MGIC INVESTMENT CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
As used below, "we" and "our" refer toMGIC Investment Corporation's consolidated operations or toMGIC Investment Corporation , as a separate entity, as the context requires. References to "we" and "our" in the context of debt obligations refer toMGIC Investment Corporation . See the "Glossary of terms and acronyms" for definitions and descriptions of terms used throughout this annual report. The Risk Factors contained in Item 1A discuss trends and uncertainties affecting us and are an integral part of the MD&A. The following is a discussion and analysis of the financial conditions and results of operations for the years endedDecember 31, 2022 and 2021, including comparisons between 2022 and 2021. Comparisons between 2021 and 2020 have been omitted from this Form 10-K, but can be found in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC .
Forward Looking and Other Statements
As discussed under "Forward Looking Statements and Risk Factors" in Item 1A of Part 1 of this Report, actual results may differ materially from the results contemplated by forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with theSecurities and Exchange Commission .MGIC Investment Corporation 2022 Form 10-K | 42
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OVERVIEW
This Overview of the MD&A highlights selected information and may not contain all of the information that is important to readers of this Annual Report. Hence, this Overview is qualified by the information that appears elsewhere in this Annual Report, including the other portions of the MD&A. Through MGIC, the principal subsidiary ofMGIC Investment Corporation , we serve lenders throughoutthe United States helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality through the use of private mortgage insurance. AtDecember 31, 2022 MGIC had$295.3 billion of primary IIF.
Summary of financial results of
Year Ended December 31,
(in millions, except per share data) 2022 2021 Change
Selected statement of operations data
Net premiums earned $ 1,007.1 $ 1,014.4 (1) %
Investment income, net of expenses 167.5 156.4 7 %
Losses incurred, net (254.6) 64.6 N/M
Other underwriting and operating
expenses, net 236.7 198.4 19 %
Loss on debt extinguishment 40.2 36.9 9 %
Income before tax 1,090.0 801.8 36 %
Provision for income taxes 224.7 166.8 35 %
Net income 865.3 635.0 36 %
Diluted income per share $ 2.79 $ 1.85 51 %
Non-GAAP Financial Measures (1)
Adjusted pre-tax operating income $ 1,140.0 $ 831.7 37 %
Adjusted net operating income 904.8 658.6 37 %
Adjusted net operating income per
diluted share $ 2.91 $ 1.91 52 %
(1)See "Explanation and Reconciliation of our use of Non-GAAP Financial
Measures."
SUMMARY OF 2022 FINANCIAL RESULTS
Net income of$865.3 million for 2022 increased by$230.4 million when compared to the prior year, and diluted income per share of$2.79 increased by 51% when compared to the prior year. The increase in net income primarily reflects a decrease in losses incurred, partially offset by a higher provision for income taxes and other underwriting and operating expenses, net. Diluted income per share increased due to an increase in net income and a decrease in the number of diluted weighted average shares outstanding. Adjusted net operating income for 2022 was$904.8 million (2021:$658.6 million ) and adjusted net operating income per diluted share was$2.91 (2021:$1.91 ). Adjusted net operating income for 2022 and 2021 included adjustments for a loss on debt extinguishment and net realized investment gains (losses). Losses incurred, net were$(254.6) million , a decrease of$319.1 million compared with losses incurred of$64.6 million for the prior year. While new delinquency notices added approximately$149.6 million to losses incurred in 2022, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of approximately$404.1 million , primarily related to a decrease in the estimated claim rate on delinquencies. The favorable development primarily resulted from greater than expected cure rates, as borrower reinstatements and servicer mitigation efforts resulted in more cures than originally estimated. Additionally, home price appreciation experienced in recent years has allowed borrowers to cure their delinquencies through the sale of their property. In 2021, new delinquency notices added approximately$124.6 million to losses incurred, while our re-estimation of loss reserves on previously received delinquency notices resulted in$60 million of favorable loss development primarily due to the decrease in the claim rate on delinquencies received prior to the COVID-19 pandemic. This was offset by the recognition of a probable loss of$6.3 million related to litigation of our claims paying practices and adverse development on LAE reserves and reinsurance.
The increase in our provision for income taxes to
compared to
before tax. Our effective tax rate for 2022 was 20.6% compared to 20.8% for
2021.
Other underwriting and operating expenses, net increased to$236.7 million in 2022 from$198.4 million in 2021 primarily due to higher expenses related to our technology investments, particularly in data and analytics, and an increase in pension expense. Pension expenses increased in 2022 as a result of settlement accounting charges during 2022.MGIC Investment Corporation 2022 Form 10-K
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BUSINESS ENVIRONMENT Economic conditions Due to higher interest rates and higher home prices in 2022, there was a decrease in home purchases in 2022 after a strong 2021. Higher interest rates also decreased refinance activity during 2022, after a robust 2021. This resulted in a decrease in our NIW, to$76.4 billion in 2022 when compared to$120.2 billion in 2021. The level of interest rates, and home prices may change in the future. For the possible effects of such changes, see our risk factors titled "If the volume of low down payment home mortgage originations declines, the amount of insurance that we write could decline," "Downturns in the domestic economy or declines in home prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns," and "Changes in interest rates, house prices or mortgage insurance cancellation requirements may change the length of time that our policies remain in force."
Mortgage insurance market
The past several years of favorable housing fundamentals and in our view,
generally favorable risk characteristics of our recently insured loans
contributed to a growing insurance in force. Higher interest rates and home
prices, resulted in a decrease in our NIW in 2022 when compared to 2021.
The percentage of our NIW with DTI ratios over 45% and LTV's over 95% increased in 2022 when compared with 2021. The increase was primarily driven by higher home prices and interest rates, and a higher percentage of NIW from purchase transactions.
Refer to "Mortgage Insurance Portfolio" for additional discussion of changes
in our NIW mix during 2022.
Competition PMI. The private mortgage insurance industry is highly competitive and is expected to remain so. We believe that we currently compete with other private 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.
Pricing practices
In recent years, the industry has materially reduced its use of standard rate cards, which were fairly consistent among competitors, and correspondingly increased its use of (i) "risk-based pricing systems" that use a spectrum of filed rates to allow for formulaic, risk-based pricing based on multiple attributes that may be quickly adjusted within certain parameters, and (ii) customized rate plans, both of which typically have rates lower than the standard rate card. Our increased use of reinsurance over the past several years, and the improved credit profile and reduced loss expectations associated with loans insured after 2008, have helped to mitigate the negative effect of declining premium rates on our expected returns. For information about competition in the private mortgage insurance industry, see our risk factor titled "Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and/or increase our losses" in Item 1A .
GSE Risk Share Transactions
In 2018, the GSEs initiated secondary mortgage market programs with loan level mortgage default coverage provided by various (re)insurers that are not mortgage insurers governed by PMIERs, and that are not selected by the lenders. Due to differences in policy terms, these programs may offer premium rates that are below prevalent single premium LPMI rates. While we view these programs as competing with traditional private mortgage insurance, we participate in these programs from time to time. The GSEs (and other investors) have also used other forms of credit enhancement that did not involve traditional private mortgage insurance, such as engaging in credit-linked note transactions executed in the capital markets, or using other forms of debt issuances or securitizations that transfer credit risk directly to other investors, including competitors and an affiliate of MGIC; using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage; or accepting credit risk without credit enhancement. Government programs. PMI also competes against government mortgage insurance programs such as the FHA,VA , andUSDA , primarily for lower FICO score business. The combined market share of primary mortgage insurance written by government programs continues to exceed that written by PMI in 2022 and 2021. Refer to "Mortgage Insurance Portfolio" for additional discussion on market share, the 2022 business environment and the impact it had on operating measures including NIW, IIF and RIF. PMIERs We operate under the requirements of the PMIERs of the GSEs in order to insure loans delivered to or purchased by them. The PMIERs include financial requirements as well as business, quality control and certain transactional approval requirements. The financial requirements of the PMIERs require a mortgage insurer's "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book of risk in force, calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions, and subject to a floor amount). Based on our application of PMIERs, MGIC's Available Assets under PMIERs totaled$5.7 billion , an excess of$2.3 billion over its Minimum Required Assets atDecember 31, 2022 . MGIC Investment Corporation 2022 Form 10-K
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BUSINESS OUTLOOK FOR 2023
Our outlook for 2023 should be viewed against the backdrop of the business
environment discussed above.
NIW
Our NIW is affected by total mortgage originations, the percentage of total mortgage originations using private mortgage insurance (the "PMI penetration rate"), and our market share within the PMI industry. As ofJanuary 2023 , the total average mortgage origination forecasts from the Fannie Mae and MBA indicate mortgage originations of$1.8 trillion in 2023, compared to an estimated$2.3 trillion in 2022. Both purchase originations and refinance transactions are forecasted to decline in 2023 when compared to 2022. As a result of the decrease in forecasted mortgage originations, we are expecting NIW to be lower in 2023 compared to 2022. The widespread use of risk based pricing systems by the PMI industry makes it more difficult to compare our rates to those offered by our competitors. We may not be aware of industry rate changes until we observe that our volume of NIW has changed. In addition, business under customized rate plans is awarded by certain customers for only limited periods of time. As a result, our NIW may fluctuate more than it had in the past.
IIF
Our IIF increased 7.6% in 2022 and is expected to be relatively flat in 2023. Our book of IIF is an important driver of our future revenues, and its growth is driven by our ability to generate NIW and the retention of our IIF, as measured by our persistency. Interest rates influence both our NIW and persistency. Generally speaking, in a rising rate environment, total mortgage originations may decline; however, absent material accumulated home price appreciation since the issuance of a policy, we would also expect policy cancellation rates to decline, and in turn increase persistency, although the impact generally lags the change in interest rates. In 2023, we expect interest rates to remain elevated compared to recent years and home prices to decline.
Results of operations
Premiums. Our direct premiums written and earned are impacted by our IIF during the period and our in force premium yield, both of which are expected to be relatively flat in 2023 when compared to 2022. Premiums earned are also impacted by the amount of accelerated premiums from single premium policy cancellations, which generally decrease as refinance activity decreases. Our unearned premium decreased to$195.3 million atDecember 31, 2022 from$241.7 million atDecember 31, 2021 . Our net premiums written and earned are primarily impacted by the changes in the direct premiums written and earned noted above and by the amount of premiums we cede under our quota share and excess of loss reinsurance transactions. The amount of premiums we cede in 2023 will be affected by any changes in our reinsurance coverage. Premiums we cede under our quota share transactions is also impacted by the profit commission we receive. The amount of profit commission is variable year-to-year and is dependent on the amount of losses incurred ceded. In 2022, negative losses incurred increased the profit commission we received, resulting in lower ceded premiums. Increases in ceded losses incurred will benefit our losses incurred line, but will result in lower profit commission and higher ceded premiums.
Factors that affect the amount of premiums we earn from our IIF are further
discussed in our "Consolidated Results of Operations - Premium yield."
Investment income. Net investment income is a material contributor to our results of operations. We expect net investment income in 2023 to increase in comparison to 2022, primarily due to higher average investment yields. The amount of investment income will be impacted by the change in the yield we can earn on investments and the level of invested assets. The level of invested assets will primarily be impacted by the amount of cash we expect to use in financing activities relative to our cash from operations. The magnitude of any change in our invested asset level will be subject to the timing of our financing activities. Losses. Losses incurred, net is impacted by the level of new delinquency notices. Generally, on our primary business, the highest claim frequency years have been the third and fourth year after loan origination. As ofDecember 31, 2022 , 80% of our primary RIF was written subsequent toDecember 31, 2019 , 85% of our primary RIF was written subsequent toDecember 31, 2018 , and 88% of our primary RIF was written subsequent toDecember 31, 2017 . The pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Our claims paid activity slowed at the start of the COVID-19 pandemic primarily due to forbearance and foreclosure moratoriums put in place. Claim activity has not yet returned to pre-COVID-19 levels. We expect net losses and LAE paid to increase, however, the magnitude and timing of the increases are uncertain. Underwriting and operating expenses, net. We expect underwriting and operating expenses, net to be modestly lower in 2023 compared to 2022. In recent years, we have made additional investments in our technology, particularly in data and analytics and will continue to make similar investments in 2023. Pension expenses also increased in 2022 as a result of settlement accounting charges incurred during 2022. In 2023, we expect to incur settlement accounting charges as a result of lump sum settlements for employees who retired in the fourth quarter of 2022.
Income taxes. We expect our 2023 effective tax rate to be approximately 21%.
CAPITAL
MGIC dividend payments to our holding company
The ability of MGIC to pay dividends is restricted by insurance regulation. Amounts in excess of prescribed limits are deemed "extraordinary" and may not be paid if disapproved by the OCI. A dividend is extraordinary when the proposed dividend amount, plus dividends paid in the twelve months preceding the dividend payment date exceed the ordinary dividend level. In 2023, MGIC could pay$92 million of ordinary dividends without OCI approval, before taking into consideration dividends paid in the preceding twelve months. In 2022 and 2021, MGIC paid a cash and/or investment security dividend of$800 million and$400 million , respectively, to our holding company. Future dividend payments from MGIC to the holding company will continue to be determined in consultation with the board.MGIC Investment Corporation 2022 Form 10-K
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Share repurchase programs
Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. The repurchase programs may be suspended for periods or discontinued at any time. We repurchased approximately 27.8 million shares in 2022 using approximately$386 million of holding company resources. In 2021, we repurchased approximately 19.0 million shares of our common stock using approximately$291 million of holding company resources. As ofDecember 31, 2022 , we had$114 million of authorization remaining to repurchase our common stock through the end of 2023 under a share repurchase program approved by our Board of Directors inOctober 2021 .
The following table shows details of our share repurchase programs.
Authorization Remaining
Repurchase Program Expiration Date Repurchased (in millions) (in millions)
2020 Authorization December 31, 2021 $ 300 $ -
2021 Authorization December 31, 2023 $ 386 $ 114
As of
outstanding which was a decrease of 8.4% from
Dividends to shareholders
In the first and second quarters of 2022, we paid quarterly cash dividends of$0.08 per share to shareholders which totaled$51.0 million . In the third and fourth quarters of 2022, we paid quarterly cash dividends of$0.10 per share which totaled$60.7 million . OnJanuary 24, 2023 , the Board of Directors declared a quarterly cash dividend to holders of the company's common stock of$0.10 per share payable onMarch 2, 2023 , to shareholders of record at the close of business onFebruary 17, 2023 . For information about how the payment of dividends by our holding company will result in an adjustment to the conversion rate and price of our convertible securities, see our risk factor titled "Your ownership in our company may be diluted by additional capital that we raise" in Item 1A .
GSEs
We must comply with a GSE's PMIERs to be eligible to insure loans delivered to or purchased by that GSE. The PMIERs include financial requirements, as well as business, quality control and certain transaction approval requirements. The financial requirements of the PMIERs require a mortgage insurer's "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are generally based on an insurer's book of risk in force and are calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions).
The PMIERs generally require us to hold significantly more Minimum Required
Assets for delinquent loans than for performing loans and the Minimum Required
Assets required to be held increases as the number of payments missed on a
delinquent loan increases.
If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs, it would significantly reduce the volume of our NIW, the substantial majority of which is for loans delivered to or purchased by the GSEs. In addition to the increase in Minimum Required Assets associated with delinquent loans, factors that may negatively impact MGIC's ability to continue to comply with the financial requirements of the PMIERs include the following:
è The GSEs may make the PMIERs more onerous in the future. The PMIERs provide that the
factors that determine Minimum Required Assets will be updated periodically, or as
needed if there is a significant change in macroeconomic conditions or loan
performance. We do not anticipate that the regular periodic updates will occur more
frequently than once every two years. The PMIERs state that the GSEs will provide
notice 180 days prior to the effective date of updates to the factors; however, the
GSEs may amend any portion of the PMIERs at any time.
è The PMIERS may be changed in response to the final regulatory capital framework for
the GSEs which was established in
è Our future operating results may be negatively impacted by the matters discussed in
our Risk Factors. Such matters could decrease our revenues, increase our losses or
require the use of assets, thereby creating a shortfall in Available Assets.
è Should capital be needed by MGIC in the future, capital contributions from our holding
company may not be available due to competing demands on holding company resources,
including for repayment of debt.
Our reinsurance transactions enable us to earn higher returns on our business than we would without them because they reduce the Minimum Required Assets we must hold under PMIERs. However, reinsurance may not always be available to us, or available on similar terms and our reinsurance subjects us to counterparty credit risk. Our access to reinsurance may be disrupted and the terms under which we are able to obtain reinsurance may be less attractive than in the past due to volatility stemming from circumstances such as higher interest rates, increased inflation, global events such as theRussia -Ukraine war, and other factors. In 2022, execution of transactions for XOL reinsurance through the ILN market was more challenging primarily due to increased pricing. The calculated credit for XOL Transactions under PMIERs is generally based on the PMIERs requirement of the covered loans and the attachment and detachment point of the coverage. PMIERs credit is generally not given for the reinsured risk above the PMIERs requirement. Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit under the PMIERs, under certain circumstances, MGIC may terminate the reinsurance transactions without penalties.
State Regulations
The insurance laws of 16 jurisdictions, includingWisconsin , our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its RIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the "State Capital Requirements." While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentageMGIC Investment Corporation 2022 Form 10-K
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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 MPP. MGIC's "policyholder position" includes its net worth or surplus and its, contingency reserve. AtDecember 31, 2022 , MGIC's risk-to-capital ratio was 10.2 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was$3.5 billion above the required MPP of$2.1 billion . Our risk-to-capital ratio and MPP reflect full credit for the risk ceded under our reinsurance transactions. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded under such transactions. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the PMIERs, MGIC may terminate the reinsurance transactions, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, refer to our risk factor titled "State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis" in Item 1A for more information about matters that could negatively affect such compliance. The NAIC previously announced plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In 2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and a risk-based capital framework to establish capital requirements for mortgage insurers, although certain items were not completely addressed by the framework, including the treatment of ceded risk and minimum capital floors. InOctober 2022 , the NAIC working group released a revised exposure draft of the Mortgage Guaranty Insurance Model Act that does not include changes to the capital requirements of the existing Model Act.
GSE REFORM
The FHFA has been the conservator of the GSEs since 2008 and has the authority
to control and direct their operations. The increased role that the federal
government has assumed in the residential housing finance system through the GSE
conservatorship may increase the likelihood that the business practices of the
GSEs change, including through administrative action, in ways that have a
material adverse effect on us and that the charters of the GSEs are changed by
new federal legislation.
It is uncertain what role the GSEs, FHA and private capital, including private
mortgage insurance, will play in the residential housing finance system in the
future. The timing and impact on our business of any resulting changes is
uncertain. Many of the proposed changes would require Congressional action to
implement and it is difficult to estimate when Congressional action would be
final and how long any associated phase-in period may last.
For additional information about the business practices of the GSEs, 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." in
Item 1A .
COVID-19 PANDEMIC
The COVID-19 pandemic materially impacted our 2020 financial results, as we
reserved for losses associated with the increased delinquency notices received.
Through December 31, 2022 , the vast majority of those delinquency notices have
cured, resulting in a decrease in losses incurred as we recognized favorable
loss development.
Forbearance for borrowers who were affected by COVID-19 allows mortgage payments
to be suspended for a period of time. Historically, forbearance plans have
reduced the incidence of our losses on affected loans. However, given the
uncertainty surrounding the long-term economic impact of COVID-19, it is
difficult to predict the ultimate effect of COVID-19 related forbearances on our
loss incidence. Whether a loan delinquency will cure, including through
modification, when forbearance ends will depend on the economic circumstances of
the borrower at that time. The severity of losses associated with delinquencies
that do not cure will depend on economic conditions at that time, including home
prices.
Foreclosures on mortgages purchased or securitized by the GSEs were suspended
through July 31, 2021 . Under a CFPB rule that was effective through December 31,
2021 , with limited exceptions, servicers were required to ensure that at least
one temporary procedural safeguard had been met before referring 120-day
delinquent loans for foreclosure. Claim activity has not yet returned to
pre-COVID-19 levels.
For additional information about how the COVID-19 pandemic may impact our future
financial results, business, liquidity, and/or financial condition, see our Risk
Factor titled "The COVID-19 pandemic may materially impact our business and
future financial condition."
FACTORS AFFECTING OUR RESULTS
Our current and future business, results of operations and financial condition are impacted by macroeconomic conditions such as rising interest rates, home prices, housing demand, level of employment, inflation, restrictions and costs on mortgage credit, and other factors. For additional information on how on our business may be impacted see our Risk Factor titled "Downturns in the domestic economy or declines in home prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns."
As noted above, the COVID-19 pandemic may adversely affect our future business,
results of operations, and financial condition.
The future effects of changing climatic conditions on our business is uncertain.
For information about possible effects, please refer to our Risk Factor titled
"Pandemics, hurricanes and other natural disasters may impact our incurred
losses, the amount and timing of paid claims, our inventory of notices of
default and our Minimum Required Assets under PMIERs."
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Our results of operations are affected by:
Premiums written and earned
Premiums written and earned in a year are influenced by:
•NIW, which increases IIF. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages from the FHA, theVA , other mortgage insurers, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance. NIW does not include loans previously insured by us that are modified, such as loans modified under HARP. •Cancellations, which reduce IIF. Cancellations due to refinancings are affected by the level of current mortgage interest rates compared to the mortgage coupon rates throughout the in force book, current home values compared to values when the loans in the in force book were insured and the terms on which mortgage credit is available. Home price appreciation can give homeowners the right to cancel mortgage insurance on their loans if sufficient home equity is achieved. Cancellations also result from policy rescissions, which require us to return any premiums received on the rescinded policies, and claim payments, which require us to return any premium received on the related policies from the date of default on the insured loans. Cancellations of single premium policies, which are generally non-refundable, result in immediate recognition of any remaining unearned premium. •Premium rates, which are affected by product type, competitive pressures, the risk characteristics of the insured loans, the percentage of coverage on the insured loans, and PMIERs capital requirements. The substantial majority of our monthly and annual mortgage insurance premiums are under premium plans for which, for the first ten years of the policy, the amount of premium is determined by multiplying the initial premium rate by the original loan balance; thereafter, the premium rate resets to a lower rate used for the remaining life of the policy. The remainder of our monthly and annual premiums are under premium plans for which premiums are determined by a fixed percentage of the loan's amortizing balance over the life of the policy. •Premiums ceded, net of profit commission under our QSR Transactions, and premiums ceded under our XOL Transactions, are primarily affected by the percentage of our IIF subject to our reinsurance transactions. The profit commission under our QSR Transactions also varies inversely with the level of ceded losses incurred on a "dollar for dollar" basis and can be eliminated at ceded loss levels higher than what we have experienced on our QSR Transactions. As a result, lower levels of losses incurred result in a higher profit commission and less benefit from ceded losses incurred; higher levels of losses incurred result in more benefit from ceded losses incurred and a lower profit commission (or for certain levels of accident year loss ratios, its elimination). See Note 9 - "Reinsurance" to our consolidated financial statements for a discussion of our reinsurance transactions. •Premiums earned are generated by the insurance that is in force during all or a portion of the period. A change in the average IIF in the current period compared to an earlier period is a factor that will increase (when the average in force is higher) or reduce (when it is lower) premiums written and earned in the current period, although this effect may be enhanced (or mitigated) by the factors discussed above.
Investment income
Our investment portfolio is composed principally of investment grade fixed income securities. The principal factors that influence investment income are the size of the portfolio and its yield. As measured by amortized cost (which excludes changes in fair value, such as from changes in interest rates), the size of the investment portfolio is mainly a function of cash generated from (or used in) operations, such as net premiums written, investment income, net claim payments and expenses, and cash provided by (or used for) non-operating activities, such as debt or stock issuances or repurchases, and dividends.
Losses incurred
Losses incurred are the current expense that reflects claim payments, costs of settling claims, and changes in our estimates of payments that will ultimately be made as a result of delinquencies on insured loans. As explained under " Critical Accounting Estimates " below, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. Prior to the COVID-19 pandemic, the level of new delinquencies has historically followed a seasonal pattern, with new delinquencies in the first part of the year lower than new delinquencies in the latter part of the year. The state of the economy, local housing markets, and various other factors, including the COVID-19 pandemic, may result in delinquencies not following the typical pattern. Losses incurred are generally affected by: •The state of the economy, including unemployment and housing values, each of which affects the likelihood that loans will become delinquent and whether loans that are delinquent cure their delinquency.
•The product mix of the in force book, with loans having higher risk
characteristics generally resulting in higher delinquencies and claims.
•The size of loans insured, with higher average loan amounts tending to increase
incurred losses.
•The percentage of coverage on insured loans, with deeper average coverage
tending to increase incurred losses.
•The rate at which we rescind policies or curtail claims. Our estimated loss
reserves incorporate our estimates of future rescissions of policies and
curtailments of claims, and reversals of rescissions and curtailments. We
collectively refer to such rescissions and denials as "rescissions" and
variations of this term. We call reductions to claims "curtailments."
•The distribution of claims over the life of a book. Historically, the first few
years after loans are originated are a period of relatively low claims, with
claims increasing substantially for several years subsequent and then declining,
although persistency, the condition of the economy, including unemployment and
housing prices, and other factors can affect this pattern. For example, a weak
economy or housing
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value declines can lead to claims from older books increasing, continuing at stable levels or experiencing a lower rate of decline. See further information under "Mortgage insurance earnings and cash flow cycle" below.
•Losses ceded under reinsurance transactions. See Note 9 - "Reinsurance" to
our consolidated financial statements for a discussion of our reinsurance
transactions.
Underwriting and other expenses
Underwriting and other expenses includes items such as employee compensation, fees for professional and consulting services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions associated with our QSR Transactions. Employee compensation expenses are variable due to share-based compensation, changes in benefits, and changes in headcount (which can fluctuate due to volume of NIW). See Note 9 - "Reinsurance" to our consolidated financial statements for a discussion of ceding commission on our QSR Transactions.
Interest expense
Interest expense reflects the interest associated with our consolidated
outstanding debt obligations discussed in Note 7 - "Debt" to our
consolidated financial statements and under " Liquidity and Capital
Resources " below.
Other
Certain activities that we do not consider being part of our fundamental
operating activities may also impact our results of operations and are described
below.
Gains (losses) on investments and other financial instruments
•Fixed income securities. Investment gains and losses reflect the difference between the amount received on the sale of a fixed income security and the fixed income security's cost basis, as well as any credit allowances and any impairments on securities we intend to sell prior to recovery of its amortized cost basis. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
•Equity securities. Investment gains and losses are accounted for as a function
of the periodic change in fair value.
•Financial instruments. Investment gains and losses on the embedded derivative on our Home Re Transactions reflect the present value impact of the variation in investment income on assets on the insurance-linked notes held by the reinsurance trusts and the contractual reference rate used to calculate the reinsurance premiums we estimate we will pay over the estimated remaining life.
Loss on debt extinguishment
Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile and/or reduce potential dilution from our outstanding convertible debt. Extinguishing our outstanding debt obligations early through these discretionary activities may result in losses primarily driven by the payment of consideration in excess of our carrying value , and the write off of unamortized debt issuance costs on the extinguished portion of the debt.
Refer to " Explanation and reconciliation of our use of Non-GAAP financial
measures " below to understand how these items impact our evaluation of our
core financial performance.
MORTGAGE INSURANCE EARNINGS AND CASH FLOW CYCLE
In general, the majority of any underwriting profit that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year following the year the book was written. Subsequent years of a book may result in either underwriting profit or underwriting losses. This pattern of results typically occurs because relatively few of the incurred losses on delinquencies that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments) and increasing losses. The typical pattern is also a function of premium rates generally resetting to lower levels after ten years. The state of the economy, local housing markets and various other factors, including the COVID-19 pandemic, may result in delinquencies not following the typical pattern.
CYBERSECURITY
As part of our business, we maintain large amounts of confidential and proprietary information, including personal information of consumers and employees, on our servers and those of cloud computing services. Federal and state laws designed to promote the protection of such information require businesses that collect or maintain personal information to adopt information security programs, and to notify individuals, and in some jurisdictions, regulatory authorities, of security breaches involving personally identifiable information. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including by cyber attacks, such as those involving ransomware. The Company discovers vulnerabilities and regularly blocks a high volume of attempts to gain unauthorized access to its systems. Globally, attacks are expected to continue accelerating in both frequency and sophistication with increasing use by actors of tools and techniques that will hinder the Company's ability to identify, investigate and recover from incidents. Such attacks may also increase as a result of retaliation byRussia in response to actions taken by theU.S. and other countries in connection withRussia's military invasion ofUkraine . The Company operates 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 the sensitive information, either through the actions of third parties or employees, will not occur. Due to our reliance on information technology systems, including ours and those of our customers and third-party service providers, and to the sensitivity of the information that we maintain, unauthorized access to the systems or disclosure of the information could adversely affect our reputation, severely disrupt our operations, result in a loss of business and expose us to material claims for damages and may require that we provideMGIC Investment Corporation 2022 Form 10-K
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free credit monitoring services to individuals affected by a security breach.
For additional information about our IT systems and cybersecurity, see our risk
factor titled "Information technology system failures or interruptions may
materially impact our operations and adversely affect our financial results" and
"We could be materially adversely affected by a cyber security breach or failure
of information security controls." in Item 1A .
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EXPLANATION AND RECONCILIATION OF OUR USE OF NON-GAAP FINANCIAL MEASURES
NON-GAAP FINANCIAL MEASURES
We believe that use of the Non-GAAP measures of adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. Adjusted pre-tax operating income (loss) is defined as GAAP income (loss) before tax, excluding the effects of net realized investment gains (losses), gain 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, improve our debt profile, and/or reduce potential
dilution from our outstanding convertible debt.
(3)Infrequent or unusual non-operating items. Items that are non-recurring in
nature and are not part of our primary operating activities.
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Non-GAAP reconciliations
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income:
Years Ended December 31,
2022 2021
Net Net
(in thousands) Pre-tax Tax Effect (after-tax) Pre-tax Tax Effect (after-tax)
Income before tax / Net income
$ 865,349 801,777 166,794 634,983 Adjustments: Net realized investment (gains) losses 9,745 2,046 7,699 (7,009) (1,472) (5,537) Loss on debt extinguishment 40,199 8,442 31,757 36,914 7,752 29,162 Adjusted pre-tax operating income / Adjusted net operating income$ 1,139,978 $ 235,173
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share: Weighted average diluted shares outstanding 311,229 351,308 Net income per diluted share$ 2.79 $ 1.85 Net realized investment (gains) losses 0.02 (0.02) Loss on debt extinguishment 0.10 0.08 Adjusted net operating income per diluted share$ 2.91 $ 1.91 MGIC Investment Corporation 2022 Form 10-K
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MORTGAGE INSURANCE PORTFOLIO MORTGAGE ORIGINATIONS The total amount of mortgage originations is generally influenced by the level of new and existing home sales, interest rates, the percentage of homes purchased for cash, and the level of refinance activity. PMI market share of total mortgage originations is influenced by the mix of purchase and refinance originations. PMI market share is also impacted by the market share of total originations of the FHA,VA ,USDA , and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance. Total mortgage originations in 2022 as compared to 2021 reflects higher interest rates and home prices, contributing to a decrease in home purchase activity in 2022 after a strong 2021. Total mortgage originations are forecasted to be lower in 2023, in comparison to the last two years. Both purchase and refinance markets are forecasted to decrease in 2023 when compared to estimates for 2022.
[[Image Removed: mtg-20221231_g2.jpg]]
E - Estimated, F- Forecast
Source: Fannie Mae and MBA estimates/forecasts as of
represent the average of all sources.
As a result of the forecasted decrease in mortgage originations discussed above,
our 2023 NIW is expected to be lower than 2022.
The total estimated mortgage insurance volume is shown below.
Estimated total of PMI, FHA,
Twelve Months Ended December 31, Twelve Months Ended December 31,
(in billions) 2022 2021
Primary mortgage insurance $858 $1,352
Source: Inside Mortgage Finance -
HARP NIW.
MORTGAGE INSURANCE INDUSTRY We compete against five other private mortgage insurers, as well as government mortgage insurance programs, including those offered by the FHA,VA , andUSDA . Refer to "Overview - Business Environment - Competition" for a discussion of our competitive position. PMI's market share is primarily impacted by competition from government mortgage insurance programs. The PMI industry's market share in 2022 increased compared to the market share in 2021.
Estimated primary MI market share
(% of total primary MI Twelve Months Ended December 31, Twelve Months Ended December 31, volume) 2022 2021 PMI 47.2% 43.2% FHA 26.7% 24.7% VA 24.5% 30.2% USDA 1.7% 1.9%
Source: Inside Mortgage Finance -
HARP NIW.
MGIC's estimated market share within the PMI industry is shown in the table below. Our risk-based pricing engine, MiQ, allows for frequent granular pricing changes including those to address our view of emerging and evolving market conditions and risk. We expect our market share to decline in first quarter of 2023 due to actions taken in 2022 reflective of our views of risk return. Additional discussion of the competitive landscape of the industry refer to
"Overview - Business Environment - Competition " and additional discussion of
pricing practices refer to " Overview - Business Environment - Pricing
Practices "
Estimated MGIC market share
(% of total primary private MI Twelve Months Ended December 31 , Twelve Months Ended December 31 ,
volume) 2022 2021
MGIC 18.9% 20.6%
Source: Inside Mortgage Finance - February 17, 2023 or SEC filings. Includes
HARP NIW.
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NEW INSURANCE WRITTEN
The following tables provide information about loan characteristics associated
with our NIW.
The percentage of our NIW with DTI ratios over 45% and LTV's over 95% increased in 2022 compared with 2021. The increases were primarily driven by higher home prices and interest rates, and a higher percentage of NIW from purchase transactions.
Primary NIW by FICO score
Years Ended December 31,
(% of primary NIW) 2022 2021
760 and greater 43.1 % 45.6 %
740 - 759 18.5 % 17.5 %
720 - 739 14.9 % 13.7 %
700 - 719 10.9 % 11.1 %
680 - 699 7.3 % 7.3 %
660 - 679 3.3 % 2.7 %
640 - 659 1.3 % 1.6 %
639 and less 0.7 % 0.5 %
Total 100 % 100 %
Primary NIW by loan-to-value
Years Ended December 31,
(% of primary NIW) 2022 2021
95.01% and above 12.3 % 10.8 %
90.01% to 95.00% 49.3 % 43.7 %
85.01% to 90.00% 28.0 % 30.0 %
80.01% to 85% 10.4 % 15.5 %
Total 100 % 100 %
Primary NIW by debt-to-income ratio
Years Ended December 31,
(% of primary NIW) 2022 2021
45.01% and above 21.3 % 13.6 %
38.01% to 45.00% 32.3 % 30.0 %
38.00% and below 46.4 % 56.4 %
Total 100 % 100 %
Primary NIW by policy payment type
Years Ended December 31,
(% of primary NIW) 2022 2021
Monthly premiums 95.7 % 92.5 %
Single premiums 4.3 % 7.4 %
Annual Premiums - % 0.1 %
Primary NIW by type of mortgage
Years Ended December 31,
(% of primary NIW) 2022 2021
Purchases 97.4 % 79.7 %
Refinances 2.6 % 20.3 %
We consider a variety of loan characteristics when accessing the risk of a loan.
The following tables provides information about loans with one or more of the
following characteristics associated with our NIW: LTV ratios greater than 95%,
mortgages with borrowers having FICO scores below 680, including those with
borrowers having FICO scores of 620-679, mortgages with borrowers having DTI
ratios greater than 45%, each attribute as determined at the time of loan
origination.
Primary NIW by number of attributes discussed above
Years Ended December 31,
(% of primary NIW) 2022 2021
One 31.5 % 26.2 %
Two or More 3.6 % 1.5 %
IIF AND RIF
Our IIF grew 7.6% in 2022, and 11.3% in 2021, as NIW more than offset policy
cancellations. Cancellation activity is impacted by refinancing activity,
policies cancelled when borrowers achieve the required amount of home equity,
and cancellations due to claim payment. Refinancing activity has historically
been affected by the level of mortgage interest rates and the level of home
price appreciation. Cancellations generally move inversely to the change in the
direction of interest rates, although they generally lag a change in direction.
Persistency. Our persistency at December 31, 2022 was 79.8% compared to 62.6% at
December 31, 2021 . Since 2000, our year-end persistency ranged from a high of
84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003 . Our
persistency rate is primarily affected by the level of current mortgage interest
rates compared to the mortgage coupon rates on our IIF, which affects the
vulnerability of the IIF to refinancing; and the current amount of equity that
borrowers have in the homes underlying our IIF.
Insurance in force and risk in force
Years Ended December 31,
($ in billions) 2022 2021
NIW $ 76.4 $ 120.2
Cancellations (55.5) (92.4)
Increase in primary IIF $ 20.9 $ 27.8
Direct primary IIF as of December 31, $ 295.3
Direct primary RIF as of December 31,$ 76.5 $ 69.3 MGIC Investment Corporation 2022 Form 10-K
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CREDIT PROFILE OF OUR PRIMARY RIF
Our 2009 and later books possess significantly improved risk characteristics when compared to our 2005-2008 books. Modification and refinance programs, such as HAMP and HARP, which expired at the end of 2016 and 2018, respectively, but have been replaced by other GSE modification programs, make outstanding loans more affordable to borrowers with the goal of reducing the number of foreclosures. As ofDecember 31, 2022 , modifications accounted for approximately 4.2% of our total primary RIF, compared to 5.4% atDecember 31, 2021 . Loans associated with 87% of all our modifications were current as ofDecember 31, 2022 . For additional information on the composition of our primary RIF see "Business - Our Products and Services" The composition of our primary RIF by policy year as ofDecember 31, 2022 and 2021 is shown below: Primary risk in force ($ in millions) December 31, 2022 December 31, 2021 2004 and prior 411 500 2005 - 2008 3,083 3,728 2009 - 2015 1,753 2,865 2016 - 2022 71,225 62,244 Total 76,472 69,337 POOL AND OTHER INSURANCE MGIC has written no new pool insurance since 2008, however, for a variety of reasons, including responding to capital market alternatives to private mortgage insurance and customer demands, MGIC may write pool risk in the future. Our direct pool RIF was$276 million ($196 million on pool policies with aggregate loss limits and$80 million on pool policies without aggregate loss limits) atDecember 31, 2022 compared to$305 million ($206 million on pool policies with aggregate loss limits and$99 million on pool policies without aggregate loss limits) atDecember 31, 2021 . If claim payments associated with a specific pool reach the aggregate loss limit, the remaining IIF within the pool would be cancelled and any remaining defaults under the pool would be removed from our default inventory. In connection with the GSEs' CRT programs, an insurance subsidiary of MGIC provides insurance and reinsurance covering portions of the credit risk related to certain reference pools of mortgages acquired by the GSEs. Our RIF, as reported to us, related to these programs was approximately$226 million and$321 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. MGIC Investment Corporation 2022 Form 10-K
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CONSOLIDATED RESULTS OF OPERATIONS
The following section of the MD&A provides a comparative discussion of our Consolidated Results of Operations for the two-year period endedDecember 31, 2022 . For a discussion of the Critical Accounting Estimates used by us that affect the Consolidated Results of Operations, see "Critical Accounting Estimates" below. Revenues Revenues Year Ended December 31, (In millions) 2022 2021 % Change Net premiums written $ 960.7$ 969.0 (1) Net premiums earned$ 1,007.1 $ 1,014.4 (1) Investment income, net of expenses 167.5 156.4 7 Net gains (losses) on investments and other financial instruments (7.5) 5.9 N/M Other revenue 5.6 9.0 (38) Total revenues$ 1,172.8 $ 1,185.7 (1)
NET PREMIUMS WRITTEN AND EARNED
Net premiums written and earned decreased 1%, respectively, in 2022 compared
with the prior year. The decrease in premiums written and earned in 2022
compared to the prior year is primarily due to a decrease in the direct premium
yield, offset by a decrease in ceded premiums written and earned.
Premium yields
Premium yield is net premiums earned divided by average IIF during the year and
is influenced by a number of key drivers, which have a varying impact from
period to period. The following table provides information related to our
premium yield for 2022, and 2021.
Premium Yield
Year Ended December 31,
(in basis points) 2022 2021
In force portfolio yield (1) 39.4 42.2
Premium refunds 0.1 (0.6)
Accelerated earnings on single premium policies 1.0 3.2
Total direct premium yield 40.5 44.8
Ceded premiums earned, net of profit commission
and assumed premiums (2) (5.2) (5.9)
Net premium yield 35.3 38.9
(1) Total direct premiums earned, excluding premium refunds and accelerated
premiums from single premium policy cancellations divided by average primary
insurance in force.
(2) Assumed premiums include those from our participation in GSE CRT programs, of which the impact on the net premium yield was 0.3 bps in 2022 and 0.4 bps in 2021
Changes in the net premium yields when compared to the respective prior year
periods reflect the following:
In force Portfolio Yield è A larger percentage of our IIF is from book years with
lower premium rates due to a
decline in premium rates in recent years resulting from
pricing competition, insuring
mortgages with lower risk characteristics, lower required
capital, the availability
of reinsurance and certain policies undergoing premium rate
resets on their ten-year
anniversaries.
Premium Refunds
è Premium refunds are primarily driven by claim activity and
our estimate of refundable
premiums on our delinquency inventory. The low level of
claims received have resulted
in a lower level of premium refunds. Our estimate of
refundable premium on our
delinquency inventory fluctuates with changes in our
delinquency inventory and our
estimate of the number of loans in our delinquency inventory
that will result in a
claim.
Accelerated earnings on single premium policies
è The lower level of refinance transactions has reduced the
benefit from accelerated
earned premium from cancellation of single premium policies
prior to their estimated
policy life.
Ceded premiums earned, net of profit commission and assumed premiums
è
Ceded premiums earned, net of profit commission adversely
impacts our net premium
yield. Ceded premiums earned, net of profit commission, are
associated with the QSR
Transactions and the XOL Transactions. Assumed premiums
consists primarily of
premiums from GSE CRT programs. See "Reinsurance
Transactions" below for further
discussion on our reinsurance transactions.
As discussed in our Risk Factor titled "Competition or changes in our
relationships with our customers could reduce our revenues, reduce our premium
yields and/or increase our losses," the private mortgage insurance industry is
highly competitive and premium rates have declined over the past several years.
With the smaller origination market, higher persistency rate, and continued high
credit quality for NIW expected in 2023, we expect our in force portfolio
premium yield to remain relatively flat during 2023.
MGIC Investment Corporation 2022 Form 10-K
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See " Overview - Factors Affecting Our Results " above for additional factors
that also influence the amount of net premiums written and earned in a year.
REINSURANCE TRANSACTIONS Quota share reinsurance
Our quota share reinsurance affects various lines of our statements of
operations and therefore we believe it should be analyzed by reviewing its total
effect on our pre-tax income, as described below.
è We cede a fixed percentage of premiums earned and received on insurance covered by
the agreements.
è We receive the benefit of a profit commission through a reduction in the premiums we
cede. The profit commission varies inversely with the level of losses incurred on a
"dollar for dollar" basis and can be eliminated at loss levels higher than we are
currently experiencing. As a result, lower levels of losses incurred result in a
higher profit commission and less benefit from ceded losses incurred, higher levels
of ceded losses incurred result in more benefit from ceded losses incurred and a
lower profit commission (or for certain levels of losses of accident year loss
ratios, its elimination).
è We receive the benefit of a ceding commission through a reduction in underwriting
expenses equal to 20% of premiums ceded (before the effect of the profit commission).
è We cede a fixed percentage of losses incurred on insurance covered by the agreements.
The following table provides information related to our QSR Transactions for
2022 and 2021.
Quota share reinsurance
As of and For the Years Ended December 31,
(Dollars in thousands) 2022 2021
Statements of operations:
Ceded premiums written and earned, net of $ 86,435 $ 118,537
profit commission
% of direct premiums written 8 % 11 %
% of direct premiums earned 7 % 10 %
Profit commission 176,084 153,759
Ceding commissions 52,071 53,460
Ceded losses incurred (19,837) 9,862
Mortgage insurance portfolio:
Ceded RIF (in millions)
2015 QSR $ - $ 889
2019 QSR - 1,539
2020 QSR 3,902 4,754
2021 QSR 6,809 7,470
2022 QSR 5,027 -
Credit Union QSR 2,261 1,594
Total ceded RIF $ 17,999 $ 16,246
Ceded premiums written, and earned net of profit commission decreased in 2022
when compared with the prior year primarily due to an increase in the profit
commission, which reduces ceded premiums written and earned. The increase in
profit commission was driven by negative losses incurred in 2022.
Ceded losses incurred for the year ended December 31, 2022 reflect favorable
loss reserve development on previously received delinquency notices. See "Losses
Incurred, net" below for discussion of our loss reserves.
We terminated our 2015 and 2019 QSR Transactions effective December 31, 2022 and
incurred an early termination fee of $2 million on our 2019 QSR Transaction. We
terminated our 2017 and 2018 QSR Transactions effective December 31, 2021 and
incurred an early termination fee of $5 million . The termination of the QSR
Transactions reduce the amount of IIF and RIF subject to QSR transactions.
Covered Risk
The percentages of our NIW, new risk written, IIF, and RIF subject to our QSR
Transactions as shown in the following table will vary from period to period in
part due to the mix of our risk written during the period and the number of
active QSR Transactions.
Quota share reinsurance
As of and
For the Years Ended
2022 2021
NIW subject to QSR Transactions 87.4 % 81.9 %
New Risk Written subject to QSR Transactions 93.0 % 90.5 %
IIF subject to QSR Transactions 67.9 % 78.4 %
RIF subject to QSR Transactions 73.0 % 77.9 %
The NIW subject to quota share reinsurance increased in 2022 compared to 2021.
The increase was driven by a decrease in refinance transactions which resulted
in a decrease in NIW with LTVs less than or equal to 85%, which generally have
lower coverage percentages, and are excluded from the QSR Transactions.
2023 QSR Transaction.
We have agreed to terms on a quota share transaction with a group of
unaffiliated reinsurers covering most of our NIW in 2023 (with an additional
10.0% quota share). This is in addition to the reinsurance agreements executed
in 2022 that included a 15% quota share on eligible 2023 NIW.
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Excess of loss reinsurance
We have Excess-of-loss transactions ("XOL Transactions") with a panel of
unaffiliated reinsurers executed through the traditional reinsurance market
("Traditional XOL Transaction") and with unaffiliated special purpose insurers
("Home Re Transactions").
The 2022 Traditional XOL Transaction provides$142.6 million of reinsurance coverage on eligible NIW in 2022. The Traditional XOL Transaction has contractual termination date after approximately ten years, with an optional termination date after seven years and quarterly thereafter. For the covered policies, we retain the first layer of the aggregate losses paid, and the reinsurers will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding reinsurance coverage amount. The reinsurance coverage is subject to adjustment based on the risk characteristics of the covered loans. The reinsurance premiums ceded to the Traditional XOL Transaction are based off the remaining reinsurance coverage levels. The Home Re Transactions are executed with unaffiliated special purpose entities ("Home Re Entities") through the issuance of insurance linked notes ("ILNs"). AtDecember 31, 2022 our Home Re Transactions provided$1.6 billion of loss coverage on a portfolio of policies having an in force date fromJuly 1, 2016 throughMarch 31, 2019 , and fromJanuary 1, 2020 throughDecember 31, 2021 ; all dates inclusive. For this reinsurance coverage, we retain the first layer of the respective aggregate losses paid, and a Home Re Entity will then provide second layer coverage up to the outstanding reinsurance amount. As ofDecember 31, 2022 , the premiums under most of our 2018-2021 reference the one-month LIBOR. As discussed in our risk factor titled "The Company may be adversely impacted by the transition from LIBOR as a reference rate," theICE Benchmark Administration , the administrator of LIBOR, will cease publishing all USD LIBOR tenors onJune 30, 2023 . The initial attachment and detachment, current attachment and detachment, and PMIERs required asset credit for each of our XOL Transactions as ofDecember 31, 2022 , are as follows: Initial Attachment % (1) Initial Detachment % (2) Current Attachment % (1) Current Detachment % (2) PMIERs Required ($ In thousands) Asset Credit Home Re 2018-1 2.25% 6.50% 11.67% 21.66% $ - Home Re 2019-1 2.50% 6.75% 14.79% 31.56% - Home Re 2020-1 3.00% 7.50% 6.20% 8.76% - Home Re 2021-1 2.25% 6.50% 3.28% 7.58% 178,788 Home Re 2021-2 2.10% 6.50% 2.56% 7.31% 315,126 Home Re 2022-1 2.75% 6.75% 2.96% 7.28% 454,318 2022 Traditional XOL 2.60% 7.10% 2.60% 7.10% 137,831
(1) The percentage represents the cumulative losses as a percentage of adjusted
risk in force that MGIC retains prior to the XOL taking losses.
(2) The percentage represents the cumulative losses as a percentage of adjusted risk in force that must be reached before MGIC begins absorbing losses after the XOL layer
We ceded premiums on our XOL Transactions of
the years ended
See Note 9 - "Reinsurance," to our consolidated financial statements for
additional discussion of our XOL Transactions.
INVESTMENT INCOME, NET
Net investment income increased 7% to
million
See "Balance Sheet Review" in this MD&A for further discussion regarding our
investment portfolio.
Net gains (losses) on investments and other financial instruments in 2022 and
2021 were
OTHER REVENUE
Other revenue decreased to
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Losses and expenses
Year Ended December 31,
(In millions) 2022 2021 % Change
Losses incurred, net $ (254.6) $ 64.6 N/M
Amortization of deferred policy
acquisition costs 12.4 12.6 (2)
Other underwriting and operating
expenses, net 236.7 198.4 19
Interest expense 48.1 71.4 (33)
Loss on debt extinguishment 40.2 36.9 9
Total losses and expenses $ 82.8 $ 383.9 (78)
LOSSES INCURRED, NET
As discussed in "Critical Accounting Estimates" below and consistent with
industry practices, we establish case loss reserves for future claims on
delinquent loans that were reported to us as two payments past due and have not
become current or resulted in a claim payment. Such loans are referred to as
being in our delinquency inventory. Case loss reserves are established based on
estimating the number of loans in our delinquency inventory that will result in
a claim payment, which is referred to as the claim rate, and further estimating
the amount of the claim payment, which is referred to as claim severity.
IBNR reserves are established for delinquencies estimated to have occurred prior
to the close of an accounting period, but have not yet been reported to us. IBNR
reserves are established using estimated delinquencies, claim rates and claim
severities.
Estimation of losses is inherently judgmental. Even in a stable environment,
changes to our estimates could result in a material impact to our consolidated
results of operations and financial position. The conditions that affect the
claim rate and claim severity include the current and future state of the
domestic economy, including unemployment, and the current and future strength of
local housing markets; exposure on insured loans; the amount of time between
delinquency and claim filing; and curtailments and rescissions. The actual
amount of the claim payments may be substantially different than our loss
reserve estimates. Our estimates could be adversely affected by several factors,
including a deterioration of regional or national economic conditions, including
unemployment, leading to a reduction in borrowers' income and thus their ability
to make mortgage payments, the impact of past and future government initiatives
and actions taken by the GSEs (including mortgage forbearance programs and
foreclosure moratoriums), and a drop in housing values that could result in,
among other things, greater losses on loans, and may affect borrower willingness
to continue to make mortgage payments when the net value of the home is below
the mortgage balance. Loss reserves in the future will also be dependent on the
number of loans reported to us as delinquent.
Prior to the COVID-19 pandemic, losses incurred have followed a seasonal trend
in which the second half of the year has weaker credit performance than the
first half, with higher new notice activity and a lower cure rate. The state of
the economy, local housing markets and various other factors, may result in
delinquencies not following the typical pattern.
As discussed in our Risk Factors titled "The Covid-19 pandemic may materially
impact our business, and future financial condition," the magnitude of any
future impact of the COVID-19 pandemic on our incurred losses is uncertain and
cannot be predicted. As discussed in our Risk Factor titled "Because we
establish loss reserves only upon a loan delinquency rather than based on
estimates of our ultimate losses on risk in force, losses may have a
disproportionate adverse effect on our earnings in certain periods" if we have
not received a notice of delinquency with respect to a loan and if we have not
estimated the loan to be delinquent as of December 31, 2022 and recorded an IBNR
reserve, then we have not yet recorded an incurred loss with respect to that
loan.
Our estimates are also affected by any agreements we enter into regarding our
claims paying practices.
Losses incurred, net decreased to$(254.6) million compared to$64.6 million in 2021, primarily due to favorable loss reserve development. While new delinquency notices added approximately$149.6 million to losses incurred in 2022, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of approximately$404.1 million primarily related to a decrease in the estimated claim rate on delinquencies. The favorable development primarily resulted from greater than expected cure rates, as borrower reinstatements and servicer mitigation efforts resulted in more cures than originally estimated. Additionally, home price appreciation experienced in recent years has allowed borrowers to cure their delinquencies through the sale of their property. In 2021, new delinquency notices added approximately$124.6 million to losses incurred, and our re-estimation of loss reserves on previously received delinquency notices resulted in$60.0 million of favorable loss development, primarily due to the decrease in the claim rate on delinquencies received prior to the COVID-19 pandemic. This was offset by the recognition of a probable loss of$6.3 million related to litigation of our claims paying practices and adverse development on LAE reserves and reinsurance.MGIC Investment Corporation 2022 Form 10-K
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See "New notice claim rate" and "Claims severity" below for additional factors
and trends that impact these loss reserve assumptions.
Composition of losses incurred
Year Ended December 31,
(In millions) 2022 2021
Current year / New notices $ 149.6 $ 124.6
Prior year reserve development (404.1) (60.0)
Losses incurred, net $ (254.5) $ 64.6
Loss ratio
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred
losses and LAE, net to net premiums earned. The decrease in the loss ratio in
2022 when compared to 2021 was primarily due to a decrease in losses incurred as
discussed above.
Year Ended December 31,
2022 2021
Loss ratio (25.3) % 6.4 %
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New notice claim rate
The table below presents our new delinquency notices received, delinquency
inventory, percentage of delinquent loans in forbearance, and the average number
of missed payments for the loans in our delinquency inventory by policy year:
New notices and delinquency inventory during the period
% of Delinquency Inventory Avg. Number of Missed
Policy Year New Notices Delinquency
Inventory in Forbearance Payments of Delinquency
Inventory
2004 and prior 3,695 2,471 13.4 % 18
2005-2008 11,702 8,317 11.9 % 19
2009-2015 3,115 2,017 12.4 % 12
2016 2,090 1,249 15.9 % 10
2017 2,797 1,719 16.9 % 10
2018 3,289 2,060 17.8 % 9
2019 3,199 1,823 21.7 % 9
2020 5,067 2,558 35.4 % 7
2021 6,656 3,307 43.9 % 5
2022 1,378 866 37.1 % 3
Total 42,988 26,387 20.9 % 12
Claim rate on new notices (1) 8 %
December 31, 2021
% of Delinquency Inventory Avg. Number of Missed
Policy Year New Notices Delinquency
Inventory in Forbearance Payments of Delinquency
Inventory
2004 and prior 3,893 2,829 21.4 % 19
2005-2008 13,070 10,882 24.3 % 19
2009-2015 4,040 3,400 34.9 % 13
2016 2,375 2,004 43.5 % 12
2017 3,384 2,949 46.6 % 12
2018 3,902 3,412 49.3 % 12
2019 4,163 3,340 58.1 % 11
2020 5,623 3,308 63.4 % 8
2021 1,982 1,166 40.9 % 4
Total 42,432 33,290 39.5 % 14
Claim rate on new notices (1) 8 %
(1) Claim rate is the respective full year weighted average rate and is rounded to the nearest whole percent.
Historically, forbearance plans have reduced the incidence of our losses on
affected loans. However, given the uncertainty surrounding the long-term
economic impact of COVID-19, it is difficult to predict the ultimate effect of
COVID-19 related forbearances on our loss incidence. Whether a loan delinquency
will cure, including through modification, when forbearance ends will depend on
the economic circumstances of the borrower at that time. The severity of losses
associated with delinquencies that do not cure will depend on economic
conditions at that time, including home prices.
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Claims severity
Factors that impact claim severity include:
è economic conditions at that time, including home prices compared to home prices at the
time of placement of coverage
è exposure on the loan, which is the unpaid principal balance of the loan times our
insurance coverage percentage,
è length of time between delinquency and claim filing (which impacts the amount of
interest and expenses, with a longer period between default and claim filing generally
increasing severity), and è curtailments. As discussed in Note 8 - "Loss Reserves," our loss reserves estimates take into consideration trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend. An increase in loss mitigation activities, primarily third party acquisitions (sometimes referred to as "short sales"), has resulted in a decrease in the average claim paid and the average claim paid as a percentage of exposure in recent years. At the start of the COVID-19 pandemic, the level of claims received decreased. Claim activity and the average claims paid as a percentage of exposure has not yet returned to pre-COVID-19 levels. The magnitude and timing of the increases are uncertain. The majority of loans insured prior to 2009 (which represent 41% of the loans in the delinquency inventory) are covered by master policy terms that, except under certain circumstances, do not limit the number of years that an insured can include interest when filing a claim. Under our current master policy terms, an insured can include accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the insured must comply with its obligations under the terms of the applicable master policy.
Claims severity trend
Average exposure on Average number of
claim paid Average claim paid % Paid to exposure missed payments at
Period claim received date
Q4 2022 $ 38,903 $ 28,492 73.2 % 41
Q3 2022 37,625 23,461 62.4 % 46
Q2 2022 44,106 27,374 62.1 % 41
Q1 2022 38,009 27,662 72.8 % 45
Q4 2021 43,485 32,722 75.2 % 42
Q3 2021 42,468 36,138 85.1 % 34
Q2 2021 40,300 34,068 84.5 % 36
Q1 2021 46,807 36,725 78.5 % 34
Note: Table excludes material settlements. Settlements include amounts paid in settlement of disputes for claims paying
practices and/or commutations of policies.
See Note 8 - "Loss Reserves" to our consolidated financial statements and
" Critical Accounting Estimates " below for a discussion of our losses
incurred and claims paying practices (including curtailments).
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The length of time a loan is in the delinquency inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the following table.
Primary delinquent inventory - number of payments delinquent
2022 2021
3 payments or less 11,484 9,529
4 - 11 payments 8,026 9,208
12 payments or more (1) 6,877 14,553
Total 26,387 33,290
3 payments or less 44 % 28 %
4 - 11 payments 30 % 28 %
12 payments or more 26 % 44 %
Total 100 % 100 %
(1)Approximately 28% and 13% of the loans in the primary delinquency inventory
with 12 payments or more delinquent have at least 36 payments delinquent as of
December 31, 2022 , and 2021, respectively.
NET LOSSES AND
Net losses and LAE paid were flat in 2022 compared to 2021, while direct losses paid decreased slightly in 2022 compared to 2021. Our claims paid activity slowed at the start of the COVID-19 pandemic primarily due to forbearance and foreclosure moratoriums put in place. We expect net losses and LAE paid to increase, however, the magnitude and timing of the increases are uncertain.
The losses and LAE paid on reinsurance terminations decreased in 2022 when
compared to 2021. The decrease is primarily due to the losses and LAE
recoverable from reinsurers at time of termination of the 2015 and 2019 QSR
Transactions (effective
recoverable from reinsurers at time of termination of the 2017 and 2018 QSR
transaction (effective
for any incurred but unpaid losses are due to us from the reinsurer
The table below presents our net losses and LAE paid for 2022 and 2021.
Net losses and LAE paid
(in millions) 2022 2021 Total primary (excluding settlements)$ 35 $ 43 Claims paying practices and NPL settlements (1) 8 14 Pool - - Direct losses paid 43 57 Reinsurance (1) (2) Net losses paid 42 55 LAE 8 14 Net losses and LAE paid before terminations 50 69 Reinsurance terminations (2) (18) (36) Net losses and LAE paid$ 32 $ 33 Average claim paid$ 26,715 $ 34,956
(1)See Note 8 - "Loss Reserves" for additional information on our
settlements of disputes for claims paying practices and/or commutations of
policies
(2)See Note 9 - "Reinsurance" for additional information on our reinsurance
terminations
The primary average claim paid can vary materially from period to period based upon a variety of factors, including the local market conditions, average loan amount, average coverage percentage, the amount of time between delinquency and claim filing, and our loss mitigation efforts on loans for which claims are paid. The primary average RIF on delinquent loans as ofDecember 31, 2022 and 2021 and for the top 5 jurisdictions (based onDecember 31, 2022 delinquency inventory) appears in the following table.
Primary average RIF - delinquent loans
2022 2021
Florida $ 59,515 $ 56,227
Texas 53,364 51,037
Illinois 41,640 40,798
Pennsylvania 40,993 39,523
New York 74,760 74,836
All other jurisdictions 51,693 51,652
Total all jurisdictions $ 52,511 $ 51,887
The primary average RIF on all loans was $64,784 and $59,518 at December 31,
2022 and December 31, 2021 , respectively. The increase is primarily due to an
increase in loans from recent years which generally have larger loan balances.
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LOSS RESERVES
Our primary delinquency inventory was 26,387 atDecember 31, 2022 , representing a decrease of 21% fromDecember 31, 2021 . We also experienced a decrease in the average direct reserve per default as shown in the table below. The average direct reserve per default is influenced by the number of consecutive months a borrower has been delinquent. Generally, a defaulted loan with more missed payments is more likely to result in a claim. The number of delinquencies in inventory with twelve or more missed payments atDecember 31, 2022 decreased when compared to the prior year. (See Note 8 -"Loss Reserves ," table 8.4.) The average direct reserve per default is also impacted by the average RIF on delinquent loans as shown above. The gross reserves as ofDecember 31, 2022 , and 2021 appear in the table below. Gross loss reserves December 31, 2022 2021 Primary: Case reserves (In millions)$ 498 $ 795 IBNR and LAE 56 82 Total primary direct loss reserves 554 877 Ending delinquency inventory 26,387 33,290 Percentage of loans delinquent (default rate) 2.22 % 2.84 % Average direct reserve per default$ 20,994 $ 26,156 Primary claims received inventory included in ending delinquency inventory 267 211 Other gross loss reserves (2) (In millions) 4 7
(1)Since a number of our pool policies include aggregate loss limits and/or
deductibles, we do not disclose an average direct reserve per default for our
pool business.
(2)Other gross loss reserves includes direct and assumed reserves that are not
included within our primary loss reserves.
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The primary delinquency inventory for the top 15 jurisdictions (based on
in table the below.
Primary delinquency inventory by jurisdiction
2022 2021
Florida * 2,414 2,948
Texas 1,935 2,572
Illinois * 1,640 2,082
Pennsylvania * 1,525 1,672
New York * 1,399 1,674
California 1,336 1,852
Ohio * 1,322 1,458
Michigan 965 1,144
Georgia 954 1,272
New Jersey * 841 1,169
North Carolina 753 987
Maryland 719 929
Indiana 622 736
Virginia 582 766
Minnesota 573 725
All other jurisdictions 8,807 11,304
Total 26,387 33,290
Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure
process, which generally increases the amount of time it takes for a foreclosure to be completed.
The primary delinquency inventory by policy year atDecember 31, 2022 and 2021 appears in the following table. Primary delinquency inventory by policy year 2022 2021 2004 and prior 2,471 2,829 2004 and prior %: 9 % 8 % 2005 1,438 1,703 2006 2,388 2,928 2007 3,680 4,973 2008 811 1,278 2005 - 2008 % 32 % 33 % 2009 51 84 2010 31 56 2011 43 79 2012 72 143 2013 243 441 2014 633 1,055 2015 944 1,542 2009 - 2015 % 8 % 10 % 2016 1,249 2,004 2017 1,719 2,949 2018 2,060 3,412 2019 1,823 3,340 2020 2,558 3,308 2021 3,307 1,166 2022 866 - 2016 and later %: 51 % 49 % Total 26,387 33,290 On our primary business, the highest claim frequency years have typically been the third and fourth year after loan origination. However, the pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Deteriorating economic conditions can result in increasing claims following a period of declining claims. As ofDecember 31, 2022 , 80% of our primary RIF was written subsequent toDecember 31, 2019 , 85% of our primary RIF was written subsequent toDecember 31, 2018 , and 88% of our primary RIF was written subsequent toDecember 31, 2017 .
UNDERWRITING AND OTHER EXPENSES, NET
Underwriting and other expenses includes items such as employee compensation
costs, fees for professional and consulting services, depreciation and
maintenance expense, and premium taxes, and are reported net of ceding
commissions.
Underwriting and other expenses, net for 2022 increased to$236.7 million from$198.4 million in 2021. The increase was primarily due to higher expenses related to our technology investments, particularly in data and analytics, and an increase in pension expense. Pension expenses increased in 2022 as a result of settlement accounting charges during 2022. In 2023, we expect to incur settlement accounting charges as a result of lump sum settlements for employees who retired in the fourth quarter of 2022.MGIC Investment Corporation 2022 Form 10-K
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Year Ended December 31,
2022 2021
Underwriting expense ratio 25.2 % 20.6 %
The underwriting expense ratio is the ratio, expressed as a percentage, of the
underwriting and operating expenses, net and amortization of DAC of our combined
insurance operations (which excludes underwriting and operating expenses of our
non-insurance subsidiaries) to net premiums written. The underwriting expense
ratio increased in 2022 compared with 2021 due to an increase in underwriting
expenses and slight decreases in net premiums written.
LOSS ON DEBT EXTINGUISHMENT
In 2022, we recorded a loss on debt extinguishment of$40.2 million , related to the repurchases of a portion our 9% Debentures, the redemption of our 5.75% Senior Notes, and the repayment of the outstanding principal balance of the FHLB Advance. In 2021, we recorded a loss on debt extinguishment of$36.9 million associated with the repurchase of most of our 9% Debentures.
See Note 7 - "Debt" to our consolidated financial statements for a
discussion on our debt.
INTEREST EXPENSE
Interest expense for 2022 was
The decrease is due to the debt transactions discussed above.
INCOME TAX EXPENSE AND EFFECTIVE TAX RATE
Income tax provision and effective tax rate
(In millions, except rate) 2022 2021 Income before tax$ 1,090 $ 802 Provision for income taxes 225 167 Effective tax rate 20.6 % 20.8 % The increase in our provision for income taxes for 2022 compared to 2021 was primarily due to an increase in income before tax. Our effective tax rate for 2022 and 2021 approximated the federal statutory income tax rate of 21%.
See Note 12 - "Income Taxes" to our consolidated financial statements for a
discussion of our tax position.
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BALANCE SHEET REVIEW
The following sections focus on the assets and liabilities experiencing major
developments in 2022.
Consolidated balance sheets - Assets
As of December 31,
(in thousands) 2022 2021 % Change
Investments $ 5,424,688 $ 6,606,749 (18)
Cash and cash equivalents 327,384
284,690 15
Premiums receivable 58,000 56,540 3
Reinsurance recoverable on loss reserves 28,240 66,905 (58)
Reinsurance recoverable on paid losses 18,081
36,275 (50)
Deferred incomes taxes, net 124,769 - N/M Other assets 232,631 273,849 (15) Total Assets$ 6,213,793 $ 7,325,008 (15) INVESTMENT PORTFOLIO
The investment portfolio decreased to
(2021:
investment portfolio due to the increase in the prevailing market interest rates
and the reduction of debt outstanding.
The return we generate on our investment portfolio is an important component of our consolidated financial results. Our investment portfolio primarily consists of a diverse mix of highly rated fixed income securities. The investment portfolio is designed to achieve the following objectives: Operating Companies (1) Holding
Company
è Preserve PMIERs assets è Provide liquidity with minimized realized loss è Maximize total return with emphasis on è
Maintain highly liquid, low volatility assets
book yield, subject to our other
objectives
è Limit portfolio volatility è Maintain high credit quality
è Duration 3.5 to 5.5 years è
Duration maximum of 2.5 years
(1)Primarily MGIC
To achieve our portfolio objectives, our asset allocation considers the risk and return parameters of the various asset classes in which we invest. This asset allocation is informed by, and based on, the following factors: è economic and market outlooks; è diversification effects; è security duration; è liquidity; è capital considerations; and è income tax rates.
The average duration and embedded investment yield of our investment portfolio
as of
Portfolio duration and embedded investment yield
December 31,
2022 2021
Duration (in years) 4.3 4.5
Pre-tax yield (1) 3.0% 2.5%
After-tax yield (1) 2.5% 2.1%
(1)Embedded investment yield is calculated on a yield-to-worst basis.
The credit risk of a security is evaluated through analysis of the security's underlying fundamentals, including the issuer's sector, scale, profitability, debt coverage, and ratings. The investment policy guidelines limit the amount of our credit exposure to any one issue, issuer and type of instrument. The following table shows the security ratings of our fixed income investments as ofDecember 31, 2022 and 2021.MGIC Investment Corporation 2022 Form 10-K
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Fixed income security ratings
% of fixed income securities at fair value
Security Ratings (1)
Period AAA AA A BBB
December 31, 2022 18% 28% 34% 20%
December 31, 2021 18% 26% 36% 20%
(1)Ratings are provided by one or more of: Moody's, Standard & Poor's and Fitch
Ratings. If three ratings are available, the middle rating is used; if two FICO
scores are available, the lower of the two is used; if only one FICO score is
available, it is used.
Our investment portfolio was invested in comparable security types for the years
ended
to
our consolidated financial statements for additional disclosure on our
investment portfolio.
Investments outlook
TheFederal Open Market Committee ("FOMC") raised the federal funds rate seven times throughout 2022 from 0.25% to 4.5% as it weighed the ongoing economic impacts of tight labor markets, supply chain disruptions and other macroeconomic factors that elevated inflationary measures. In February, 2023 theFOMC increased the federal funds rate by an additional 0.25% and signaled continued restrictive monetary policy in response to inflationary pressures. Market yields have increased in response to theFOMC's actions, which has resulted in a decrease in our fixed income investment valuations. The actions of theFOMC and other ongoing macroeconomic factors could create significant economic uncertainty, such as increasing recessionary concerns, which may result in a widening of credit spreads. Market volatility resulting from these factors may continue to impact our investment valuations and returns.
We seek to manage our exposure to interest rate risk and volatility by
maintaining a diverse mix of high-quality securities with an intermediate
duration profile.
While higher interest rates may adversely impact the fair values of our fixed income investments, they present a near-term opportunity for investment into securities with yields in excess of the book yield on our portfolio. Increases in market-based portfolio yields are expected to result in higher net investment income in future periods. In addition to fixed income securities, we also hold cash and cash equivalents which yield returns that trend with changes in the federal funds rate. As ofDecember 31, 2022 , approximately 6% of the fair value of our investment portfolio consisted of securities referencing LIBOR. As discussed in our risk factor titled "The Company may be adversely impacted by the transition from LIBOR as a reference rate," theICE Benchmark Administration , the administrator of LIBOR, will cease publishing all USD LIBOR tenors onJune 30, 2023 .
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to$327.4 million , as ofDecember 31, 2022 (2021:$284.7 million ), as net cash generated from operating was substantially used in financing activities.
DEFERRED INCOME TAXES
Our net deferred tax asset was$124.8 million atDecember 31, 2022 and is separately stated in our consolidated balance sheets as Deferred income taxes, net. Our net deferred income tax liability was$39.4 million atDecember 31, 2021 and is included as a component of Other liabilities in our consolidated balance sheets. The change in our deferred income tax asset and liability was primarily due to the tax effect of unrealized losses generated by the investment portfolio during 2022. We owned$661.7 million and$426.3 million of tax and loss bonds atDecember 31, 2022 andDecember 31, 2021 , respectively. See Note
12 - " Income Tax es " to our consolidated financial
statements for additional disclosure on the components of our deferred tax
assets and liabilities.
REINSURANCE RECOVERABLE ON PAID LOSSES
Reinsurance recoverable on paid losses decreased to$18.1 million atDecember 31, 2022 (2021:$36.3 million ). The decrease in the reinsurance recoverable on paid losses is primarily due from the losses recoverable from reinsurers at time of termination of the 2015 and 2019 QSR Transactions (effectiveDecember 31, 2022 ), compared to the losses recoverable from reinsurers at time of termination of the 2017 and 2018 QSR transaction (effectiveDecember 31, 2021 ). In a reinsurance termination, amounts for any incurred but unpaid losses are due to us from the reinsurers.
OTHER ASSETS
Other assets decreased to$111 million as ofDecember 31, 2022 (2021:$134 million ), primarily driven by a change in the net funded status of our employee benefit plans. See Note 11 - "Benefit Plans" to our consolidated financial statements for additional disclosure on our employee benefit plans. MGIC Investment Corporation 2022 Form 10-K
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Consolidated balance sheets - Liabilities and equity
As of December 31,
(In thousands) 2022 2021 % Change
Liabilities
Loss reserves $ 557,988 $ 883,522 (37)
Unearned premiums 195,289 241,690 (19)
Long-term debt 662,810 1,146,712 (42)
Other liabilities 154,966 191,702 (19)
Total Liabilities $ 1,571,053 $ 2,463,626 (36)
Shareholders' equity
Common stock $ 371,353 $ 371,353 -
Paid-in capital 1,798,842 1,794,906 -
Treasury stock (1,050,238) (675,265) 56
AOCI, net of tax (481,511) 119,697 (502)
Retained earnings 4,004,294 3,250,691 23
Total $ 4,642,740 $ 4,861,382 (4)
LOSS RESERVES AND REINSURANCE RECOVERABLE ON LOSS RESERVES
Our loss reserves include estimates of losses and settlement expenses on (1) loans in our delinquency inventory (known as case reserves), (2) IBNR delinquencies, and (3) LAE. Our gross reserves are reduced by reinsurance recoverable on loss reserves to calculate a net reserve balance. Loss reserves decreased to$558.0 million as ofDecember 31, 2022 , from$883.5 million ofDecember 31, 2021 . Reinsurance recoverables on loss reserves were$28.2 million and$66.9 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. The decrease in loss reserves from 2022 to 2021 is primarily due to favorable development of$404.1 million on previously received delinquency notices, partially offset by loss reserves established on new delinquency notices. The reinsurance recoverable on loss reserves is impacted by the change in direct reserves and the percentage of our delinquency inventory covered by reinsurance transactions. LONG-TERM DEBT Our long-term debt decreased to$662.8 million as ofDecember 31, 2022 from$1,146.7 million as ofDecember 31, 2021 as we paid down our long-term debt in 2022. We repurchased$89.1 million in aggregate principal amount of our 9% Debentures, repaid the outstanding balance of the FHLB Advance of$155.0 million and we redeemed the$242.3 million of aggregate principal outstanding on our 5.75% Senior Notes due in 2023.
UNEARNED PREMIUM
Our unearned premium decreased to$195.3 million as ofDecember 31, 2022 from$241.7 million as ofDecember 31, 2021 primarily due to the run-off of our existing portfolio of single premium policies outpacing the level of NIW from single premium policies. OTHER LIABILITIES
Other liabilities decreased to
liability, accrual for premium refunds, and interest payable. These were
partially offset by an increase in our liability for pension obligation.
SHAREHOLDER'S EQUITY
The decrease in shareholders' equity represents a decrease in the fair value of
our investments portfolio discussed above, repurchases of our common stock, and
dividends paid to shareholders, partially offset by net income in 2022.
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LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED CASH FLOW ANALYSIS
We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our insurance operations and income earned on our investment portfolio, less amounts paid for claims, interest expense and operating expenses, (2) investing cash flows related to the purchase, sale and maturity of investments and purchases of property and equipment and (3) financing cash flows generally from activities that impact our capital structure, such as changes in debt and shares outstanding, and dividend payments. The following table summarizes these three cash flows on a consolidated basis for the last two years.
Summary of consolidated cash flows
Years ended December 31,
(In thousands) 2022 2021
Total cash provided by (used in):
Operating activities $ 650,012 $ 696,317
Investing activities 410,485 (160,749)
Financing activities (1,032,542) (527,290)
Increase (decrease) in cash and cash equivalents and
restricted cash and cash equivalents
$ 27,955 $ 8,278 Operating activities
The following list highlights the major sources and uses of cash flow from
operating activities:
Sources + Premiums received + Loss payments from reinsurers + Investment income Uses - Claim payments - Premium ceded to reinsurers - Interest expense - Operating expenses - Tax payments Our largest source of cash is from premiums received from our insurance policies, which we receive on a monthly installment basis for most policies. Premiums are received at the beginning of the coverage period for single premium and annual premium policies. Our largest cash outflow is generally for claims that arise when a delinquency results in an insured loss. Based on historical experience, we expect our future claim payments associated with established case loss reserves to pay out at or within 5 years, with the majority of future claim payments made within one to three years. Our claims paid activity slowed at the start of the COVID-19 pandemic primarily due to forbearance and foreclosure moratoriums put in place. We expect net losses and LAE paid to increase, however, the magnitude and timing of the increases are uncertain.
We invest our net cash flow in various investment securities that earn interest.
We also use cash to pay for our ongoing expenses such as salaries, debt
interest, professional services and occupancy costs.
We also have purchase obligations totaling approximately
consist primarily of contracts related to our continued investment in our
information technology infrastructure in the normal course of business. The
majority of these obligations are under contracts that give us cancellation
rights with notice. In the next twelve months we anticipate we will pay
approximately
In connection with our reinsurance transactions, we cede, or pay out, part of the premiums we receive to our reinsurers and collect cash when claims subject to our reinsurance coverage are paid. Net cash provided by operating activities in 2022 decreased compared to 2021 primarily due to an increase in income taxes paid, increase in underwriting and operating expenses paid, a decrease in investment income collected, and a decrease in premiums received. This was partially offset by a decrease in losses paid, net of reinsurance settlements and a decrease in interest payments.
Investing activities
The following list highlights the major sources and uses of cash flow from
investing activities:
Sources + Proceeds from sales of investments + Proceeds from maturity of fixed income securities Uses - Purchases of investments - Purchases of property and equipment We maintain an investment portfolio that is primarily invested in a diverse mix of fixed income securities. As ofDecember 31, 2022 , our portfolio had a fair value of$5.4 billion , a decrease of$1.2 billion , or 17.9% fromDecember 31, 2021 . Net cash flows provided by investing activities in 2022 primarily reflect sales and maturities of fixed income and equity securities during the year that exceeded purchases as proceeds were used in financing activities. Net cash used in investing activities in 2021 primarily reflects purchases of fixed income and equity securities during the year that exceeded sales of such securities as cash from operations was available for additional investment. In addition to investment portfolio activities, our investing activities included investment in our technology infrastructure to enhance our ability to conduct business and execute our strategies.MGIC Investment Corporation 2022 Form 10-K
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Financing activities
The following list highlights the major sources and uses of cash flow from
financing activities:
Sources
+ Proceeds from debt and/or common stock issuances
Uses
- Repayment/repurchase of debt
- Repurchase of common stock
- Payment of dividends to shareholders
- Payment of withholding taxes related to share-based compensation net share settlement
Net cash flows used in financing activities in 2022 primarily reflects repurchase of our common stock, repayment of our 5.75% Notes and our FHLB Advance, the repurchase of a most of our 9% Debentures and payment of dividends to shareholders. Net cash flows used in financing activities in 2021 primarily reflect repurchases of our common stock, repurchase of a portion of our 9% Debentures, payment of dividends to shareholders and the payment of withholding taxes related to share-based compensation net share settlement.
For a further discussion of matters affecting our cash flows, see " Balance
Sheet Review " above and "Debt at our Holding Company and Holding Company
Liquidity" below.
CAPITALIZATION Capital Risk
Capital risk is the risk of adverse impact on our ability to comply with capital
requirements (regulatory and GSE) and to maintain the level, structure and
composition of capital required for meeting financial performance objectives.
A strong capital position is essential to our business strategy and is important to maintain a competitive position in our industry. Our capital strategy focuses on long-term stability, which enables us to build and invest in our business, even in a stressed environment.
Our capital management objectives are to:
è influence and ensure compliance with capital requirements,
è maintain access to capital and reinsurance markets,
è manage our capital to support our business strategies and the competing priorities of
relevant stakeholders
è assess appropriate uses for capital that cannot be deployed in support of our business
strategies, including the size and form of capital return to shareholders, and
è support business opportunities by enabling capital flexibility and efficiently using
company resources.
These objectives are achieved through ongoing monitoring and management of our
capital position, mortgage insurance portfolio stress modeling, and a capital
governance framework. Capital management is intended to be flexible in order to
react to a range of potential events. The focus we place on any individual
objective may change over time due to factors that include, but are not limited
to, economic conditions, changes at the GSEs, competition, and alternative
transactions to transfer mortgage risk.
Capital Structure
The following table summarizes our capital structure as ofDecember 31, 2022 , and 2021. (In thousands, except ratio) 2022 2021 Common stock, paid-in capital, retained earnings, less treasury stock$ 5,124,251 $ 4,741,685 Accumulated other comprehensive loss, net of tax (481,511) 119,697 Total shareholders' equity 4,642,740 4,861,382 Long-term debt, par value 671,086 1,157,500 Total capital resources$ 5,313,826 $ 6,018,882 Ratio of long-term debt to shareholders' equity 14.5 % 23.8 %
The decrease in shareholders' equity in 2022 represents a decrease in the fair
value of our investments portfolio, repurchases of our common stock, and
dividends paid, partially offset by net income in 2022. See Note 13 -
"Shareholders' Equity" for further information.
DEBT AT OUR HOLDING COMPANY AND HOLDING COMPANY LIQUIDITY
Debt obligations - holding company
The 5.25% Notes and 9% Debentures are obligations of our holding company,MGIC Investment Corporation , and not of its subsidiaries. We have no debt obligations due within the next twelve months. As ofDecember 31, 2022 , our 5.25% Notes had$650 million of outstanding principal due in 2028 and our 9% Debentures had$21.1 million of outstanding principal due inApril 2063 . In 2022, we repurchased$89.1 aggregate principal of our 9% debentures, redeemed the outstanding principal balance on our 5.75% Notes, and repaid the outstanding balance of our FHLB advance. The 9% Debentures are a convertible debt issuance. Subject to certain limitations and restrictions, holders of the 9% Debentures may convert their notes into shares of our common stock at their option prior to certain dates prescribed under the terms of their issuance, in which case our corresponding obligation will be eliminated prior to the scheduled maturity.
See Note 7 - "Debt" for further information on our outstanding debt
obligations and transactions impacting our consolidated financial statements in
2022 and 2021.
Liquidity analysis - holding company
As ofDecember 31, 2022 , andDecember 31, 2021 , we had approximately$647 million and$663 million , respectively, in cash and investments at our holding company. These resources are maintained primarily to service our debt interest expense, pay debt maturities, repurchase shares, pay dividends to shareholders, and to settle intercompany obligations. While these assets are held, we generate investment income that serves to offset a portion of our cash requirements. The payment of dividends from MGIC are the principal source of holding company cash inflow and their payment is restricted by insurance regulation. See Note 14 - "Statutory Information" to our consolidated financial statement for additional information aboutMGIC Investment Corporation 2022 Form 10-K
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MGIC's dividend restrictions. The payment of dividends from MGIC is also influenced by our view of the appropriate level of excess PMIERs Available Assets to maintain. Raising capital in the public markets is another potential source of holding company liquidity. The ability to raise capital in the public markets is subject to prevailing market conditions, investor demand for the securities to be issued, and our deemed creditworthiness. Over the next twelve months the principal demand on holding company resources will be interest payments on our 5.25% Notes and 9% Debentures approximating$36.0 million , based on the debt outstanding atDecember 31, 2022 . We believe our holding company has sufficient sources of liquidity to meet its payment obligations for the foreseeable future. During 2022 and 2021, we used approximately$386 million and$291 million respectively, of available holding company cash to repurchase shares of our common stock. ThroughFebruary 17, 2023 we used approximately$42.6 million of available holding company cash to repurchase shares of our common stock. The repurchase programs may be suspended or discontinued at any time. See
"Overview - Capital" of this MD&A for a discussion of our share repurchase
programs.
We may use additional holding company cash to repurchase additional shares or to repurchase our outstanding debt obligations. Such repurchases may be material, may be made for cash (funded by debt) and/or exchanges for other securities, and may be made in open market purchases (including through 10b5-1 plans), privately negotiated acquisitions or other transactions. See "Overview-Capital" of this MD&A for a discussion of our share repurchase programs. In 2022, we used$110.9 million to pay cash dividends to shareholders. OnJanuary 24, 2023 , our Board of Directors declared a quarterly cash dividend of$0.10 per common share to shareholders of record onFebruary 17, 2023 , payable onMarch 2, 2023 .
Our holding company cash and investments decreased
as of
Significant cash and investments inflows during the year:
•$800 million dividends received from MGIC,
•$94 million intercompany tax receipts, and
•$8 million of investment income.
Significant cash outflows during the year:
•$386 million of net share repurchase transactions,
•$248 million of 5.75% Notes redemption,
•$121 million of 9% Debenture repurchases,
•$111 million of cash dividends paid to shareholders, and
•$53 million of interest payments on our 5.75% Notes, 5.25% Notes, and 9%
Debentures.
The net unrealized losses on our holding company investment portfolio were
approximately
modified duration of approximately 1.1 years.
Scheduled debt maturities beyond the next twelve months include$650 million of our 5.25% Notes in 2028 and$21.1 million of our 9% Debentures in 2063. The principal amount of the 9% Debentures is currently convertible, at the holder's option, at a conversion rate, which is subject to adjustment, of 77.962 common shares per$1,000 principal amount of debentures. This represents a conversion price of approximately$12.83 per share. We may redeem the 9% Debentures in whole or in part from time to time, at our option, at a redemption price equal to 100% of the principal amount of the 9% Debentures being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds$16.67 (adjusted pro rata for changes in the conversion price) for at least 20 of the 30 trading days preceding notice of the redemption. We expect to provide a redemption notice for the Debentures when this requirement is met and would expect the majority of the holders of the Debentures would elect to convert their Debentures into common stock before the redemption date. Under the terms of the Debenture, we may pay cash in lieu of issuing shares. See Note 7 - "Debt" to our consolidated financial statements for additional information about our long term debt. The description in Note 7 - "Debt"
to
our consolidated financial statements is qualified in its entirety by the terms of the notes and debentures. The terms of our 9% Debentures are contained in the Indenture dated as ofMarch 28, 2008 , between us andU.S. Bank National Association filed as an exhibit to our Form 10-Q filed with theSEC onMay 12, 2008 . The terms of our 5.25% Notes are contained in a Supplemental Indenture, dated as ofAugust 12, 2020 , between us andU.S. Bank National Association , as trustee, which is included as an exhibit to our 8-K filed with theSEC onAugust 12, 2020 , and in the Indenture dated as ofOctober 15, 2000 between us and the trustee.
Although not anticipated in the near term, we may also contribute funds to our
insurance operations to comply with the PMIERs or the State Capital
Requirements. See " Overview - Capital " above for a discussion of these
requirements.
DEBT AT SUBSIDIARIES
MGIC is a member of the FHLB, which provides MGIC access to an additional source of liquidity via a secured lending facility. In the first quarter of 2022, we prepaid the outstanding principal balance of$155.0 million on the FHLB Advance and incurred a prepayment fee of$1.3 million .
Capital Adequacy
PMIERs
We operate under each of the GSE's PMIERs. Refer to " Overview - Capital -
GSEs " of this MD&A for further discussion of PMIERs.
As ofDecember 31, 2022 , MGIC's Available Assets under PMIERs totaled approximately$5.7 billion , an excess of approximately$2.3 billion over its Minimum Required Assets; and MGIC is in compliance with the requirements of the PMIERs and eligible to insure loans delivered to or purchased by the GSEs. Maintaining a sufficient level of excess Available Assets will allow MGIC to remain in compliance with the PMIERs financial requirements.MGIC Investment Corporation 2022 Form 10-K
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The table below presents the PMIERS capital credit for our reinsurance
transactions.
PMIERs - Reinsurance Credit
December 31,
(In millions) 2022 2021
QSR Transactions $ 1,228 $ 1,129
Home Re Transactions 948 765
Traditional XOL Transactions 138 -
Total capital credit for Reinsurance Transactions
Our 2023 QSR transaction terms are generally comparable to our existing QSR
transactions and will also provide PMIERs capital credit. Refer to Note 9 -
"Reinsurance" to our consolidated financial statements for additional
information on our reinsurance transactions.
The PMIERs generally require us to hold significantly more Minimum Required
Assets for delinquent loans than for performing loans and the Minimum Required
Assets required to be held increases as the number of payments missed on a
delinquent loan increases.
We plan to continuously comply with the PMIERs through our operational
activities or through the contribution of funds from our holding company,
subject to demands on the holding company's resources, as outlined above.
RISK-TO-CAPITAL
We compute our risk-to-capital ratio on a separate company statutory basis, as well as on a combined insurance operations basis. The risk-to-capital ratio is our net RIF divided by our policyholders' position. Our net RIF includes both primary and pool RIF and excludes risk on policies that are currently in default and for which case loss reserves have been established and the risk covered by reinsurance. The risk amount includes pools of loans with contractual aggregate loss limits and without these limits. MGIC's policyholders' position consists primarily of statutory policyholders' surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to a contingency reserve of approximately 50% of earned premiums. These contributions must generally be maintained for a period of ten years. However, with regulatory approval a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of earned premiums in a calendar year.
The table below presents MGIC's risk-to-capital calculation.
Risk-to-capital - MGIC
December 31,
(In millions, except ratio) 2022 2021
RIF - net (1) $ 56,292 $ 50,298
Statutory policyholders' surplus
Statutory contingency reserve
4,597 4,056
Statutory policyholders' position
Risk-to-capital
10.2:1 9.5:1 (1)RIF - net, as shown in the table above, is net of reinsurance and exposure on policies currently delinquent$1.4 billion atDecember 31, 2022 and$1.8 billion atDecember 31, 2021 and for which case loss reserves have been established. The 2022 increase in MGIC's risk-to-capital was due to an increase in RIF, net of reinsurance, partially offset by an increase in our statutory policyholder's position. The increase in statutory policyholders' position was primarily due to an increase in statutory contingency reserves and net income during 2022, offset by dividends paid to our holding company of$800 million . The increase in our RIF, net of reinsurance, was primarily due to an increase in our IIF and the termination of our 2015 and 2019 QSR Transaction, offset by a decrease in our reduction to risk on policies that are currently in default for which loss reserves have been established. Our risk-to-capital ratio will increase if the percentage increase in capital exceeds the percentage decrease in insured risk.
For additional information regarding regulatory capital see Note 14 -
"Statutory Information" to our consolidated financial statements as well as
our risk factor titled "State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted basis" in Item 1A .
Financial Strength Ratings
MGIC financial strength ratings
Rating Agency Rating Outlook Moody's Investors Service A3 Stable
A.M. Best
A- Stable
MAC financial strength ratings
Rating Agency Rating Outlook A.M. Best A- Stable
For further information about the importance of MGIC's ratings and rating
methodologies, 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" in Item 1A.
MGIC Investment Corporation 2022 Form 10-K
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CRITICAL ACCOUNTING ESTIMATES
The accounting estimate described below requires significant judgments and
estimates in the preparation of our consolidated financial statements.
LOSS RESERVES
The estimation of case loss reserves is subject to inherent uncertainty and requires significant judgement by management. Changes to our estimates could result in a material impact to our consolidated results and financial position, even in a stable economic environment.
Case Reserves
Case reserves are established for estimated insurance losses when notices of delinquency on insured mortgage loans are received. Such loans are referred to as being in our delinquency inventory. For reporting purposes, we consider a loan delinquent when it is two or more payments past due and has not become current or resulted in a claim payment. Even though the accounting standard, ASC 944, regarding accounting and reporting by insurance entities specifically excluded mortgage insurance from its guidance relating to loss reserves, we establish loss reserves using the general principles contained in the insurance standard. However, consistent with industry standards for mortgage insurers, we do not establish case loss reserves for future claims on insured loans which are not currently delinquent.
We establish reserves using estimated claim rates and claim severities in
estimating the ultimate loss.
The estimated claim rates and claim severities are used to determine the amount we estimate will actually be paid on the delinquent loans as of the reserve date. If a policy is rescinded we do not expect that it will result in a claim payment and thus the rescission generally reduces the historical claim rate used in establishing reserves. In addition, if a loan cures its delinquency, including through a successful loan modification, the cure reduces the historical claim rate used in establishing reserves. To establish reserves, we utilize a reserving model that continually incorporates historical data into the estimated claim rate. The model also incorporates an estimate for the amount of the claim we will pay, or severity. The severity is estimated using the historical percentage of our claims paid compared to our loan exposures, as well as the RIF of the loans currently in default. We do not utilize an explicit rescission rate in our reserving methodology, but rather our reserving methodology incorporates the effects rescission activity has had on our historical claim rate and claim severities. We review recent trends in the claim rate, claim severity, levels of defaults by geography and average loan exposure. As a result, the process to determine reserves does not include quantitative ranges of outcomes that are reasonably likely to occur. The claim rates and claim severities are affected by external events, including actual economic conditions such as changes in unemployment rates, interest rates or housing values, pandemics and natural disasters. Our estimation process does not include a correlation between claim rates and claim severities to projected economic conditions such as changes in unemployment rates, interest rates or housing values. Our experience is that analysis of that nature would not produce reliable results as the change in one economic condition cannot be isolated to determine its specific effect on our ultimate paid losses because each economic condition is also influenced by other economic conditions. Additionally, the changes and interactions of these economic conditions are not likely homogeneous throughout the regions in which we conduct business. Each economic condition influences our ultimate paid losses differently, even if apparently similar in nature. Furthermore, changes in economic conditions may not necessarily be reflected in our loss development in the quarter or year in which the changes occur. Actual claim results generally lag changes in economic conditions by at least nine to twelve months.
Our estimates are also affected by any agreements we enter into regarding our
claims paying practices as discussed in Note 17 - "Litigation and
Contingencies" to our consolidated financial statements.
Our estimate of loss reserves is sensitive to changes in claim rate and claim severity; it is possible that even a relatively small change in our estimated claim rate or claim severity could have a material impact on reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as ofDecember 31, 2022 , assuming all other factors remain constant, a$1,000 increase/decrease in the average claim severity reserve factor would change the reserve amount by approximately +/-$10 million . A one percentage point increase/decrease in the average claim rate reserve factor would change the reserve amount by approximately +/-$15 million . Historically, it has not been uncommon for us to experience variability in the development of the loss reserves through the end of the following year at this level or higher, as shown by the historical development of our loss reserves in the table below:
Historical development of loss reserves
Losses incurred related to
prior
(In thousands) years (1) Reserve at end of prior year 2022 (404,130) 883,522 2021 (60,015) 880,537 2020 19,604 555,334 2019 (71,006) 674,019 2018 (167,366) 985,635
(1)A negative number for a prior year indicates a redundancy of loss reserves. A
positive number for a prior year indicates a deficiency of loss reserves.
See Note 8 - "Loss Reserves" to our consolidated financial statements for a
discussion of recent loss development.
MGIC Investment Corporation 2022 Form 10-K | 74
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