MGIC borrowed $155 million from the Federal Home Loan Bank of Chicago. This is an obligation of MGIC and not of our holding company.
The priceOur success depends, in part, on our ability to manage risks in our investment portfolio.
Our investment portfolio is an important source of revenue and is our primary source of claims paying resources. Although our investment portfolio consists mostly of highly-rated fixed income investments, our investment portfolio is affected by
general economic conditions and tax policy, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and credit spreads and, consequently, the value of our common stockfixed income securities. The value of our investment portfolio may fluctuate significantly, which may make it difficult for holders to resell common stock when they want or at a price they find attractive.
The market price for our common stock may fluctuate significantly.also be adversely affected by ratings downgrades, increased bankruptcies and credit spreads widening in distressed industries, such as energy, lodging and leisure, autos, transportation and retail. In addition, the collectability and valuation of our municipal bond portfolio may be adversely affected if state and local municipalities incur increased costs to respond to COVID-19 and receive fewer tax revenues due to adverse economic conditions. Our investment portfolio also includes commercial mortgage-backed securities, collateralized loan obligations, and asset-backed securities, which could be adversely affected by declines in real estate valuations and/or financial market disruption, including a heightened collection risk on the underlying loans. As a result of these matters, we may not achieve our investment objectives and a reduction in the market value of our investments could have an adverse effect on our liquidity, financial condition and results of operations.
For the significant portion of our investment portfolio that is held by MGIC, to receive full capital credit under insurance regulatory requirements and under the PMIERs, we generally are limited to investing in investment grade fixed income securities whose yields reflect their lower credit risk factors described herein,profile. Our investment income depends upon the following factors maysize 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 market price forsize of the portfolio.
In addition, we structure our common stock: announcements by us orinvestment portfolio to satisfy our competitors of acquisitions or strategic initiatives; our actual or anticipated quarterly and annual operating results; changes in expectations of future financial performance (including incurred losses on our insurance in force); changes in estimates of securities analysts or rating agencies; actual or anticipated
changesexpected liabilities, including claim payments in our share repurchase program or dividends; changes in general conditions in the economy, the mortgage insurance industrybusiness. If we underestimate our liabilities or improperly structure our investments to meet these liabilities, we could have unexpected losses resulting from the financial markets; changes in operating performance or market valuationforced liquidation of companies in the mortgage insurance industry; the addition or departurefixed income investments before their maturity, which could adversely affect our results of key personnel; changes in tax law; and adverse press or news announcements affecting us or the industry. In addition, ownership by certain types of investors may affect the market price and trading volume of our common stock. For example, ownership in our common stock by investors such as index funds and exchange-traded funds can affect the stock’s price when those investors must purchase or sell our common stock because the investors have experienced significant cash inflows or outflows, the index to which our common stock belongs has been rebalanced, or our common stock is added to and/or removed from an index (due to changes in our market capitalization, for example).operations.
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Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about purchases of MGIC Investment Corporation common stock by us during the three months ended June 30, 2019.2020.
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Share repurchases |
Period Beginning | | Period Ending | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the programs (1) |
April 1, 2019 | | April 30, 2019 | | — |
| | $ | — |
| | — |
| | $ | 224,940,973 |
|
May 1, 2019 | | May 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | 224,940.973 |
|
June 1, 2019 | | June 30, 2019 | | 1,808,739 |
| | $ | 13.79 |
| | 1,808,739 |
| | $ | 200,000,000 |
|
| | | | 1,808,739 |
| | $ | 13.79 |
| | 1,808,739 |
| | |
|
| | | | | | | | | | | | | | | | |
Share repurchases |
Period Beginning | | Period Ending | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the programs (1) |
April 1, 2020 | | April 30, 2020 | | — |
| | $ | — |
| | — |
| | $ | 290,818,024 |
|
May 1, 2020 | | May 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 290,818,024 |
|
June 1, 2020 | | June 30, 2020 | | — |
| | $ | — |
| | — |
| | $ | 290,818,024 |
|
| | | | — |
| | $ | — |
| | — |
| | |
| |
(1) | The share repurchase activity completed the $200 million share repurchase program authorized by the Board of Directors on April 26, 2018. On March 19, 2019,January 28, 2020, our Board of Directors authorized an additionala share repurchase program under which we may repurchase up to $200an additional $300 million of our common stock through the end of 2020.2021. Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.time, and in light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases. |
MGIC Investment Corporation - Q2 20192020 | 6169
Item 6. Exhibits
The accompanying Index to Exhibits is incorporated by reference in answer to this portion of this Item, and except as otherwise indicated in the next sentence, the Exhibits listed in such Index are filed as part of this Form 10-Q. Exhibit 32 is not filed as part of this Form 10-Q but accompanies this Form 10-Q.
(Part II, Item 6)
Index to exhibits
|
| | |
| | |
| | |
Exhibit Number | | Description of Exhibit |
| | Separation Agreement between Stephen Mackey and Mortgage Guaranty Insurance Corporation dated as of May 14, 2019 *, † |
| | Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 † |
| | Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 † |
| | Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 6 of Part II, this Exhibit is not being “filed”) †† |
| | Risk Factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, and through updating of various statistical and other information † |
101.INS | | Inline XBRL Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
| | | | | |
| | | | | |
| | | | | |
Exhibit Number | | Description of Exhibit | Form | Exhibit(s) | Filing Date |
| | | 8-K | 3.2 | May 19, 2020 |
| | | 8-K | 3.2 | May 19, 2020 |
| | Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 † | | | |
| | Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 † | | | |
| | Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 6 of Part II, this Exhibit is not being “filed”) †† | | | |
| | Risk Factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, and through updating of various statistical and other information † | | | |
101.INS | | Inline XBRL Instance Document | | | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | |
* Denotes a management contract or compensatory plan.
† Filed herewith.
†† Furnished herewith.
MGIC Investment Corporation - Q2 20192020 | 6270
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on August 5, 2019.4, 2020.
|
| |
| MGIC INVESTMENT CORPORATION |
| |
| /s/ Nathaniel H. Colson |
| Nathaniel H. Colson |
| Executive Vice President and |
| Chief Financial Officer |
| |
| /s/ Julie K. Sperber |
| Julie K. Sperber |
| Vice President, Controller and Chief Accounting Officer |
MGIC Investment Corporation - Q2 20192020 | 6371