0000876437
false
0000876437
2024-05-01
2024-05-01
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 1, 2024
MGIC Investment Corporation
__________________________________________
(Exact name of registrant as specified in its charter)
Wisconsin 1-10816 39-1486475
__________________________________ _____________________ ____________________________
(State or other jurisdiction of incorporation) (Commission File Number) (I.R.S. Employer Identification No.)
250 E. Kilbourn Avenue Milwaukee, Wisconsin 53202
________________________________ ___________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 347-6480
(414)
Not Applicable
Former name or former address, if changed since last report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common stock MTG New York Stock Exchange
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of
the following provisions:
Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as
defined in as defined in Rule 405 of the Securities Act of 1933 ((s)230.405 of
this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934
((s)240.12b-2 of this chapter).
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. [ ]
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Item 2.02 Results of Operations and Financial Condition.
The Company issued a press release on
May 1, 2024
announcing its results of operations for the quarter ended March 31, 2024 and
certain other information. The press release is furnished as Exhibit 99.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
Pursuant to General Instruction B.2 to Form 8-K, the Company's
May 1, 2024
press release is furnished as Exhibit 99 and is not filed.
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Exhibit Index
Exhibit No. Description
99 Press Release dated
May 1, 2024
. (Pursuant to General Instruction B.2 to Form 8-K,
this press release is furnished and is not filed.)
104 Cover Page Interactive Data File (the cover page XBRL
tags are embedded within the Inline XBRL document).
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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 hereunto duly authorized.
MGIC INVESTMENT CORPORATION
Date: May 1, 2024 By: \s\ Julie K. Sperber
Julie K. Sperber
Vice President, Controller and Chief Accounting Officer
Exhibit 99
Investor Relations: Dianna Higgins | (414) 347-2635 | dianna_higgins@mgic.com
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MGIC Investment Corporation Reports First Quarter 2024 Results
First Quarter 2024 Net Income of $174.1 million or $0.64 per Diluted Share
First Quarter 2024 Adjusted Net Operating Income (Non-GAAP) of
$178.4 million
or
$0.65
per Diluted Share
MILWAUKEE
(May 1, 2024) -
MGIC Investment Corporation (NYSE: MTG) today reported operating and financial
results for the first quarter of 2024.
Tim Mattke, CEO of MTG and Mortgage Guaranty Insurance Corporation ("MGIC")
said, "
We began the year with a solid quarter generating net income of
$174 million,
delivering a return on equity of 13.7%, and increasing book value per share by
14.5% year-over-year while returning meaningful capital to our shareholders.
We continue to benefit from favorable credit trends and the resiliency of the
housing market.
We remain confident in our position in the market and ability to execute our
business strategies
."
SUMMARY FINANCIAL METRICS Quarter ended
($ in millions, except where otherwise noted) Q1 2024 Q4 2023 Q1 2023
New insurance written (NIW) (billions) $ 9.1 $ 10.9 $ 8.2
Net premiums earned $ 242.6 $ 226.4 $ 242.0
Annual persistency 85.7 % 86.1 % 84.5 %
Insurance in force (billions) $ 290.9 $ 293.5 $ 292.4
Losses incurred, net $ 4.6 $ (9.5) $ 6.4
Primary delinquency inventory 24,142 25,650 24,757
Primary IIF delinquency rate (count based) 2.15 % 2.25 % 2.12 %
Loss ratio 1.9 % (4.2 %) 2.7 %
Underwriting expense ratio 25.7 % 24.6 % 31.1 %
Net premium yield (bps) 33.2 30.8 32.9
In force portfolio yield (bps) 38.5 38.6 38.7
Annualized return on equity 13.7 % 15.2 % 13.3 %
Book value per common share outstanding $ 18.97 $ 18.61 $ 16.57
Adjust for AOCI $ 1.21 $ 1.16 $ 1.37
Tangible book value per share $ 20.18 $ 19.77 $ 17.94
CAPITAL AND LIQUIDITY As of
($ in billions, except where otherwise noted) March 31, 2024 December 31, 2023 March 31, 2023
PMIERs available assets $ 5.9 $ 5.8 $ 5.9
PMIERs excess $ 2.5 $ 2.4 $ 2.4
Holding company liquidity (millions) $ 793 $ 918 $ 582
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FIRST QUARTER 2024 HIGHLIGHTS
.
We paid a dividend of $0.115 per common share to shareholders during the first
quarter of 2024.
.
We repurchased 4.7 million shares of common stock using $93.3 million of
holding company cash.
.
In January, S&P upgraded MGIC's financial strength and credit rating to A- and
at the same time upgraded the credit rating on MGIC Investment to BBB-. The
outlook for the ratings is stable.
.
In March, Moody's affirmed MGIC's A3 IFS rating, and changed the outlook to
positive from stable.
SECOND QUARTER 2024 HIGHLIGHTS
.
In April, we repurchased an additional 2.7 million shares of our common stock
using $54.8 million of holding company cash.
.
We declared a dividend of $0.115 per common share to shareholders payable on
May 21, 2024, to shareholders of record at the close of business on May 9,
2024.
.
MGIC paid a $350 million dividend to our holding company.
.
In April 2024, our board of directors approved an additional share repurchase
program, authorizing us to purchase up to $750 million of common stock prior
to December 31, 2026.
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Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call May 2, 2024, at 10
a.m. ET to allow securities analysts and shareholders the opportunity to hear
management discuss the company's quarterly results. Individuals interested in
joining by telephone should register for the call at https://register.vevent.com
/register/BI67cd18ae5035429a817e573920d45d36 to receive the dial-in number and
unique PIN to access the call. It is recommended that you join the call at
least 10 minutes before the conference call begins. The call is also being
webcast and can be accessed at the company's website at
http://mtg.mgic.com
/ under "Newsroom."
A replay of the webcast will be available on the company's website through
June 3, 2024.
About MGIC
Mortgage Guaranty Insurance Corporation (MGIC) (
www.mgic.com
), the principal subsidiary of MGIC Investment Corporation, serves lenders
throughout the United States, helping families achieve homeownership sooner by
making affordable low-down-payment mortgages a reality through the use of
private mortgage insurance. At March 31, 2024, MGIC had $290.9 billion of
primary insurance in force covering 1.1 million mortgages.
This press release, which includes certain additional statistical and other
information, including non-GAAP financial information and a supplement that
contains various portfolio statistics, are all available on the Company's
website at
https://mtg.mgic.com/
under "Newsroom."
From time to time MGIC Investment Corporation releases important information
via postings on its corporate website, and via postings on MGIC's website for
information related to underwriting and pricing, and intends to continue to do
so in the future. Such postings include corrections of previous disclosures
and may be made without any other disclosure. Investors and other interested
parties are encouraged to enroll to receive automatic email alerts and Really
Simple Syndication (RSS) feeds regarding new postings. Enrollment information
for MGIC Investment Corporation alerts can be found at
https://mtg.mgic.com/shareholder-services/email-alerts
. For information about our underwriting and rates, see
https://www.mgic.com/underwriting
.
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
Our actual results could be affected by the risk factors below. These risk
factors should be reviewed in connection with this press release and our
periodic reports to the Securities and Exchange Commission ("SEC"). These risk
factors may also cause actual results to differ materially from the results
contemplated by forward looking statements that we may make. Forward looking
statements consist of statements which relate to matters other than historical
fact, including matters that inherently refer to future events. Among others,
statements that include words such as "believe," "anticipate," "will" or
"expect," or words of similar import, are forward looking statements. We are
not undertaking any obligation to update any forward looking statements or
other statements we may make even though these statements may be affected by
events or circumstances occurring after the forward looking statements or
other statements were made. No investor should rely on the fact that such
statements are current at any time other than the time at which this press
release was delivered for dissemination to the public.
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.
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Use of 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 accounting
principles generally accepted in the United States of America (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 and losses on debt extinguishment and
infrequent or unusual non-operating items where applicable.
Adjusted net operating income (loss)
is defined as GAAP net income (loss) excluding the after-tax effects of net
realized investment gains (losses), gain and losses on debt extinguishment and
infrequent or unusual non-operating items where applicable. The amounts of
adjustments to components of pre-tax operating income (loss) are tax effected
using a federal statutory tax rate of 21%.
Adjusted net operating income (loss) per diluted share
is calculated in a manner consistent with the accounting standard regarding
earnings per share by dividing (i) adjusted net operating income (loss) after
making adjustments 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.
(1)
Net realized investment gains (losses).
The recognition of net realized investment gains or losses can vary
significantly across periods as the timing of individual securities sales is
highly discretionary and is influenced by such factors as market opportunities,
our tax and capital profile, and overall market cycles.
(2)
Gains and losses on debt extinguishment.
Gains and losses on debt extinguishment result from discretionary activities
that are undertaken to enhance our capital position, and/or improve our debt
profile.
(3)
Infrequent or unusual non-operating items
.
Items that are non-recurring in nature and are not part of our primary
operating activities.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
(In thousands, except per share data) 2024 2023
Net premiums written $ 233,800 $ 230,192
Revenues
Net premiums earned $ 242,644 $ 242,015
Net investment income 59,744 49,223
Net gains (losses) on investments and other financial instruments (8,509) (7,698)
Other revenue 482 425
Total revenues 294,361 283,965
Losses and expenses
Losses incurred, net 4,555 6,446
Underwriting and other expenses, net 61,027 72,541
Interest expense 8,899 9,374
Total losses and expenses 74,481 88,361
Income before tax 219,880 195,604
Provision for income taxes 45,783 41,057
Net income $ 174,097 $ 154,547
Net income per diluted share $ 0.64 $ 0.53
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE (UNAUDITED)
Three Months Ended March 31,
(In thousands, except per share data) 2024 2023
Net income $ 174,097 $ 154,547
Interest expense, net of tax:
9% Convertible Junior Subordinated Debentures due 2063 - 375
Diluted net income available to common shareholders $ 174,097 $ 154,922
Weighted average shares - basic 270,314 290,989
Effect of dilutive securities:
Unvested restricted stock units 2,794 2,079
9% Convertible Junior Subordinated Debentures due 2063 - 1,644
Weighted average shares - diluted 273,108 294,712
Net income per diluted share $ 0.64 $ 0.53
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NON-GAAP RECONCILIATIONS
Reconciliation of Income before tax / Net income to Adjusted
pre-tax operating income / Adjusted net operating income
Three Months Ended March 31,
2024 2023
(In thousands, except Pre-tax Tax Net Pre-tax Tax Net
per share amounts) Effect (after-tax) Effect (after-tax)
Income before tax $ 219,880 $ 45,783 $ 174,097 $ 195,604 $ 41,057 $ 154,547
/ Net income
Adjustments:
Net realized 5,429 1,140 4,289 4,068 854 3,214
investment losses
Adjusted pre-tax operating $ 225,309 $ 46,923 $ 178,386 $ 199,672 $ 41,911 $ 157,761
income / Adjusted
net operating
income
Reconciliation of Net income per diluted share to
Adjusted net operating income per diluted share
Weighted average 273,108 294,712
shares - diluted
Net income per $ 0.64 $ 0.53
diluted share
Net realized 0.02 0.01
investment losses
Adjusted net operating $ 0.65 (1) $ 0.54
income per diluted share
(1)
Does not foot due to rounding
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, March 31,
(In thousands, except per share data) 2024 2023 2023
ASSETS
Investments $ 5,688,261 $ 5,738,734 $ 5,579,426
(1)
Cash and cash equivalents 431,347 363,666 358,214
Restricted cash and cash equivalents 8,221 6,978 8,358
Reinsurance recoverable on loss reserves 39,200 33,302 32,761
(2)
Home office and equipment, net 37,614 38,755 40,580
Deferred insurance policy acquisition costs 13,846 14,591 18,097
Deferred income taxes, net 76,271 79,782 100,174
Other assets 240,486 262,572 214,678
Total assets $ 6,535,246 $ 6,538,380 $ 6,352,288
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves $ 504,447 $ 505,379 $ 558,515
(2)
Unearned premiums 148,935 157,779 183,467
Senior notes 643,563 643,196 642,092
Convertible junior debentures - - 21,086
Other liabilities 135,958 160,009 169,484
Total liabilities 1,432,903 1,466,363 1,574,644
Shareholders' equity 5,102,343 5,072,017 4,777,644
Total liabilities and shareholders' equity $ 6,535,246 $ 6,538,380 $ 6,352,288
Book value per share $ 18.97 $ 18.61 $ 16.57
(3)
(1) $ (351,064) $ (337,909) $ (414,984)
Investments include net unrealized gains (losses) on securities
(2) $ 465,247 $ 472,077 $ 525,754
Loss reserves, net of reinsurance recoverable on loss reserves
(3) 268,990 272,494 288,366
Shares outstanding
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
ADDITIONAL INFORMATION - NEW INSURANCE WRITTEN
2024 2023
Q1 Q4 Q3 Q2 Q1
New primary insurance $ 9.1 $ 10.9 $ 14.6 $ 12.4 $ 8.2
written (NIW) (billions)
Monthly (including split 8.8 10.3 14.0 12.0 7.9
premium plans) and
annual premium
plans
Single premium 0.3 0.6 0.6 0.4 0.3
plans
Product mix as a
% of primary NIW
FICO < 3 % 4 % 4 % 4 % 5 %
680
95% 15 % 13 % 12 % 11 % 13 %
LTVs
45% 28 % 30 % 28 % 22 % 23 %
DTI
Singles 3 % 5 % 4 % 3 % 4 %
Refinances 2 % 3 % 1 % 2 % 2 %
New primary risk $ 2.4 $ 2.8 $ 3.8 $ 3.2 $ 2.1
written (billions)
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
ADDITIONAL INFORMATION - INSURANCE IN FORCE and RISK IN FORCE
2024 2023
Q1 Q4 Q3 Q2 Q1
Primary Insurance In $ 290.9 $ 293.5 $ 294.3 $ 292.5 $ 292.4
Force (IIF) (billions)
Total # 1,123,209 1,139,796 1,151,431 1,155,439 1,164,196
of loans
Premium
Yield
In force 38.5 38.6 38.6 38.6 38.7
portfolio yield
(1)
Premium 0.1 (0.5) 0.2 (0.1) (0.1)
refunds
(2)
Accelerated earnings 0.3 0.5 0.4 0.4 0.3
on single premium
Total direct 38.9 38.6 39.2 38.9 38.9
premium yield
Ceded premiums earned, (5.7) (7.8) (6.3) (5.7) (6.0)
net of profit
commission and
assumed premiums
(3)
Net premium 33.2 30.8 32.9 33.2 32.9
yield
Average Loan Size $ 259.0 $ 257.5 $ 255.6 $ 253.1 $ 251.2
of IIF (thousands)
Annual 85.7 % 86.1 % 86.3 % 85.9 % 84.5 %
Persistency
(4)
Primary Risk In Force $ 76.8 $ 77.2 $ 77.1 $ 76.4 $ 76.0
(RIF) (billions)
By FICO
(%)
(5)
FICO 43 % 43 % 43 % 43 % 42 %
760 &
FICO 18 % 18 % 18 % 18 % 18 %
740-759
FICO 14 % 14 % 14 % 14 % 14 %
720-739
FICO 11 % 11 % 11 % 11 % 11 %
700-719
FICO 7 % 7 % 7 % 7 % 8 %
680-699
FICO 3 % 3 % 3 % 3 % 3 %
660-679
FICO 2 % 2 % 2 % 2 % 2 %
640-659
FICO 639 2 % 2 % 2 % 2 % 2 %
& <
Average Coverage 26.4 % 26.3 % 26.2 % 26.1 % 26.0 %
Ratio (RIF/IIF)
Direct Pool RIF
(millions)
With aggregate $ 180 $ 186 $ 187 $ 189 $ 189
loss limits
Without aggregate $ 56 $ 70 $ 72 $ 75 $ 78
loss limits
(1) Total direct premiums earned, excluding premium refunds and accelerated
premiums from single premium policy cancellations divided by average primary
insurance in force.
(2) Premium refunds and our estimate of refundable premium on our delinquency
inventory divided by average primary insurance in force.
(3) Ceded premiums earned, net of profit commissions and assumed premiums.
Assumed premiums include our participation in GSE Credit Risk Transfer
programs, of which the impact on the net premium yield was 0.5 bps in the
first quarter of 2024. Ceded premiums for reinsurance cancellation activities
decreased the premium yield by 1.9 bps in the fourth quarter of 2023.
(4) As of September 30, 2023, we refined our methodology for calculating our
Annual Persistency by excluding the amortization of the principal balance. All
prior periods have been revised.
(5) The FICO credit score at the time of origination for a loan with multiple
borrowers is the lowest of the borrowers' "decision FICO scores." A borrower's
"decision FICO score" is determined as follows: if there are three FICO scores
available, the middle FICO score is used; if two FICO scores are available,
the lower of the two is used; if only one FICO score is available, it is used.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
ADDITIONAL INFORMATION - DELINQUENCY STATISTICS
2024 2023
Q1 Q4 Q3 Q2 Q1
Primary IIF -
Delinquent
Roll Forward
- # of
Loans
Beginning 25,650 24,720 23,823 24,757 26,387
Delinquent
Inventory
New 12,177 12,708 12,240 10,580 11,297
Notices
Cures (13,314) (11,370) (10,975) (11,156) (12,607)
Paid (352) (310) (359) (348) (311)
claims
Rescissions (19) (17) (9) (10) (9)
and
denials
Other items - (81) - - -
removed
from
inventory
(1)
Ending 24,142 25,650 24,720 23,823 24,757
Delinquent
Inventory
Primary IIF 2.15 % 2.25 % 2.14 % 2.05 % 2.12 %
Delinquency
Rate (count
based)
Primary claim 266 302 284 291 296
received
inventory
included in
ending
delinquent
inventory
Composition
of
Cures
Reported 4,086 3,390 3,393 2,781 3,553
delinquent
and
cured
intraquarter
Number of
payments
delinquent
prior to
cure
3 5,711 4,808 4,343 4,635 5,181
payments
or
less
4-11 2,769 2,341 2,241 2,581 2,664
payments
12 748 831 998 1,159 1,209
payments
or
more
Total 13,314 11,370 10,975 11,156 12,607
Cures
in
Quarter
Composition
of
Paids
Number of
payments
delinquent
at time
of
claim
payment
3 - - - - 1
payments
or
less
4-11 30 15 18 16 9
payments
12 322 295 341 332 301
payments
or
more
Total 352 310 359 348 311
Paids
in
Quarter
Aging of
Primary
Delinquent
Inventory
Consecutive
months
delinquent
3 7,930 33% 9,175 36% 8,732 35% 7,663 32% 7,573 31 %
months
or
less
4-11 9,010 38% 8,900 35% 8,220 33% 8,070 34% 8,563 34 %
months
12 7,202 29% 7,575 29% 7,768 32% 8,090 34% 8,621 35 %
months
or
more
Number of
payments
delinquent
3 11,620 48% 12,665 50% 11,867 48% 10,694 45% 10,453 42 %
payments
or
less
4-11 7,849 33% 8,064 31% 7,570 31% 7,437 31% 8,016 33 %
payments
12 4,673 19% 4,921 19% 5,283 21% 5,692 24% 6,288 25 %
payments
or
more
(1) Items removed from inventory are associated with commutations of coverage
on non-performing policies.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
ADDITIONAL INFORMATION - RESERVES and CLAIMS PAID
2024 2023
Q1 Q4 Q3 Q2 Q1
Reserves (millions)
Primary Direct Loss Reserves $ 501 $ 502 $ 522 $ 527 $ 555
Pool Direct loss reserves 3 3 3 3 3
Other Gross Reserves - - 1 1 1
Total Gross Loss Reserves $ 504 $ 505 $ 526 $ 531 $ 559
Primary Average Direct Reserve $ 20,761 $ 19,562 $ 21,119 $ 22,123 $ 22,423
Per Delinquency
Net Paid Claims (millions) $ 12 $ 13 $ 11 $ 12 $ 10
(1)
Total primary (excluding 10 10 10 10 9
settlements)
Rescission and NPL settlements - 1 - - -
Reinsurance - - (1) - -
LAE and other 2 2 2 2 1
Reinsurance Terminations - (9) - - -
(1)
Primary Average Claim Payment $ 28.3 $ 31.1 $ 28.5 $ 29.8 $ 28.2
(thousands)
(2)
(1) Net paid claims, as presented, does not include amounts received in
conjunction with terminations or commutations of reinsurance agreements.
(2) Excludes amounts paid in settlement disputes for claims paying practices
and/or commutations of policies.
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MGIC INVESTMENT CORPORATION
AND SUBSIDIARIES
ADDITIONAL INFORMATION -
REINSURANCE AND MI RATIOS
2024 2023
Q1 Q4 Q3 Q2 Q1
Quota Share
Reinsurance
% NIW subject 87.7 % 85.8 % 87.2 % 87.5 % 86.4 %
to reinsurance
Ceded premiums written $ 28.7 $ 33.9 $ 32.7 $ 27.4 $ 29.9
and earned (millions)
(1)
Ceded losses $ 6.5 $ 2.2 $ 6.8 $ 1.9 $ 4.7
incurred (millions)
Ceding commissions $ 10.6 $ 13.0 $ 12.7 $ 12.4 $ 12.3
(millions) (included in
underwriting and
other expenses)
Profit commission (millions) $ 24.6 $ 35.9 $ 30.7 $ 34.8 $ 31.7
(included in ceded
premiums)
Excess-of-Loss
Reinsurance
Ceded premiums $ 16.1 $ 27.1 $ 17.4 $ 17.5 $ 16.9
earned (millions)
(2)
Mortgage Guaranty Insurance 9.8:1 (3) 10.2:1 9.6:1 9.9:1 9.7:1
Corporation - Risk to
Capital
Combined Insurance Companies 9.8:1 (3) 10.1:1 9.5:1 9.8:1 9.7:1
- Risk to Capital
GAAP loss ratio (insurance 1.9 % (4.2) % (0.0 %) (7.3) % 2.7 %
operations only)
GAAP underwriting expense 25.7 % 24.6 % 22.2 % 24.1 % 31.1 %
ratio (insurance
operations
only)
(1) Includes $5 million termination fee incurred to terminate our 2020 QSR
Transaction in Q4 2023.
(2) Includes $8 million of additional ceded premium in Q4 2023 associated with
the cost of the tender premium and associated expenses on our Home Re 2019-1
Ltd., Home Re 2021-1 Ltd., and Home Re 2021-2 Ltd. Transactions.
(3) Preliminary
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Risk Factors
As used below, "we," "our" and "us" refer to MGIC Investment Corporation's
consolidated operations or to MGIC Investment Corporation, as the context
requires; and "MGIC" refers to Mortgage Guaranty Insurance Corporation.
Risk Factors Relating to Global Events
Wars and/or other global events may adversely affect the U.S. economy and our
business.
Wars and/or other global events may result in increased inflation rates,
strained supply chains, and increased volatility in the domestic and global
financial markets. Wars and/or other global events have in the past and may
continue to impact our business in various ways, including the following which
are described in more detail in the remainder of these risk factors:
.
The terms under which we are able to obtain quota share reinsurance ("QSR")
and/or excess-of-loss ("XOL") reinsurance through the insurance-linked notes
("ILN") market and the traditional reinsurance market may be negatively
impacted and terms under which we are able to access those markets in the
future may be limited or less attractive.
.
The risk of a cybersecurity incident that affects our company may increase.
.
Wars may negatively impact the domestic economy, which may increase
unemployment and inflation, or decrease home prices, in each case leading to
an increase in loan delinquencies.
.
The volatility in the financial markets may impact the performance of our
investment portfolio and our investment portfolio may include investments in
companies or securities that are negatively impacted by wars and/or other
global events.
Risk Factors Relating to the Mortgage Insurance Industry and its Regulation
Downturns in the domestic economy or declines in home prices may result in
more homeowners defaulting and our losses increasing, with a corresponding
decrease in our returns.
Losses result from events that reduce a borrower's ability or willingness to
make mortgage payments, such as unemployment, health issues, changes in family
status, and decreases in home prices that result in the borrower's mortgage
balance exceeding the net value of the home. A deterioration in economic
conditions, including an increase in unemployment, generally increases the
likelihood that borrowers will not have sufficient income to pay their
mortgages and can also adversely affect home prices.
High levels of unemployment may result in an increasing number of loan
delinquencies and an increasing number of insurance claims; however,
unemployment is difficult to predict as it may be impacted by a number of
factors, including the health of the economy, and wars and other global events.
The seasonally-adjusted Purchase-Only U.S. Home Price Index of the Federal
Housing Finance Agency (the "FHFA"), which is based on single-family
properties whose mortgages have been purchased or securitized by Fannie Mae or
Freddie Mac, indicates that home prices increased 1.2% nationwide in February,
2024 compared to January, 2024. Although the 12 month change in home prices
recently reached historically high rates, the rate of growth is moderating: it
increased by 6.7% in 2023, after increasing 6.8%, and 17.8% in 2022 and 2021,
respectively. The national average price-to-income ratio exceeds its
historical average, in part as a result of recent home price appreciation
outpacing increases in income. Affordability issues can put downward pressure
on home prices. A decline in home prices may occur even absent a deterioration
in economic conditions due to declines in demand for homes, which in turn may
result from changes in buyers' perceptions of the potential for future
appreciation, restrictions on and the cost of mortgage credit due to more
stringent underwriting standards, higher interest rates, changes to the tax
deductibility of mortgage interest, decreases in the rate of household
formations, or other factors.
Changes in the business practices of Fannie Mae and Freddie Mac ("the GSEs"),
federal legislation that changes their charters or a restructuring of the GSEs
could reduce our revenues or increase our losses.
The substantial majority of our new insurance written ("NIW") is for loans
purchased by the GSEs; therefore, the business practices of the GSEs greatly
impact our business. In 2022 the GSEs each published Equitable Housing Finance
Plans ("Plans"). Updated Plans were subsequently published by the GSEs in
April 2023. The Plans seek to advance equity in housing finance over a
three-year period and include potential changes to the GSEs' business
practices and policies. Specifically relating to mortgage insurance, (1)
Fannie Mae's Plan includes the creation of special purpose credit program(s)
("SPCPs") targeted to historically underserved borrowers with a goal of
lowering costs for such borrowers through lower than standard mortgage
insurance requirements; and (2) Freddie Mac's Plan includes plans to work with
mortgage insurers to look for ways to lower mortgage costs, the creation of
SPCPs targeted to historically underserved borrowers, and the planned purchase
of loans originated through lender-created
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SPCPs. To the extent the business practices and policies of the GSEs regarding
mortgage insurance coverage, costs and cancellation change, including more
broadly than through SPCPs, such changes may negatively impact the mortgage
insurance industry and our financial results.
Other business practices of the GSEs that affect the mortgage insurance
industry include:
.
The GSEs' private mortgage insurer eligibility requirements ("PMIERs"), the
financial requirements of which are discussed in our risk factor titled
"We may not continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease if we are required to maintain more
capital in order to maintain our eligibility."
.
The capital and collateral requirements for participants in the GSEs'
alternative forms of credit enhancement discussed in our risk factor titled
"The amount of insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage insurance or are unable to
obtain capital relief for mortgage insurance."
.
The level of private mortgage insurance coverage, subject to the limitations
of the GSEs' charters, when private mortgage insurance is used as the required
credit enhancement on low down payment mortgages (the GSEs generally require a
level of mortgage insurance coverage that is higher than the level of coverage
required by their charters; any change in the required level of coverage will
impact our new risk written).
.
The amount of loan level price adjustments and guaranty fees (which result in
higher costs to borrowers) that the GSEs assess on loans that require private
mortgage insurance. The requirements of the new GSE capital framework may lead
the GSEs to increase their guaranty fees. In addition, the FHFA has indicated
that it is reviewing the GSEs' pricing in connection with preparing them to
exit conservatorship and to ensure that pricing subsidies benefit only
affordable housing activities.
.
Whether the GSEs select or 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 and the business practices
associated with such cancellations.
If the GSEs or other mortgage investors change their practices regarding the
timing of cancellation of mortgage insurance due to home price appreciation,
policy goals, changing risk tolerances or otherwise, we could experience an
unexpected reduction in our insurance in force ("IIF"), which would negatively
impact our business and financial results.
For more information, see the above discussion of the GSEs' Equitable Housing
Plans and our risk factor titled "
Changes in interest rates, house prices or mortgage insurance cancellation
requirements may change the length of time that our policies remain in force
."
.
The programs established by the GSEs intended to avoid or mitigate loss on
insured mortgages and the circumstances in which mortgage servicers must
implement such programs.
.
The terms that the GSEs require to be included in mortgage insurance policies
for loans that they purchase, including limitations on the rescission rights
of mortgage insurers.
.
The extent to which the GSEs intervene in mortgage insurers' claims paying
practices, rescission practices or rescission settlement practices with
lenders.
.
The maximum loan limits of the GSEs compared to those of the Federal Housing
Administration ("FHA") and other investors.
.
The benchmarks established by the FHFA for loans to be purchased by the GSEs,
which can affect the loans available to be insured. In December 2021, the FHFA
established the benchmark levels for 2022-2024 purchases of low-income home
mortgages, very low-income home mortgages and low-income refinance mortgages,
each of which exceeded the 2021 benchmarks. The FHFA also established two new
sub-goals: one targeting minority communities and the other targeting
low-income neighborhoods.
The FHFA has been the conservator of the GSEs since 2008 and has the authority
to control and direct their operations. Given that the Director of the FHFA is
removable by the President at will, the agency's agenda, policies and actions
are influenced by the then-current administration. The increased role that the
federal government has assumed in the residential housing finance system
through the GSE conservatorships may increase the likelihood that the business
practices of the GSEs change, including through administration changes and
actions. Such changes could have a material adverse effect on us. The GSEs
also possess substantial market power, which enables them to influence our
business and the mortgage insurance industry in general.
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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 are
uncertain. For changes that would require Congressional action to implement it
is difficult to estimate when Congressional action would be final and how long
any associated phase-in period may last.
We may not continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease if we are required to maintain more
capital in order to maintain our eligibility.
We must comply with a GSE's PMIERs to be eligible to insure loans delivered to
or purchased by that GSE. The PMIERs include financial requirements, as well
as business, quality control and certain transaction approval requirements.
The PMIERs provide that the GSEs may amend any provision of the PMIERs or
impose additional requirements with an effective date specified by the GSEs.
The financial requirements of the PMIERs require a mortgage insurer's
"Available Assets" (generally only the most liquid assets of an insurer) to
equal or exceed its "Minimum Required Assets" (which are generally based on an
insurer's book of risk in force and calculated from tables of factors with
several risk dimensions, reduced for credit given for risk ceded under
reinsurance agreements).
Based on our interpretation of the PMIERs, as of March 31, 2024, MGIC's
Available Assets totaled $5.9 billion, or $2.5 billion in excess of its
Minimum Required Assets. MGIC is in compliance with the PMIERs and eligible to
insure loans purchased by the GSEs. Our "Minimum Required Assets" reflect a
credit for risk ceded under our QSR and XOL reinsurance transactions, which
are discussed in our risk factor titled
"Our underwriting practices and the mix of business we write affects our
Minimum Required Assets under the PMIERs, our premium yields and the
likelihood of losses occurring."
The calculated credit for XOL reinsurance transactions under PMIERs is
generally based on the PMIERs requirement of the covered loans and the
attachment and detachment points of the coverage, all of which fluctuate over
time. PMIERs credit is generally not given for the reinsured risk above the
PMIERs requirement. The GSEs have discretion to further limit reinsurance
credit under the PMIERs. Refer to "Consolidated Results of Operations -
Reinsurance Transactions" in Part I, Item 2 of our Quarterly Report on Form
10-Q for information about the calculated PMIERs credit for our XOL
transactions. There is a risk we will not receive our current level of credit
in future periods for ceded risk. In addition, we may not receive the same
level of credit under future reinsurance transactions that we receive under
existing transactions. If MGIC is not allowed certain levels of credit under
the PMIERs, under certain circumstances, MGIC may terminate the reinsurance
transactions without penalty.
The PMIERs generally require us to hold significantly more Minimum Required
Assets for delinquent loans than for performing loans and the Minimum Required
Assets required to be held increases as the number of payments missed on a
delinquent loan increases. If the number of loan delinquencies increases for
reasons discussed in these risk factors, or otherwise, it may cause our
Minimum Required Assets to exceed our Available Assets. We are unable to
predict the ultimate number of loans that will become delinquent.
If our Available Assets fall below our Minimum Required Assets, we would not
be in compliance with the PMIERs. The PMIERs provide a list of remediation
actions for a mortgage insurer's non-compliance, with additional actions
possible in the GSEs' discretion. At the extreme, the GSEs may suspend or
terminate our eligibility to insure loans purchased by them. Such suspension
or termination would significantly reduce the volume of our NIW, the
substantial majority of which is for loans delivered to or purchased by the
GSEs.
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.
Because loss reserve estimates are subject to uncertainties, paid claims may
be substantially different than our loss reserves.
When we establish case reserves, we estimate our ultimate loss on delinquent
loans by estimating the number of such loans that will result in a claim
payment (the "claim rate"), and further estimating the amount of the claim
payment (the "claim severity"). Changes to our claim rate and claim severity
estimates could have a material impact on our future results, even in a stable
economic environment. Our estimates incorporate anticipated cures, loss
mitigation activity, rescissions and curtailments. The establishment of loss
reserves is subject to inherent uncertainty and requires significant judgment
by management. Our actual claim payments may differ substantially from our
loss reserve estimates. Our estimates could be affected by several factors,
including a change in regional or national economic conditions as discussed in
these risk factors and a change in the length of time loans are delinquent
before claims are received. Generally, the longer a loan is delinquent before
a claim is received, the greater the severity. Foreclosure moratoriums and
forbearance programs increase the average time it takes to receive claims.
Economic conditions may differ from region to region. Information about the
geographic dispersion of our risk in force and delinquency inventory can be
found in our Annual Reports on Form 10-K and our Quarterly Reports on Form
10-Q. Losses incurred generally follow 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 Covid-19
pandemic and subsequent governmental response temporarily disrupted that
seasonality but it appears to be returning.
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We are subject to comprehensive regulation and other requirements, which we
may fail to satisfy.
We are subject to comprehensive regulation, including by state insurance
departments. Many regulations are designed for the protection of our insured
policyholders and consumers, rather than for the benefit of investors.
Mortgage insurers, including MGIC, have in the past been involved in
litigation and regulatory actions related to alleged violations of the
anti-referral fee provisions of the Real Estate Settlement Procedures Act
("RESPA"), and the notice provisions of the Fair Credit Reporting Act
("FCRA"). While these proceedings in the aggregate did not result in material
liability for MGIC, there can be no assurance that the outcome of future
proceedings, if any, under these laws or others would not have a material
adverse effect on us.
We provide contract underwriting services, including on loans for which we are
not providing mortgage insurance. These services are subject to federal and
state regulation. Our failure to meet the standards set forth in the
applicable regulations would subject us to potential regulatory action. To the
extent that we are construed to make independent credit decisions in
connection with our contract underwriting activities, we also could be subject
to increased regulatory requirements under the Equal Credit Opportunity Act
("ECOA"), FCRA, and other laws. Under relevant laws, examination may also be
made of whether a mortgage insurer's underwriting decisions have a disparate
impact on persons belonging to a protected class in violation of the law.
Although their scope varies, state insurance laws generally grant broad
supervisory powers to agencies or officials to examine insurance companies and
enforce rules or exercise discretion affecting almost every significant aspect
of the insurance business, including payment for the referral of insurance
business, premium rates and discrimination in pricing, and minimum capital
requirements. The increased use, by the private mortgage insurance industry,
of risk-based pricing systems that establish premium rates based on more
attributes than previously considered, and of algorithms, artificial
intelligence and data and analytics, has led
to additional regulatory scrutiny of premium rates and of other matters such
as discrimination in pricing and underwriting, data privacy and access to
insurance. For more information about state capital requirements, see our risk
factor titled "
State capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis
." For information about regulation of data privacy, see our risk factor
titled "
We could be materially adversely affected by a cybersecurity breach or failure
of information security controls
." For more details about the various ways in which our subsidiaries are
regulated, see "Business - Regulation" in Item 1 of our Annual Report on Form
10-K for the year ended December 31, 2023.
While we have established policies and procedures to comply with applicable
laws and regulations, many such laws and regulations are complex and it is not
possible to predict the eventual scope, duration or outcome of any reviews or
investigations nor is it possible to predict their effect on us or the
mortgage insurance industry.
Pandemics, hurricanes and other disasters may impact our incurred losses, the
amount and timing of paid claims, our inventory of notices of default and our
Minimum Required Assets under PMIERs.
Pandemics and other disasters, such as hurricanes, tornadoes, earthquakes,
wildfires and floods, or other events related to climate change, could trigger
an economic downturn in the affected areas, or in areas with similar risks,
which could result in a decrease in home prices and an increased claim rate
and claim severity in those areas. Due to the increased frequency and severity
of natural disasters, some homeowners' insurers are withdrawing from certain
states or areas that they deem to be high risk. Even though we do not
generally insure losses related to property damage, the inability of a
borrower to obtain hazard and/or flood insurance, or the increased cost of
such insurance, could lead to a decrease in home prices in the affected areas
and an increase in delinquencies and our incurred losses.
Pandemics and other disasters could also lead to increased reinsurance rates
or reduced availability of reinsurance. This may cause us to retain more risk
than we otherwise would retain and could negatively affect our compliance with
the financial requirements of State Capital Requirements and the PMIERs.
The PMIERs require us to maintain significantly more "Minimum Required Assets"
for delinquent loans than for performing loans. 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."
FHFA is working to incorporate climate risk considerations into its policy
development and processes. The FHFA has also instructed the GSEs to designate
climate change as a priority concern and actively consider its effects in
their decision making. In 2022, FHFA established internal working groups and a
steering committee in order to monitor the GSEs' management of climate risk.
It is possible that efforts to manage these risks by the FHFA, GSEs (including
through GSE guideline or mortgage insurance policy changes) or others could
materially impact the volume and characteristics of our NIW (including its
policy terms), home prices in certain areas and defaults by borrowers in
certain areas.
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Reinsurance may be unavailable at current levels and prices, and/or the GSEs
may reduce the amount of capital credit we receive for our reinsurance
transactions.
We have in place QSR and XOL reinsurance transactions providing various
amounts of coverage on our risk in force as of March 31, 2024. Refer to Part
1, Note 4 - "Reinsurance" and Part 1, Item 2 "Consolidated Results of
Operations - Reinsurance Transactions" of our Quarterly Report on Form 10-Q,
for more information about coverage under our reinsurance transactions. The
reinsurance transactions reduce the tail-risk associated with stress
scenarios. As a result, they reduce the risk-based capital that we are
required to hold to support the risk and they allow us to earn higher returns
on risk-based capital for our business than we would without them. However,
market conditions impact the availability and cost of reinsurance. Reinsurance
may not always be available to us, or available only on terms or at costs that
we consider unacceptable. If we are not able to obtain reinsurance we will be
required to hold additional capital to support our risk in force.
Reinsurance transactions subject us to counterparty risk, including the
financial capability of the reinsurers to make payments for losses ceded to
them under the reinsurance agreements. As reinsurance does not relieve us of
our obligation to pay claims to our policyholders, our inability to recover
losses from a reinsurer could have a material impact on our results of
operations and financial condition.
The GSEs may change the credit they allow under the PMIERs for risk ceded
under our reinsurance transactions. If the GSEs were to reduce the credit that
we receive for reinsurance under the PMIERs, it could result in decreased
returns absent an increase in our premium rates. An increase in our premium
rates to adjust for a decrease in reinsurance credit may lead to a decrease in
our NIW and net income.
Because we establish loss reserves only upon a loan delinquency rather than
based on estimates of our ultimate losses on risk in force, losses may have a
disproportionate adverse effect on our earnings in certain periods.
In accordance with accounting principles generally accepted in the United
States, we establish case reserves for insurance losses and loss adjustment
expenses only when delinquency notices are received for insured loans that are
two or more payments past due and for loans we estimate are delinquent but for
which delinquency notices have not yet been received (which we include in
"IBNR"). Losses that may occur from loans that are not delinquent are not
reflected in our financial statements, except when a "premium deficiency" is
recorded. A premium deficiency would be recorded if the present value of
expected future losses and expenses exceeds the present value of expected
future premiums and already established loss reserves on the applicable loans.
As a result, future losses incurred on loans that are not currently delinquent
may have a material impact on future results as delinquencies emerge. As of
March 31, 2024, we had established case reserves and reported losses incurred
for 24,142 loans in our delinquency inventory and our IBNR reserve totaled $22
million. The number of loans in our delinquency inventory may increase from
that level as a result of economic conditions relating to current global
events or other factors and our losses incurred may increase.
State capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis.
The insurance laws of 16 jurisdictions, including Wisconsin, MGIC's
domiciliary state, require a mortgage insurer to maintain a minimum amount of
statutory capital relative to its risk in force (or a similar measure) in
order for the mortgage insurer to continue to write new business. We refer to
these requirements as the "State Capital Requirements." While they vary among
jurisdictions, the most common State Capital Requirements allow for a maximum
risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i)
the percentage decrease in capital exceeds the percentage decrease in insured
risk, or (ii) the percentage increase in capital is less than the percentage
increase in insured risk. Wisconsin does not regulate capital by using a
risk-to-capital measure but instead requires a minimum policyholder position
("MPP"). MGIC's "policyholder position" includes its net worth, or surplus,
and its contingency reserve.
At March 31, 2024, MGIC's risk-to-capital ratio was 9.8 to 1, below the
maximum allowed by the jurisdictions with State Capital Requirements, and its
policyholder position was $3.8 billion above the required MPP of $2.2 billion.
Our risk-to-capital ratio and MPP reflect credit for the risk ceded under our
reinsurance agreements with unaffiliated reinsurers
.
If MGIC is not allowed an agreed level of credit under the State Capital
Requirements, MGIC may terminate the reinsurance transactions, without penalty.
The NAIC established a Mortgage Guaranty Insurance Working Group to determine
and make recommendations to the NAIC's Financial Condition Committee as to
what, if any, changes to make to the solvency and other regulations relating
to mortgage guaranty insurers. A draft of a revised Mortgage Guaranty
Insurance Model Act was adopted by the Financial Condition Committee in July
2023 and by the Executive Committee and Plenary NAIC in August 2023. The
revised Model Act includes requirements relating to, among other things: (i)
capital and minimum capital requirements, and contingency reserves; (ii)
restrictions on mortgage insurers' investments in notes secured by mortgages;
(iii) prudent underwriting standards and formal underwriting guidelines; (iv)
the establishment of formal, internal "Mortgage Guaranty Quality Control
Programs" with respect to in-force business; and (v) reinsurance and
prohibitions on captive reinsurance arrangements. It is uncertain when the
revised Model Act will be adopted in any
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jurisdiction. The provisions of the Model Act, if adopted in their final form,
are not expected to have a material adverse effect on our business. It is
unknown whether any changes will be made by state legislatures prior to
adoption, and the effect changes, if any, will have on the mortgage guaranty
insurance market generally, or on our business.
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 if MGIC does not obtain a waiver of such
requirements. It is possible that regulatory action by one or more
jurisdictions, including those that do not have specific State Capital
Requirements, may prevent MGIC from continuing to write new insurance in such
jurisdictions. If we are unable to write business in a particular
jurisdiction, lenders may be unwilling to procure insurance from us anywhere.
In addition, a lender's assessment of the future ability of our insurance
operations to meet the State Capital Requirements or the PMIERs may affect its
willingness to procure insurance from us. In this regard, see our risk factor
titled
"Competition or changes in our relationships with our customers could reduce
our revenues, reduce our premium yields and/or increase our losses."
A possible future failure by MGIC to meet the State Capital Requirements or
the PMIERs will not necessarily mean that MGIC lacks sufficient resources to
pay claims on its insurance liabilities. You should read the rest of these
risk factors for information about matters that could negatively affect MGIC's
compliance with State Capital Requirements and its claims paying resources.
If the volume of low down payment home mortgage originations declines, the
amount of insurance that we write could decline.
The factors that may affect the volume of low down payment mortgage
originations include the health of the U.S. economy; conditions in regional
and local economies and the level of consumer confidence; the health and
stability of the financial services industry; restrictions on mortgage credit
due to more stringent underwriting standards, liquidity issues or
risk-retention and/or capital requirements affecting lenders; the level of
home mortgage interest rates; housing affordability; new and existing housing
availability; the rate of household formation, which is influenced, in part,
by population and immigration trends; homeownership rates; the rate of home
price appreciation, which in times of heavy refinancing can affect whether
refinanced loans have LTV ratios that require private mortgage insurance; and
government housing policy encouraging loans to first-time homebuyers. A
decline in the volume of low down payment home mortgage originations could
decrease demand for mortgage insurance and limit our NIW. For other factors
that could decrease the demand for mortgage insurance, see our risk factor
titled
"The amount of insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage insurance or are unable to
obtain capital relief for mortgage insurance."
The amount of insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage insurance or are unable to
obtain capital relief for mortgage insurance.
Alternatives to private mortgage insurance include:
.
investors using risk mitigation and credit risk transfer techniques other than
private mortgage insurance, or accepting credit risk without credit
enhancement,
.
lenders and other investors holding mortgages in portfolio and self-insuring,
.
lenders using FHA, U.S. Department of Veterans Affairs ("VA") and other
government mortgage insurance programs, and
.
lenders originating mortgages using piggyback structures to avoid private
mortgage insurance, such as a first mortgage with an 80% loan-to-value ("LTV")
ratio and a second mortgage with a 10%, 15% or 20% LTV ratio rather than a
first mortgage with a 90%, 95% or 100% LTV ratio that has private mortgage
insurance.
The GSEs' charters generally require credit enhancement for a low down payment
mortgage loan (a loan in an amount that exceeds 80% of a home's value) in
order for such loan to be eligible for purchase by the GSEs. Private mortgage
insurance generally has been purchased by lenders in primary mortgage market
transactions to satisfy this credit enhancement requirement. In 2018, the GSEs
initiated secondary mortgage market programs with loan level mortgage default
coverage provided by various (re)insurers that are not mortgage insurers
governed by PMIERs, and that are not selected by the lenders. These programs,
which currently account for a small percentage of the low down payment market,
compete with traditional private mortgage insurance and, due to differences in
policy terms, they may offer premium rates that are below prevalent single
premium lender-paid mortgage insurance ("LPMI") rates. We participate in these
programs from time to time. See our risk factor titled "
Changes in the business practices of Fannie Mae and Freddie Mac's ("the
GSEs"), federal legislation that changes their charters or a restructuring of
the GSEs could reduce our revenues or increase our losses"
for a discussion of various business practices of the GSEs that may be
changed, including through expansion or modification of these programs.
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The GSEs (and other investors) have also used other forms of credit
enhancement that did not involve traditional private mortgage insurance, such
as engaging in credit-linked note transactions executed in the capital
markets, or using other forms of debt issuances or securitizations that
transfer credit risk directly to other investors, including competitors and an
affiliate of MGIC; using other risk mitigation techniques in conjunction with
reduced levels of private mortgage insurance coverage; or accepting credit
risk without credit enhancement.
If the FHA or other government-supported mortgage insurance programs increase
their share of the mortgage insurance market, our business could be affected.
The FHA's share of the low down payment residential mortgages that were
subject to FHA, VA, USDA or primary private mortgage insurance was 33.2% in
2023, 26.7% in 2022, and 24.7% in 2021. Since 2012, the FHA's market share has
been as low as 23.4% (2020) and as high as 42.1% (in 2012). Factors that
influence the FHA's market share include relative rates and fees, underwriting
guidelines and loan limits of the FHA, VA, private mortgage insurers and the
GSEs; changes to the GSEs' business practices; lenders' perceptions of legal
risks under FHA versus GSE programs; flexibility for the FHA to establish new
products as a result of federal legislation and programs; returns expected to
be obtained by lenders for Ginnie Mae securitization of FHA-insured loans
compared to those obtained from selling loans to the GSEs for securitization;
and differences in policy terms, such as the ability of a borrower to cancel
insurance coverage under certain circumstances. On February 22, 2023, the FHA
announced a 30-basis point decrease in its mortgage insurance premium rates.
This rate reduction has negatively impacted our NIW. We are unable to predict
the extent of any further impact on our NIW or how the factors that affect the
FHA's share of NIW 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 21.5% in 2023,
24.5% in 2022, and 30.2% in 2021. Since 2012, the VA's market share has been
as high as 30.9% (in 2020). The VA's 2023 market share was the lowest since
2013 (22.8%). We believe that the VA's market share grows as the number of
borrowers that are eligible for the VA's program increases, and when eligible
borrowers opt to use the VA program when refinancing their mortgages. The VA
program offers 100% LTV ratio loans and charges a one-time funding fee that
can be included in the loan amount.
In July 2023, the Federal Reserve Board, Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency proposed a
revised regulatory capital rule that would impose higher capital standards on
large U.S. banks. Under the proposed regulation's new expanded risk-based
approach, affected banks would no longer receive risk-based capital relief for
mortgage insurance on loans held in their portfolios. If adopted as proposed,
the regulation is expected to have a negative effect on our NIW; however, at
this time it is difficult to predict the extent of the impact.
Changes in interest rates, house prices or mortgage insurance cancellation
requirements may change the length of time that our policies remain in force.
The premium from a single premium policy is collected upfront and generally
earned over the estimated life of the policy. In contrast, premiums from
monthly and annual premium policies are received each month or year, as
applicable, and earned each month over the life of the policy. In each year,
most of our premiums earned are from insurance that has been written in prior
years. As a result, the length of time insurance remains in force, which is
generally measured by persistency (the percentage of our insurance remaining
in force from one year prior), is a significant determinant of our revenues. A
higher than expected persistency rate may decrease the profitability from
single premium policies because they will remain in force longer and may
increase the incidence of claims that was estimated when the policies were
written. A low persistency rate on monthly and annual premium policies will
reduce future premiums but may also reduce the incidence of claims, while a
high persistency on those policies will increase future premiums but may
increase the incidence of claims.
Our annual persistency rate was 85.7% at March 31, 2024, 86.1% at December 31,
2023, and 82.2% at December 31, 2022. Since 2018, our annual persistency rate
ranged from a high of 86.3% at September 30, 2023 to a low of 60.7% at March
31, 2021. Our persistency rate is primarily affected by the level of current
mortgage interest rates compared to the mortgage coupon rates on our insurance
in force, which affects the vulnerability of the IIF to refinancing; and the
current amount of equity that borrowers have in the homes underlying our
insurance in force. The amount of equity affects persistency in the following
ways:
.
Borrowers with significant equity may be able to refinance their loans without
requiring mortgage insurance.
.
The Homeowners Protection Act ("HOPA") requires servicers to cancel mortgage
insurance when a borrower's LTV ratio meets or is scheduled to meet certain
levels, generally based on the original value of the home and subject to
various conditions and exclusions.
.
The GSEs' mortgage insurance cancellation guidelines apply more broadly than
HOPA and also consider a home's current value. For more information about the
GSEs' guidelines and business practices, and how they may change, see our risk
factor titled "
Changes in the business practices of
Fannie Mae and Freddie Mac ("the GSEs")
, federal legislation that changes their charters or a restructuring of the
GSEs could reduce our revenues or increase our losses.
"
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We are susceptible to disruptions in the servicing of mortgage loans that we
insure and we rely on third-party reporting for information regarding the
mortgage loans we insure.
We depend on reliable, consistent third-party servicing of the loans that we
insure. An increase in delinquent loans may result in liquidity issues for
servicers. When a mortgage loan that is collateral for a mortgage-backed
security ("MBS") becomes delinquent, the servicer is usually required to
continue to pay principal and interest to the MBS investors, generally for
four months, even though the servicer is not receiving payments from
borrowers. This may cause liquidity issues, especially for non-bank servicers
(who service approximately 48% of the loans underlying our IIF as of March 31,
2024) because they do not have the same sources of liquidity that bank
servicers have.
While there has been no disruption in our premium receipts through the first
quarter of 2024, servicers who experience future liquidity issues may be less
likely to advance premiums to us on policies covering delinquent loans or to
remit premiums on policies covering loans that are not delinquent. Our
policies generally allow us to cancel coverage on loans that are not
delinquent if the premiums are not paid within a grace period.
An increase in delinquent loans or a transfer of servicing resulting from
liquidity issues, may increase the operational burden on servicers, cause a
disruption in the servicing of delinquent loans and reduce servicers'
abilities to undertake mitigation efforts that could help limit our losses.
The information presented in this report and on our website with respect to
the mortgage loans we insure is based on information reported to us by third
parties, including the servicers and originators of the mortgage loans, and
information presented may be subject to lapses or inaccuracies in reporting
from such third parties. In many cases, we may not be aware that information
reported to us is incorrect until such time as a claim is made against us
under the relevant insurance policy. We do not consistently receive monthly
policy status information from servicers for single premium policies, and may
not be aware that the mortgage loans insured by such policies have been
repaid. We periodically attempt to determine if coverage is still in force on
such policies by asking the last servicer of record or through the periodic
reconciliation of loan information with certain servicers. It may be possible
that our reports continue to reflect, as active, policies on mortgage loans
that have been repaid.
Risk Factors Relating to Our Business Generally
If our risk management programs are not effective in identifying, or adequate
in controlling or mitigating, the risks we face, or if the models used in our
businesses are inaccurate, it could have a material adverse impact on our
business, results of operations and financial condition.
Our enterprise risk management program, described in "Business - Our Products
and Services - Risk Management" in Item 1 of our Annual Report on Form 10-K
for the year ended December 31, 2023, may not be effective in identifying, or
adequate in controlling or mitigating, the risks we face in our business.
We employ proprietary and third-party models for a wide range of purposes,
including the following: projecting losses, premiums, expenses, and returns;
pricing products (through our risk-based pricing system); determining the
techniques used to underwrite insurance; estimating reserves; evaluating risk;
determining internal capital requirements; and performing stress testing.
These models rely on estimates, projections, and assumptions that are
inherently uncertain and may not always operate as intended. This can be
especially true when extraordinary events occur, such as wars, periods of
extreme inflation, pandemics, or environmental disasters related to changing
climatic conditions. In addition, our models are being continuously updated
over time. Changes in models or model assumptions could lead to material
changes in our future expectations, returns, or financial results. The models
we employ are complex, which could increase our risk of error in their design,
implementation, or use. Also, the associated input data, assumptions, and
calculations may not always be correct or accurate and the controls we have in
place to mitigate these risks may not be effective in all cases. The risks
related to our models may increase when we change assumptions, methodologies,
or modeling platforms. Moreover, we may use information we receive through
enhancements to refine or otherwise change existing assumptions and/or
methodologies.
Information technology system failures or interruptions may materially impact
our operations and/or adversely affect our financial results.
We are heavily dependent on our information technology systems to conduct our
business. Our ability to efficiently operate our business depends
significantly on the reliability and capacity of our systems and technology.
The failure of our systems and technology, or our disaster recovery and
business continuity plans, to operate effectively could affect our ability to
provide our products and services to customers, reduce efficiency, or cause
delays in operations. Significant capital investments might be required to
remediate any such problems. We are also dependent on our ongoing
relationships with key technology providers, including provisioning of their
products and technologies, and their ability to support those products and
technologies. The inability of these providers to successfully provide and
support those products could have an adverse impact on our business and
results of operations.
From time to time we upgrade, automate or otherwise transform our information
systems, business processes, risk-based pricing system, and our system for
evaluating risk. Certain information systems have been in place for a
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number of years and it has become increasingly difficult to support their
operation. The implementation of technological and business process
improvements, as well as their integration with customer and third-party
systems when applicable, is complex, expensive and time consuming. If we fail
to timely and successfully implement and integrate the new technology systems,
if the third party providers upon which we are reliant do not perform as
expected, if our legacy systems fail to operate as required, or if the
upgraded systems and/or transformed and automated business processes do not
operate as expected, it could have a material adverse impact on our business,
business prospects and results of operations.
We could be materially adversely affected by a cybersecurity breach or failure
of information security controls.
As part of our business, we maintain large amounts of confidential and
proprietary information both on our own servers and those of cloud computing
services. This includes personal information of consumers and our employees.
Personal information is subject to an increasing number of federal and state
laws and regulations regarding privacy and data security, as well as
contractual commitments. Any failure or perceived failure by us, or by the
vendors with whom we share this information, to comply with such obligations
may result in damage to our reputation, financial losses, litigation,
increased costs, regulatory penalties or customer dissatisfaction.
All information technology systems are potentially vulnerable to damage or
interruption from a variety of sources, including by cyber attacks, such as
those involving ransomware. We regularly defend against threats to our data
and systems, including malware and computer virus attacks, unauthorized
access, system failures and disruptions. Threats have the potential to
jeopardize the information processed and stored in, and transmitted through,
our computer systems and networks and otherwise cause interruptions or
malfunctions in our operations, which could result in damage to our
reputation, financial losses, litigation, increased costs, regulatory
penalties or customer dissatisfaction. We could be similarly affected by
threats against our vendors and/or third-parties with whom we share
information.
Globally, attacks are expected to continue accelerating in both frequency and
sophistication with increasing use by actors of tools and techniques that may
hinder our ability to identify, investigate and recover from incidents. Such
attacks may also increase as a result of retaliation by threat actors against
actions taken by the U.S. and other countries in connection with wars and
other global events. We operate under a hybrid workforce model and such model
may be more vulnerable to security breaches.
While we have information security policies and systems in place to secure our
information technology systems and to prevent unauthorized access to or
disclosure of sensitive information, there can be no assurance with respect to
our systems and those of our third-party vendors that unauthorized access to
the systems or disclosure of sensitive information, either through the actions
of third parties or employees, will not occur. Due to our reliance on
information technology systems, including ours and those of our customers and
third-party service providers, and to the sensitivity of the information that
we maintain, unauthorized access to the systems or disclosure of the
information could adversely affect our reputation, severely disrupt our
operations, result in a loss of business and expose us to material claims for
damages and may require that we provide free credit monitoring services to
individuals affected by a security breach.
Should we experience an unauthorized disclosure of information or a cyber
attack, including those involving ransomware, some of the costs we incur may
not be recoverable through insurance, or legal or other processes, and this
may have a material adverse effect on our results of operations.
Our underwriting practices and the mix of business we write affects our
Minimum Required Assets under the PMIERs, our premium yields and the
likelihood of losses occurring.
The Minimum Required Assets under the PMIERs are, in part, a function of the
direct risk-in-force and the risk profile of the loans we insure, considering
LTV ratio, credit score, vintage, Home Affordable Refinance Program ("HARP")
status and delinquency status; and whether the loans were insured under
lender-paid mortgage insurance policies or other policies that are not subject
to automatic termination consistent with the Homeowners Protection Act
requirements for borrower-paid mortgage insurance. Therefore, if our direct
risk-in-force increases through increases in NIW, or if our mix of business
changes to include loans with higher LTV ratios or lower FICO scores, for
example, all other things equal, we will be required to hold more Available
Assets in order to maintain GSE eligibility.
The percentage of our NIW from all single premium policies was 4.0% in 2023.
Beginning in 2012, the annual percentage of our NIW from single policies has
been as low as 4.3% in 2022 and as high as 20.4% in 2015. Depending on the
actual life of a single premium policy and its premium rate relative to that
of a monthly premium policy, a single premium policy may generate more or less
premium than a monthly premium policy over its life.
As discussed in our risk factor titled "
Reinsurance may be unavailable at current levels and prices, and/or the GSEs
may reduce the amount of capital credit we receive for our reinsurance
transactions
,"
we have in place various QSR transactions. Although the transactions reduce
our premiums, they have a lesser impact on our overall results, as
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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 incurred. We also have in
place various XOL reinsurance transactions under which we cede premiums. Under
the XOL reinsurance transactions, for the respective reinsurance coverage
periods, we retain the first layer of aggregate losses and the reinsurers
provide second layer coverage up to the outstanding reinsurance coverage
amount.
In addition to the effect of reinsurance on our premiums, if credit
performance remains strong and loss ratios remain low, we expect a decline in
our in force portfolio yield over time as competition in the industry results
in lower premium rates. Refinance transactions on single premium policies
benefit the yield due to the impact of accelerated earned premium from
cancellation prior to their estimated life. Recent low levels of refinance
transactions have reduced that benefit.
Our ability to rescind insurance coverage became more limited for new
insurance written beginning in mid-2012, and it became further limited for new
insurance written under our revised master policy that became effective March
1, 2020. These limitations may result in higher losses paid than would be the
case under our previous master policies.
From time to time, in response to market conditions, we change the types of
loans that we insure. We also may change our underwriting guidelines,
including by agreeing with certain approval recommendations from a GSE
automated underwriting system. We also make exceptions to our underwriting
requirements on a loan-by-loan basis and for certain customer programs. Our
underwriting requirements are available on our website at http://www.mgic.com/un
derwriting/index.html.
Even when home prices are stable or rising, mortgages with certain
characteristics have higher probabilities of claims. As of March 31, 2024,
mortgages with these characteristics in our primary risk in force included
mortgages with LTV ratios greater than 95% (16%), mortgages with borrowers
having FICO scores below 680 (7%), including those with borrowers having FICO
scores of 620-679 (6%), mortgages with limited underwriting, including limited
borrower documentation (1%), and mortgages with borrowers having DTI ratios
greater than 45% (or where no ratio is available) (18%), each attribute is
determined at the time of loan origination. Loans with more than one of these
attributes accounted for 5% of our primary risk in force as of March 31, 2024,
and 5% and 4% of our primary risk in force as of December 31, 2023 and
December 31, 2022, respectively. When home prices increase, interest rates
increase and/or the percentage of our NIW from purchase transactions
increases, our NIW on mortgages with higher LTV ratios and higher DTI ratios
may increase. Our NIW on mortgages with LTV ratios greater than 95% was 15%
for the first quarter of 2024, 13% for the first quarter of 2023, 11% for the
first quarter of 2022, and 12% for the full year of 2023. Our NIW on mortgages
with DTI ratios greater than 45% was 28% in the first quarter of 2024, 23% in
first quarter of 2023, 17% in the first quarter of 2022, and 26% for the full
year of 2023.
From time to time, we change the processes we use to underwrite loans. For
example: we rely on information provided to us by lenders that was obtained
from certain of the GSEs' automated appraisal and income verification tools,
which may produce results that differ from the results that would have been
determined using different methods; we accept GSE appraisal waivers for
certain refinance loans; and we accept GSE appraisal flexibilities that allow
property valuations in certain transactions to be based on appraisals that do
not involve an onsite or interior inspection of the property. Our acceptance
of automated GSE appraisal and income verification tools, GSE appraisal
waivers and GSE appraisal flexibilities may affect our pricing and risk
assessment. We also continue to further automate our underwriting processes
and it is possible that our automated processes result in our insuring loans
that we would not otherwise have insured under our prior processes.
Approximately 71% of our NIW in the first quarter of 2024 and 71% of our 2023
NIW was originated under delegated underwriting programs pursuant to which the
loan originators had authority on our behalf to underwrite the loans for our
mortgage insurance. For loans originated through a delegated underwriting
program, we depend on the originators' compliance with our guidelines and rely
on the originators' representations that the loans being insured satisfy the
underwriting guidelines, eligibility criteria and other requirements. While we
have established systems and processes to monitor whether certain aspects of
our underwriting guidelines were being followed by the originators, such
systems may not ensure that the guidelines were being strictly followed at the
time the loans were originated.
The widespread use of risk-based pricing systems by the private mortgage
insurance industry (discussed in our risk factor titled
"Competition or changes in our relationships with our customers could reduce
our revenues, reduce our premium yields and / or increase our losses"
) makes it more difficult to compare our premium rates to those offered by our
competitors. We may not be aware of industry rate changes until we observe
that our mix of new insurance written has changed and our mix may fluctuate
more as a result.
In March of 2024, the National Association of Realtors (NAR) reached a
settlement agreement to resolve a series of lawsuits against it. As part of
the settlement, NAR will end the requirement that home sellers offer to pay
the real estate brokerage fees of homebuyers' real estate agents in order to
list for-sale properties on the MLS Multiple Listing Service. If the expense
of the buyer's agent commission is shifted to the buyer, it may negatively
impact the ability of the buyer to secure financing.
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If state or federal regulations or statutes are changed in ways that ease
mortgage lending standards and/or requirements, or if lenders seek ways to
replace business in times of lower mortgage originations, it is possible that
more mortgage loans could be originated with higher risk characteristics than
are currently being originated, such as loans with lower FICO scores and
higher DTI ratios. The focus of the FHFA leadership on increasing
homeownership opportunities for borrowers is likely to have this effect.
Lenders could pressure mortgage insurers to insure such loans, which are
expected to experience higher claim rates. Although we attempt to incorporate
these higher expected claim rates into our underwriting and pricing models,
there can be no assurance that the premiums earned and the associated
investment income will be adequate to compensate for actual losses paid even
under our current underwriting requirements.
The premiums we charge may not be adequate to compensate us for our
liabilities for losses and as a result any inadequacy could materially affect
our financial condition and results of operations.
When we set our premiums at policy issuance, we have expectations regarding
likely performance of the insured risks over the long term. Generally, we
cannot cancel mortgage insurance coverage or adjust renewal premiums during
the life of a policy. As a result, higher than anticipated claims generally
cannot be offset by premium increases on policies in force or mitigated by our
non-renewal or cancellation of insurance coverage. Our premiums are subject to
approval by state regulatory agencies, which can delay or limit our ability to
increase premiums on future policies. In addition, our customized rate plans
may delay our ability to increase premiums on future policies covered by such
plans. The premiums we charge, the 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 we set the premiums, our returns may be lower than we assumed. For a
discussion of the amount of capital we are required to hold, see our risk
factor titled "
We may not continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease if we are required to maintain more
capital in order to maintain our eligibility
."
Actual or perceived instability in the financial services industry or
non-performance by financial institutions or transactional counterparties
could materially impact our business.
Limited liquidity, defaults, non-performance or other adverse developments
that affect financial institutions, transactional counterparties or other
companies in the financial services industry with which we do business, or
concerns or rumors about the possibility of such events, have in the past and
may in the future lead to market-wide liquidity problems. Such conditions may
negatively impact our results and/or financial condition. While we are unable
to predict the full impact of these conditions, they may lead to among other
things: disruption to the mortgage market, delayed access to deposits or other
financial assets; losses of deposits in excess of federally-insured levels;
reduced access to, or increased costs associated with, funding sources and
other credit arrangements adequate to finance our current or future
operations; increased regulatory pressure; the inability of our counterparties
and/or customers to meet their obligations to us; economic downturn; and
rising unemployment levels. Refer to our risk factor titled "
Downturns in the domestic economy or declines in home prices may result in
more homeowners defaulting and our losses increasing, with a corresponding
decrease in our returns
" for more information about the potential effects of a deterioration of
economic conditions on our business.
We routinely execute transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment
banks, reinsurers, and our customers. Many of these transactions expose us to
credit risk and losses in the event of a default by a counterparty or
customer. Any such losses could have a material adverse effect on our
financial condition and results of operations.
We rely on our management team and our business could be harmed if we are
unable to retain qualified personnel or successfully develop and/or recruit
their replacements.
Our success depends, in part, on the skills, working relationships and
continued services of our management team and other key personnel. The
unexpected departure of key personnel could adversely affect the conduct of
our business. In such event, we would be required to obtain other personnel to
manage and operate our business. In addition, we will be required to replace
the knowledge and expertise of our aging workforce as our workers retire. In
either case, there can be no assurance that we would be able to develop or
recruit suitable replacements for the departing individuals; that replacements
could be hired, if necessary, on terms that are favorable to us; or that we
can successfully transition such replacements in a timely manner. We currently
have not entered into any employment agreements with our officers or key
personnel. Volatility or lack of performance in our stock price may affect our
ability to retain our key personnel or attract replacements should key
personnel depart. Without a properly skilled and experienced workforce, our
costs, including productivity costs and costs to replace employees may
increase, and this could negatively impact our earnings.
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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. Changes in the competitive
landscape, including as a result of new market entrants, may adversely impact
our results.
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, our customers are
dissatisfied with our claims-paying practices (including insurance policy
rescissions and claim curtailments), or the availability of alternatives to
mortgage insurance.
In recent years, the industry has materially reduced its use of standard rate
cards, which were fairly consistent among competitors, and correspondingly
increased its use of (i) pricing systems that use a spectrum of filed rates to
allow for formulaic, risk-based pricing based on multiple attributes that may
be quickly adjusted within certain parameters, and (ii) customized rate plans.
The widespread use of risk-based pricing systems by the private mortgage
insurance industry makes it more difficult to compare our rates to those
offered by our competitors. We may not be aware of industry rate changes until
we observe that our volume of NIW has changed. In addition, business under
customized rate plans is awarded by certain customers for only limited periods
of time. As a result, our NIW may fluctuate more than it had in the past.
Failure to maintain our business relationships and business volumes with our
largest customers could materially impact our business. Regarding the
concentration of our new business, our top ten customers accounted for
approximately 37% and 34% in the twelve months ended March 31, 2024 and March
31, 2023, respectively.
We monitor various competitive and economic factors while seeking to balance
both profitability and market share considerations in developing our pricing
strategies. Our premium yield is expected to decline over time as older
insurance policies with premium rates that are generally higher run off and
new insurance policies with premium rates that are generally lower remain on
our books.
Certain of our competitors have access to capital at a lower cost than we do
(including, through off-shore intercompany reinsurance vehicles, which have
tax advantages that may increase if U.S. corporate income taxes increase). As
a result, they may be able to achieve higher after-tax rates of return on
their NIW compared to us, which could allow them to leverage reduced premium
rates to gain market share, and they may be better positioned to compete
outside of traditional mortgage insurance, including by participating in
alternative forms of credit enhancement pursued by the GSEs discussed in our
risk factor titled
"The amount of insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage insurance or are unable to
obtain capital relief for mortgage insurance
."
Adverse rating agency actions could have a material adverse impact on our
business, results of operations and financial condition.
Financial strength ratings, which various rating agencies publish as
independent opinions of an insurer's financial strength and ability to meet
ongoing insurance and contract obligations, are important to maintaining
public confidence in our mortgage insurance coverage and our competitive
position. PMIERs requires approved insurers to maintain at least one rating
with a rating agency acceptable to the respective GSEs. Downgrades in our
financial strength ratings could materially affect our business and results of
operations, including in the ways described below:
.
Our failure to maintain a rating acceptable to the GSEs could impact our
eligibility as an approved insurer under PMIERs.
.
A downgrade in our financial strength ratings could result in increased
scrutiny of our financial condition by the GSEs and/or our customers,
potentially resulting in a decrease in the amount of our NIW.
.
If we are unable to compete effectively in the current or any future markets
as a result of the financial strength ratings assigned to our insurance
subsidiaries, our future NIW could be negatively affected.
.
Our ability to participate in the non-GSE residential mortgage-backed
securities market (the size of which has been limited since 2008, but may grow
in the future), could depend on our ability to maintain and improve our
investment grade ratings for our insurance subsidiaries. We could be
competitively disadvantaged with some market participants because the
financial strength ratings of our insurance subsidiaries are lower than those
of
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some competitors.
MGIC's financial strength rating from A.M. Best is A- (with a positive
outlook), from Moody's is A3 (with a positive outlook) and from Standard &
Poor's is
A-
(with a stable outlook)
.
.
Financial strength ratings may also play a greater role if the GSEs no longer
operate in their current capacities, for example, due to legislative or
regulatory action. In addition, although the PMIERs do not require minimum
financial strength ratings, the GSEs consider financial strength ratings to be
important when using forms of credit enhancement other than traditional
mortgage insurance, as discussed in our risk factor titled "
The amount of insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage insurance or are unable to
obtain capital relief for mortgage insurance."
The final GSE capital framework provides more capital credit for transactions
with higher rated counterparties, as well as those who are diversified.
Although we are currently unaware of a direct impact on MGIC, this could
potentially become a competitive disadvantage in the future.
.
Downgrades to our ratings or the ratings of our mortgage insurance subsidiary
could adversely affect our cost of funds, liquidity, and access to capital
markets
.
We are subject to the risk of legal proceedings.
We operate in a highly regulated industry that is subject to the risk of
litigation and regulatory proceedings, including related to our claims paying
practices. From time to time, we are a party to material litigation and are
also subject to legal and regulatory claims, assertions, actions, reviews,
audits, inquiries and investigations. Additional lawsuits, legal and
regulatory proceedings and inquiries or other matters may arise in the future.
The outcome of future legal and regulatory proceedings, inquiries or other
matters could result in adverse judgments, settlements, fines, injunctions,
restitutions or other relief which could require significant expenditures or
have a material adverse effect on our business prospects, results of
operations and financial condition. See our risk factor titled "
We are subject to comprehensive regulation and other requirements, which we
may fail to satisfy"
for additional information about risks related to government enforcement actions
.
From time to time, we are involved in disputes and legal proceedings in the
ordinary course of business. In our opinion, based on the facts known at this
time, the ultimate resolution of these ordinary course disputes and legal
proceedings will not have a material adverse effect on our financial position
or results of operations. Under ASC 450-20, until a loss associated with
settlement discussions or legal proceedings becomes probable and can be
reasonably estimated, we do not accrue an estimated loss. When we determine
that a loss is probable and can be reasonably estimated, we record our best
estimate of our probable loss. In those cases, until settlement negotiations
or legal proceedings are concluded it is possible that we will record an
additional loss.
Our 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 fixed income securities. Prevailing market
rates have increased for various reasons, including inflationary pressures,
which has reduced the fair value of our investment portfolio holdings relative
to their amortized cost. The value of our investment portfolio may also be
adversely affected by ratings downgrades, increased bankruptcies, and credit
spreads widening. In addition, the collectability and valuation of our
municipal bond portfolio may be adversely affected by budget deficits, and
declining tax bases and revenues experienced by state and local municipalities.
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, increases in
unemployment, geopolitical risks and/or financial market disruption, including
more restrictive lending conditions and 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.
We carry certain financial instruments at fair value and disclose the fair
value of all financial instruments. Valuations use inputs and assumptions that
are not always observable or may require estimation; valuation methods may be
complex and may also require estimation, thereby resulting in values that are
less certain and may vary significantly from the value at which the
investments may be ultimately sold. For additional information about the
methodologies, estimates and assumptions we use in determining the fair value
of our investments refer to Note 3 of Item 8 in Part II our Annual Report on
Form 10-K for the year ended December 31, 2023 - "Fair Value Measurements."
Federal budget deficit concerns and the potential for political conflict over
the U.S. government's debt limit may increase the possibility of a default by
the U.S. government on its debt obligations, related credit-rating downgrades,
or an economic recession in the United States. Many of our investment
securities are issued by the U.S. government
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and government agencies and sponsored entities. As a result of uncertain
domestic political conditions, including potential future federal government
shutdowns, the possibility of the federal government defaulting on its
obligations due to debt ceiling limitations or other unresolved political
issues, investments in financial instruments issued or guaranteed by the
federal government pose liquidity risks. Any potential downgrades by rating
agencies in long-term sovereign credit ratings, as well as sovereign debt
issues facing the governments of other countries, could have a material
adverse impact on financial markets and economic conditions worldwide.
For the significant portion of our investment portfolio that is held by MGIC,
to receive full capital credit under insurance regulatory requirements and
under the PMIERs, we generally are limited to investing in investment grade
fixed income securities whose yields reflect their lower credit risk profile.
Our investment income depends upon the size of the portfolio and its
reinvestment at prevailing interest rates. A prolonged period of low
investment yields would have an adverse impact on our investment income as
would a decrease in the size of the portfolio.
We structure our investment portfolio to satisfy our expected liabilities,
including claim payments in our mortgage insurance business. If we
underestimate our liabilities or improperly structure our investments to meet
these liabilities, we could have unexpected losses resulting from the forced
liquidation of fixed income investments before their maturity, which could
adversely affect our results of operations.
Our holding company debt obligations are material.
At March 31, 2024, we had approximately $793 million in cash and investments
at our holding company and our holding company's long-term debt obligations
were $650 million in aggregate principal amount. Annual debt service on the
long-term debt obligations outstanding as of March 31, 2024, is approximately
$34 million.
The long-term debt obligations are owed by our holding company, MGIC
Investment Corporation, and not its subsidiaries. The payment of dividends
from MGIC is the principal source of our holding company cash inflow. Other
sources of holding company cash inflow include investment income and raising
capital in the public markets. The payment of dividends on our common shares
in the future depends largely on the earnings and cash flows of MGIC, and is
additionally subject to regulatory approval as described below. Although MGIC
holds assets in excess of its minimum statutory capital requirements and its
PMIERs financial requirements, the ability of MGIC to pay dividends is
restricted by insurance regulation. In general, dividends in excess of
prescribed limits are deemed "extraordinary" and may not be paid if
disapproved by the OCI. In 2024, MGIC can pay $64 million of ordinary
dividends without OCI approval, before taking into consideration dividends
paid in the preceding twelve months. A dividend is extraordinary when the
proposed dividend amount plus dividends paid in the last twelve months from
the dividend payment date exceed the ordinary dividend level. In the twelve
months ended March 31, 2024, MGIC paid $600 million in dividends to the
holding company. Future dividend payments from MGIC to the holding company
will be determined in consultation with the board of directors, and after
considering any updated estimates about our business.
If any capital contributions to our subsidiaries are required, such
contributions would decrease our holding company cash and investments.
Your ownership in our company may be diluted by additional capital that we
raise.
As noted above under our risk factor titled
"We may not continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease if we are required to maintain more
capital in order to maintain our eligibility,"
although we are currently in compliance with the requirements of the PMIERs,
there can be no assurance that we would not seek to issue additional debt
capital or to raise additional equity or equity-linked capital to manage our
capital position under the PMIERs or for other purposes. Any future issuance
of equity securities may dilute your ownership interest in our company. In
addition, the market price of our common stock could decline as a result of
sales of a large number of shares or similar securities in the market or the
perception that such sales could occur.
The price of our common stock may fluctuate significantly, which may make it
difficult for holders to resell common stock when they want or at a price they
find attractive.
The market price for our common stock may fluctuate significantly. In addition
to the risk factors described herein, the following factors may have an
adverse impact on the market price for our common stock: changes in general
conditions in the economy, the mortgage insurance industry or the financial
stability of markets and financial services industry; announcements by us or
our competitors of acquisitions or strategic initiatives; our actual or
anticipated quarterly and annual operating results; changes in expectations of
future financial performance (including incurred losses on our insurance in
force); changes in estimates of securities analysts or rating agencies; actual
or anticipated changes in our share repurchase program or dividends; changes
in operating performance or market valuation of companies in the mortgage
insurance industry; the addition or departure of key personnel; changes in tax
law; and adverse press or news announcements affecting us or the industry. In
addition, ownership by certain types of investors may affect the market price
and trading volume of our common stock. For example, ownership in our common
stock by investors such as index funds and exchange-traded funds can affect
the stock's price when those investors must purchase or sell our common stock
because the investors have experienced significant cash inflows
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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).
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