2021 Annual Report

MGIC Investment Corporation

Annual Report

2021

Our Business

We are a holding company and through wholly-owned subsidiaries, including Mortgage Guaranty Insurance Corporation, we provide private mortgage insurance, other mortgage credit risk management solutions, and ancillary services.

Financial Summary

2019

2020

2021

Net income ($ millions)	$	673.8	$	446.1	$	635.0
Diluted income per share ($)	$	1.85	$	1.29	$	1.85
Net operating income(1)($ millions)	$	669.7	$	456.8	$	658.6
Net operating income per diluted share(1)($)	$	1.84	$	1.32	$	1.91
New Primary Insurance Written
($ billions)

$1,186 $12.41

(1)

30,028 $119 $65

We believe that use of the Non-GAAP measures of net operating income and net operating income per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information. For a description of how we calculate these measures and for a reconciliation of these measure to their nearest comparable GAAP measures, see "Explanation and Reconciliation of our use of Non-GAAP Financial Measures" in Management's

Discussion and Analysis of Financial Condition and Results of Operations.

At MGIC, our main business objective is to provide critical support to the housing market, including first-time, and low- and moderate-wealth homebuyers. We strive to achieve that objective by, among other things, offering competitive products and best-in-class service to mortgage originators and servicers, and by maintaining a sharp focus on the sources and uses of our capital. We deliver a product that helps people get the keys to their own homes.

Dear Fellow Shareholders:

I am pleased to report that 2021 was another successful year for our company. The successes we enjoyed reflect the solid credit quality of our growing insurance in force, a strong housing market, a decreasing delinquency rate, our market presence, the current favorable economic conditions, and the hard work and commitment to excellence of my fellow co-workers. Following are several of our 2021 accomplishments:

• Earned $635 million of net income ($1.85 per diluted share) for the year, compared to $446 million ($1.29 per diluted share) in 2020.
• Increased primary new insurance written (NIW) from $112.1 billion in 2020 to $120.2 billion in 2021 and increased primary insurance in force (IIF) by more than 11.3% year-over-year. The NIW is consistent with the Company's risk and retugoals.
• Paid $400 million of cash dividends from our principal subsidiary, Mortgage Guaranty Insurance Corporation (MGIC) to our holding company, after having temporarily suspended such dividends through mid-2021 as a result of the COVID-19 pandemic.
• Maintained financial strength and capital flexibility while returning approximately $385 million in capital to shareholders:
• Repurchased 5.6% of our shares that were outstanding at the beginning of the year.
• Increased cash dividends to shareholders by 33% in the second half of 2021.
• Repurchased $99 million of our 2063 Junior Convertible Debentures, which eliminated approximately 7.5 million potentially dilutive shares.
• Expanded our reinsurance program by reaching favorable terms to secure quota share reinsurance coverage on NIW through 2023, and by executing two insurance linked note transactions, providing a total of $797 million in excess-of-loss reinsurance coverage on a portion of our 2020 and 2021 NIW. These transactions allow us to better manage our risk profile and provide an alternative source of capital.
• Continued to transform our business processes along a number of dimensions, including pricing, data and analytics, inside sales and our underwriting platform.

The accomplishments described above were all achieved despite managing through the continuing effects of the COVID-19 pandemic including transitioning our workforce to a flexible hybrid model from the remote work environment, in a second straight year of record-breaking NIW.

Net income rebounded to $635.0 from $446.1 million in 2020 and earnings per diluted share increased to $1.85 from $1.29 in 2020. The increase in net income primarily reflects a decrease in losses incurred, partially offset by increases in the provision for income taxes, other underwriting and operating expenses, net, and loss on debt extinguishment. The increase in diluted earnings per share also reflects a decreasein the number of diluted weighted average shares outstanding. In 2021 we generated a 13.5% retuon shareholders' equity and paid a common dividend with an approximate yield of 2%.

Throughout 2021, home prices continued to appreciate while interest rates remained relatively attractive and housing stock remained constrained. The demand for single family purchase loans continued to be robust, although we did begin to see refinance activity slow down, especially in the second half of the year, as interest rates ticked up. While lower refinance activity typically results in less NIW, it is generally a positive for persistency (the percentage of insurance remaining in force from the year prior) and IIF growth, which is the source of future revenue. For the second consecutive year, the housing market was one of the bright spots in the economy - it generated more than $4 trillion of purchase and refinance mortgage originations and enabled us to write a record volume of new business. This record amount of NIW combined with modestly higher persistency on our existing books of business increased our IIF by 11% year-over-year.

Our record NIW was also the result of our value proposition for both lenders (ease of execution and ancillary services) and borrowers (faster equity buildup and ability to cancel, when compared to FHA execution). As reported byInside Mortgage Finance, the size of the market for insurable low down-payment loans was approximately $1.4 trillion in each of 2021and 2020, and the private mortgage insurance (PMI) industry's share of that market was 43.2% in 2021, compared to 43.9% in 2020. We are proud to say that we increased our market share within the PMI industry to 20.6% in 2021, compared to 18.7% in 2020.

The insurance we wrote in recent years has performed exceptionally well, in part due to strong credit profiles of the insured loans and the vibrant economy, with its low unemployment and solid home price appreciation. However, as the spike in delinquencies that resulted from the COVID-19 pandemic reminded us, economic cycles can change and it is important to have in place risk management tools to help prepare for such changes. One tool is reinsurance. We have used quota share transactions since 2013 and have used insurance-linked notes transactions, executed in the capital markets, on portions of our 2016 through 2021 books of business. We have been able to execute these transactions at attractive costs of capital and intend to continue to seek to use these tools when it makes economic sense. In addition to reducing losses in weaker economic environments (we ceded $10 million of incurred losses in 2021 compared to $78 million in 2020), these transactions diversify our sources of capital relief and enhance our returns.

MGIC's balance sheet and capital position were strong entering the year and continued to strengthen throughout 2021. At year-end 2021, MGIC had $3.4 billion more capital than required under state capital requirements and $2.2 billion more available assets than required by the private mortgage insurer eligibility requirements (PMIERs) of Fannie Mae and Freddie Mac (the GSEs).

As of December 31, 2021, our consolidated cash and investments totaled $6.9 billion, including $663 million of cash and investments at our holding company. The consolidated investment portfolio had a mix of 84% taxable and 16% tax exempt securities, and a pre-tax yield of approximately 2.5%. Our total debt-to-capital ratio was approximately 19% at December 31, 2021.

Our capital management strategy has resulted in a strong and dynamic capital position, which has allowed us to successfully take advantage of the unexpectedly large 2020 and 2021 housing markets. Further, we are positioned to take full advantage of the overall market opportunity for private mortgage insurance, which we expect will be somewhat smaller in 2022.

Our current capital management strategy has three primary priorities:

• Protect the health of the holding company and maintain maximum capital flexibility
• Protect the health of MGIC and position it to succeed in the future
• Retuexcess capital to shareholders above target liquidity levels of MGIC and the holding company

We executed several capital management transactions in 2021 that improved the quality of our balance sheet including the repurchase of $98.6 million in aggregate principal amount of our 9% Debentures at a purchase price of $135.5 million, plus accrued interest. Although the repurchase resulted in a $36.9 million loss on debt extinguishment, it also reduced our potentially dilutive shares by approximately 7.5 million shares, eliminated approximately $9 million of annual interest expense, and lowered our overall debt to capital ratio.

Reflecting MGIC's strong balance sheet and capital position as well as its outlook for the future, our Board authorized MGIC to pay dividends totaling of $400 million to our holding company in 2021. In the third quarter of 2021, the MTG Board increased the common dividend by 33% to $0.08/share and for the full year 2021, we returned $94.7 million in dividends to our shareholders.

The holding company repurchased approximately 19.0 million shares of common stock in 2021, or 5.6% of the beginning number of shares outstanding, using the remaining authorization under the program that was approved by our Board in 2020. In the fourth quarter of 2021, our board approved a separate $500 million share repurchase program that expires at the end of 2023 and we began to repurchase shares under it in 2022.

Turning now to the regulatory environment, the federal government, through various agencies, including the Federal Housing Finance Agency (FHFA), Consumer Financial Protection Bureau (CFPB), and the Federal Housing Administration (FHA) continues to focus its housing policy efforts on promoting equitable access to sustainable and affordable housing, mitigating foreclosure and eviction risk for homeowners impacted by COVID-19, and ensuring a successful economic recovery, as opposed to making large scale changes to the housing finance infrastructure. Our business is organized to deliver a product that helps borrowers get the keys to their own homes, opening the door to the economic and social benefits of sustainable homeownership and we believe that we are well-positioned to responsibly capitalize on these efforts.

We believe that sustainable housing options are possible without creating undue risk to the housing system, provided the programs are thoughtfully constructed. We will continue to educate about the benefits, and advocate for the increased use, of private capital, including private mortgage insurance, in the residential housing and mortgage finance industry. The use of private capital reduces taxpayer exposure to housing while maintaining a resilient housing finance system.

This year, 2022, marks the 65th year that MGIC has been supporting the U.S. housing market and helping individuals and families achieve affordable and sustainable homeownership. In addition to offering a compelling business proposition for our customers, we want to foster an environment where diversity is embraced, and co-workers are positioned to succeed. This requires providing tools and resources for people to fully develop in the organization, increasing opportunities for engagement, and endeavoring to recruit diverse teams to best serve our customers.

At MGIC, we take pride in knowing that what we do matters. As pioneers of the modeform of private mortgage insurance, MGIC has helped over 13.5 million families achieve homeownership sooner. This is a touchstone we retuto when we think about the work we do, how we do it, and why we do it. Homeownership can be a powerful vehicle for financial stability and generational wealth, which means that our impact extends well beyond the walls of our company, beyond our investors, beyond our customers, even beyond the consumers who use our product. Our work supports resilient communities and the social fabric at large. To help articulate our values, we annually publish on our website an Environmental, Social and Governance Report.

I am confident in our positioning in this market, and we like the risk-reward equation that the current conditions offer. We have the right team in place to build off of our solid foundation to continue to deliver competitive offerings and best-in-class service to our customers and generate strong returns for our shareholders through the core business as well as capital returns. That is why, when I look ahead, I am very excited about the future of our company.

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MGIC Investment Corporation published this content on 25 March 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 March 2022 17:59:27 UTC.