At December 31, 2020, we had one office space lease in the United States which expires in 2021 and which requires monthly rental payments that in the aggregate are immaterial.
Net income $ 446,093 $ 673,763 $ 670,097 $ 355,761 $ 342,517
Direct primary IIF $ 246,572 $ 222,295 $ 209,707 $ 194,941 $ 182,040
The following is a discussion and analysis of the financial conditions and results of operations for the year ended December 31, 2020 and 2019, including comparisons between 2020 and 2019. Comparisons between 2019 and 2018 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 ended December 31, 2019 filed with the SEC.
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 the Securities and Exchange Commission.
Through our subsidiary, MGIC, we are a leading provider of PMI in the United States, as measured by $246.6 billion of primary IIF on a consolidated basis at December 31, 2020.
Adjusted net operating income per diluted share $ 1.32 $ 1.84 (28) %
(1)See "Explanation and Reconciliation of our use of Non-GAAP Financial Measures."
Net investment income decreased due to lower investment yields, partially offset by an increase in the investment portfolio balance.
Losses incurred, net were $364.8 million, compared to $118.6 million the prior year. The increase reflects an increase in new delinquency notices due to the COVID-19 pandemic and the current macroeconomic environment. The increase in losses incurred was also due to adverse development of $19.6 million in 2020 compared to favorable development of $71.0 million in 2019, which was net of the non-recurring recognition of a probable loss of $23.5 million for litigation of our claims paying practices. In 2020, the COVID-19 pandemic began to affect the U.S. economy and we received new delinquency notices of 106,099 compared to 54,239 for the prior year. This was partially offset by an increase in cures received in latter half of 2020 as the economy improved.
Mortgage interest rates have been lower on average in 2020 compared to 2019. The lower mortgage rates contributed to a material increase in home purchase and refinance activity in 2020. The homeownership rate increased slightly in 2020. The continued favorable housing trends and the increase in refinance transactions resulted in a significant increase in our NIW, from $112.1 billion in 2020 when compared to $63.4 billion in 2019.
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
In recent years much of the changes in premium pricing practices has centered on the decrease in the use of our standard rate card as published on our website, www.mgic.com/rates, the increased use of "risk-based pricing systems" that utilize a spectrum of filed rates that allow for formulaic, risk-based pricing based on multiple attributes that may be quickly adjusted within certain parameters, and customized rate plans both of which typically have rates lower than the standard rate card. We expect our direct premium yield to continue to decline as older policies with higher premium rates run off, and new insurance policies with lower premium rates are written.
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.
Refer to "Mortgage Insurance Portfolio" for additional discussion of the 2020 business environment and the impact it had on operating measures including NIW, IIF and RIF.
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 the more restrictive PMIERs, MGIC's Available Assets under PMIERs totaled $5.3 billion, an excess of $1.8 billion over its Minimum Required Assets at December 31, 2020.
Our outlook for 2021 should be viewed against the backdrop of the business environment discussed above.
Our NIW is affected by total mortgage originations, the percentage of total mortgage originations using private mortgage insurance (the "PMI penetration rate"), and our market share within the PMI industry. As of late January 2021, the total mortgage origination forecasts from the GSEs and MBA indicate average mortgage originations of $3.3 trillion in 2021, compared to an average estimated $4 trillion in 2020. Purchase originations are expected to increase in 2021, compared to 2020, while refinance transactions are expected to decrease in 2021. Our NIW from refinance originations is expected to be lower in 2021 compared to a strong 2020. In 2020, the majority of the refinances were from recent books that experienced only a modest level of price appreciation. Therefore, many of the refinanced loans in 2020 required mortgage insurance. We expect the PMI penetration rate on refinance transactions to decline in 2021.
Investment income. Net investment income is a material contributor to our results of operations. We expect net investment income in 2021 to be comparable to 2020. We expect our invested assets will remain relatively flat. The amount of investment income will be impacted by the change in the yield we can earn on investments.
Losses. Losses incurred, net in 2020 were $364.8 million, an increase of $246.2 million over the prior year losses incurred of $118.6 million. The increase was primarily due to an increase in the delinquency inventory due to the impacts of the COVID-19 pandemic, including unemployment resulting from initiatives intended to reduce the transmission of COVID-19. We expect 2021 losses incurred to be lower than the comparable amount for 2020 as we expect to receive fewer new delinquency notices in 2021. 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 delinquencies on our loss incidence. The foreclosure moratoriums and forbearance plans in place have decreased our losses and LAE paid in 2020. As foreclosure moratoriums and forbearance plans end, we expect to see an increase in claims received and claims paid, but the magnitude and timing of the increases are uncertain.
As of December 31, 2020, we had approximately 339 million shares of common stock outstanding.
Forbearance for federally-insured mortgages allows for mortgage payments to be suspended for up to 360 days; an initial forbearance period of up to 180 days and, if requested by the borrower following contact by the servicers, an extension of up to 180 days. The servicer of the loan must begin attempts to contact the borrower no later than 30 days prior to the expiration of any forbearance plan term and must continue outreach attempts until appropriate contact is made or the forbearance plan term has expired.
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 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 quota share reinsurance subjects us to counterparty credit risk. The calculated credit for excess of loss reinsurance 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. The total credit under the PMIERS for risk ceded under our reinsurance transactions is subject to a modest reduction. Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future transactions that we receive under existing transactions.
At December 31, 2020, MGIC’s risk-to-capital ratio was 9.2 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $3.2 billion above the required MPP of $1.7 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.
In 2019, the U.S. Treasury Department (“Treasury”) released the “Treasury Housing Reform Plan” (the “Plan”). The Plan recommends administrative and legislative reforms for the housing finance system, with such reforms intended to achieve the goals of ending conservatorships of the GSEs; increasing competition and participation by the private sector in the mortgage market including by authorizing the FHFA to approve additional guarantors of conventional mortgages in the secondary market, simplifying the qualified mortgage (“QM”) rule of the Consumer Financial Protection Bureau (“CFPB”), transferring risk to the private sector, and eliminating the GSE Patch (discussed below); establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and
The GSE capital framework adopted in November 2020 establishes a post-conservatorship regulatory capital framework intended to ensure that the GSEs operate in a safe and sound manner. In January 2021, the GSEs' Preferred Stock Purchase Agreements ("PSPAs") were amended to allow the GSEs to continue to retain earnings until they satisfy the requirements of the 2020 GSE capital framework. In addition, a proposed rule issued by the FHFA in December 2020 would require minimum funding requirements and new liquidity standards.
In December 2020, the CFPB adopted a rule that will eliminate the GSE Patch effective upon the earlier of the GSEs’ exit from conservatorship or July 1, 2021. The GSE Patch expanded the definition of QM under the Truth in Lending Act (Regulation Z) ("TILA") to include mortgages eligible to be purchased by the GSEs, even if the mortgages do not meet the debt-to-income ("DTI") ratio limit of 43% that is included in the standard QM definition. Originating a QM may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay. Not all future loans with DTI ratios greater than 43% will be affected by the expiration of the GSE Patch. The new QM definition that becomes effective March 1, 2021, continues to require lenders to consider a borrower's DTI ratio; however, it replaces the DTI ratio cap with a pricing threshold that would exclude from the definition of QM a loan whose annual percentage rate (“APR”) exceeds the average prime offer rate for comparable loans by 2.25 percentage points or more.
The Treasury’s Plan indicated that the FHFA and HUD should develop and implement a specific understanding as to the appropriate roles and overlap between the GSEs and FHA, including with respect to the GSEs’ acquisitions of high LTV ratio and high DTI ratio loans. In connection with the 2021 amendment to the PSPAs, the GSEs must limit the acquisition of certain loans with multiple higher risk characteristics related to LTV, DTI and credit score, to levels indicated to be their current levels at the time of the amendment.
The COVID-19 pandemic had a material impact on our 2020 financial results. The increased level of unemployment and economic uncertainty resulting from the COVID-19 pandemic, initiatives to reduce the transmission of COVID-19 (including "shelter-in-place" restrictions), as well as COVID-19-related illnesses and deaths, had a material impact on our financial results, as we reserved for losses associated with the increased delinquency notices received. While uncertain, the future impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may also be material. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the level of unemployment, and the impact of past and future government initiatives and actions taken by the GSEs (including mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce its transmission.
•Additional cash payments to individuals provided for in the Consolidated Appropriations Act signed into law in December 2020.
•For those mortgages that are not subject to forbearance, a suspension of foreclosures and evictions until at least March 31, 2021, on mortgages purchased or securitized by the GSEs.
•An extension of the maximum duration for unemployment benefits, generally through March 14, 2021.
•"Paycheck Protection Program" to provide small businesses with funds to pay certain payroll and other costs.
As noted above, the servicer of the loan must begin attempts to contact the borrower no later than 30 days prior to the expiration of any forbearance plan term and must continue outreach attempts until appropriate contact is made or the forbearance plan term has expired. In certain circumstances, the servicer may be unable to contact the borrower and the forbearance plan will expire after the first 180-day plan. A delinquent mortgage for which the borrower was unable to be contacted and that is not in a forbearance plan may be more likely to result in a claim than a delinquent loan in a forbearance plan. The substantial majority of our NIW was delivered to or purchased by the GSEs. While servicers of some non-GSE loans may not be required to offer forbearance to borrowers, we allow servicers to apply GSE loss mitigation programs to non-GSE loans. In addition, the CFPB requires substantial loss mitigation efforts be made prior to servicers initiating foreclosure, therefore, servicers of non-GSE loans may have an incentive to offer forbearance or deferment.
62% of our delinquency inventory was reported to us as in forbearance plans. Whether a loan's delinquency will cure, including through modification, when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. The severity of losses associated with loans whose delinquencies do not cure will depend on economic conditions at that time, including home prices.
As shown in the table below, approximately 8% of our total primary RIF has been modified as of December 31, 2020. Based on loan count at December 31, 2020, the loans associated with 94% of all HARP modifications and 77% of HAMP and other modifications were current.
As noted above, the COVID-19 pandemic may adversely affect our future business, results of operations, and financial condition. The extent of the adverse effects will depend on the duration and continued severity of the COVID-19 pandemic and its effects on the U.S. economy and housing market. We have addressed some of the potential impacts throughout this document.
•NIW, which increases IIF. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages from the FHA, the VA, other mortgage insurers, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance. NIW does not include loans previously insured by us that are modified, such as loans modified under HARP.
•Cancellations, which reduce IIF. Cancellations due to refinancing 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. However, for loans that have utilized HARP, the initial ten-year period resets as of the date of the HARP transaction. The remainder of our monthly and annual premiums are under premium plans for which premiums are determined by a fixed percentage of the loan’s amortizing balance over the life of the policy.
the current period compared to an earlier period is a factor that will increase (when the average in force is higher) or reduce (when it is lower) premiums written and earned in the current period, although this effect may be enhanced (or mitigated) by differences in the average premium rate between the two periods, as well as by premiums that are returned or expected to be returned in connection with claim payments and rescissions, and premiums ceded under reinsurance transactions. Also, NIW and cancellations during a period will generally have a greater effect on premiums earned in subsequent periods than in the period in which these events occur.
•The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.
•The size of loans insured, with higher average loan amounts tending to increase losses incurred.
•The percentage of coverage on insured loans, with deeper average coverage tending to increase 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 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 agreements. See Note 9 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance agreements.
•Fixed income securities. Realized 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 (2020) and any "other than temporary" impairments (2019) recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
Adjusted net operating income (loss) is defined as GAAP net income (loss) excluding the after-tax effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss), and infrequent or unusual non-operating items, where applicable. The amounts of adjustments to components of pre-tax operating income (loss) are tax effected using our now federal statutory income tax rate of 21%.
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.
(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)Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles, individual issuer performance, and general economic conditions.
Adjusted pre-tax operating income / Adjusted net operating income $ 572,754 $ 116,004 $ 456,750 $ 842,869 $ 173,141 $ 669,728
The PMI industry's market share through September 30, 2020 decreased compared to the market share for the full year of 2019.
(% of total primary MI volume) Nine Months Ended September 30, 2020 Twelve Months Ended December 31, 2019
(% of total primary private MI volume) Nine Months Ended September 30, 2020 Twelve Months Ended December 31, 2019
Source: Inside Mortgage Finance - November 13, 2020 or SEC filings. Excludes HARP NIW.
Our IIF grew 10.9% in 2020, and 6.0% in 2019, as NIW more than offset policy cancellations. Cancellation activity is primarily due to refinancing activity, but is also impacted by rescissions, cancellations due to claim payment, and policies cancelled when borrowers achieve the required amount of home equity. Refinancing activity has historically been affected by the level of mortgage interest rates and the level of home price appreciation. Cancellations generally move inversely to the change in the direction of interest rates, although they generally lag a change in direction.
Persistency. Our persistency at December 31, 2020 was 60.5% compared to 75.8% at December 31, 2019. Since 2000, our year-end persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003.
Direct primary IIF as of December 31, $ 246.6 $ 222.3
Direct primary RIF as of December 31, $ 61.8 $ 57.2
The proportion of our total primary RIF written after 2008 has been steadily increasing in proportion to our total primary RIF. Our 2009 and later books possess significantly improved risk characteristics when compared to our 2005-2008 books. The credit profile of our pre-2009 RIF has benefited from modification and refinance programs making outstanding loans more affordable to borrowers with the goal of reducing the number of foreclosures. These programs included HAMP and HARP, which expired at the end of 2016 and 2018, respectively, but have been replaced by other GSE modification programs. HARP allowed borrowers who were not delinquent, but who may not otherwise have been able to refinance their loans under the current GSE underwriting standards due to, for example, the current LTV exceeding 100%, to refinance and lower their note rate. As of December 31, 2020, HARP modifications accounted for approximately 3.2% of our total primary RIF, compared to 4.6% at December 31, 2019. Loans associated with 94.1% of all our HARP modifications were current as of December 31, 2020. For additional information on the composition of our primary RIF see "Business - Our Products and Services"
The composition of our primary RIF by policy year as of December 31, 2020 and 2019 is shown below:
Ceded premiums earned, net of profit commission adversely impact our premium yield. Ceded premium earned, net of profit commission, were primarily associated with QSR Transactions and Home Re Transactions. Assumed premiums consists primarily of premiums from GSE CRT programs. See "Reinsurance Agreements" below for further discussion on our reinsurance transactions.
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 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 result in a higher profit commission and less benefit from ceded losses; higher levels of ceded losses result in more benefit from ceded losses and a lower profit commission (or for certain levels of losses of accident year loss ratios, its elimination).
Ceded premiums written and earned, net of profit commission $ 167,930 $ 111,550
The amount of our NIW, new risk written, IIF, and RIF subject to our QSR Transactions as shown in the following table will vary from period to period in part due to the mix of our risk written during the period.
New Risk Written subject to QSR Transactions 85.5 % 89.5 %
In October 2020, MGIC entered into an excess-of-loss agreement (executed through an insurance linked notes transaction) on a portfolio of policies having in force dates from January 1, 2020 through July 31, 2020.
In February 2021, MGIC entered into $398.8 excess of loss agreement (executed through an insurance linked notes transaction) on a portfolio of policies having in force dates from August 1, 2020 through December 31, 2020.
A "Trigger Event" has occurred on for each our outstanding ILN transactions. On the 2018 and 2019 ILN transactions a “Trigger Event” has occurred because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded 4% of the total reinsured principal balance of loans under each transaction. A “Trigger Event” has occurred on our 2020 ILN transaction because the credit enhancement of the most senior tranche is less than the target credit enhancement. While the “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments.
Other revenue decreased to $9 million in 2020 from $11 million in 2019.
As discussed in “Critical Accounting Policies” 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 delinquent 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.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrower income and thus their ability to make mortgage payments, and a drop in housing values that could result in, among other things, greater losses on loans, and may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Historically, losses incurred have followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new notice activity and a lower cure rate. Changes in economic circumstances, including those associated with the COVID-19 pandemic affected this pattern in 2020.
As discussed in our Risk Factor titled “The Covid-19 pandemic may continue to materially impact our financial results and may also materially impact our business, liquidity and financial condition" the impact of the COVID-19 pandemic on our future incurred losses is uncertain and may be material. 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, 2020 and recorded an IBNR reserve, then we have not yet recorded an incurred loss with respect to that loan.
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred losses and LAE, net to net premiums earned. The increase in the loss ratio in 2020 when compared to 2019 was primarily due to an increase in losses incurred discussed above.
We received an increased number of new delinquency notices in 2020 compared to 2019, as a result of the COVID-19 pandemic and its related effects (including higher unemployment and the widespread introduction of loan forbearance plans as a mechanism for economic relief). The decrease in the weighted average new notice claim rate for 2020 to 7% from 8% at December 31, 2019 is primarily due to the percentage of new notices of delinquency reported to as being in a COVID-19 related forbearance plan. As of December 31, 2020, 62% of our delinquency inventory were in such plans.
Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicers, and we believe substantially all represent forbearances related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current.
Policy Year New Notices in 2020 Delinquency Inventory as of 12/31/20 % of Delinquency Inventory in Forbearance Avg. Number of Missed Payments of Delinquency Inventory
Policy Year New Notices in 2019 Inventory as of 12/31/19 Avg. Number of Missed Payments of Delinquency Inventory
(1) - Claim rate is the respective full year weighted average rate and is rounded to the nearest whole percent.
è economic conditions at that time, including home prices compared to home prices at the time of placement of coverage
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
As discussed in Note 8 - "Loss Reserves," the average time for servicers to process foreclosures, prior to 2020, has been decreasing. In light of the uncertainty caused by the COVID-19 pandemic, the average number of missed payments at the time a claim is received and expected to be received will increase in 2021. Our loss reserves estimates take into consideration trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend.
The majority of loans from 2005 through 2008 (which represent 30% of the loans in the delinquent inventory) are covered by master policy terms that, except under certain circumstances, do not limit the number of years that an insured can include interest when filing a claim. Under our current master policy terms, an insured can include accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the insured must comply with its obligations under the terms of the applicable master policy.
Period Average exposure on claim paid Average claim paid % Paid to exposure Average number of missed payments at claim received date
In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or severity could have a material impact on loss reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of December 31, 2020, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the loss reserve amount by approximately +/- $16 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $34 million.
See Note 8 - “Loss Reserves” to our consolidated financial statements and “Critical Accounting Policies” below for a discussion of our losses incurred and claims paying practices (including curtailments).
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.
(1)Approximately 31% and 36% of the loans in the primary delinquency inventory with 12 payments or more delinquent have at least 36 payments delinquent as of December 31, 2020, and 2019 , respectively.
Forbearance programs enacted by the GSEs provide for payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. These forbearance plans generally allow for mortgage payments to be suspended for up to 360 days: an initial forbearance period up to 180 days and, if requested by the borrower, an extension of up to 180 days. For loans in a COVID-19 forbearance plan as of February 28, 2021, the plan may be extended for an additional three months, subject to certain limits. As of December 31, 2020, 62% of our delinquency inventory was reported as subject to a forbearance plan. We believe substantially all represent forbearances related to COVID-19. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicer. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current. We expect our delinquency inventory will remain at elevated levels during 2021 due to the impacts of the COVID-19 pandemic and initiatives intended to reduce the transmission of COVID-19. Given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related delinquencies on our loss incidence.
Net losses and LAE paid decreased 50% in 2020 compared to 2019 primarily due to lower claim activity on our primary business due to foreclosure moratoriums and payment forbearance plans in place. During 2019, losses paid included settlement payments under commutations of coverage on policies and/or related to disputes concerning our claims paying practices.
While foreclosure moratoriums and payment forbearance plans remain in place, net losses and LAE paid are expected to continue to be lower. As the various moratorium and forbearance plans end, we expect net losses and LAE paid to increase, however, the magnitude and timing of the increases are uncertain.
The table below presents our net losses and LAE paid for 2020 and 2019.
Primary losses paid for the top 15 jurisdictions (based on 2020 losses paid) and all other jurisdictions for 2020 and 2019 appears in the table below.
The primary average claim paid can vary materially from period to period based upon a variety of factors, including the local market conditions, average loan amount, average coverage percentage, the amount of time between delinquency and claim filing, and our loss mitigation efforts on loans for which claims are paid.
The primary average RIF on delinquent loans as of December 31, 2020 and 2019 and for the top 5 jurisdictions (based on 2020 losses paid) appears in the following table.
Our primary default rate at December 31, 2020 was 5.11% (2019: 2.78% ). Our primary delinquency inventory held 57,710 loans at December 31, 2020, compared to 30,028 at December 31, 2019. The increase in our primary delinquency inventory from the prior year is primarily due to the adverse economic impact of the COVID-19 pandemic. As of December 31, 2020, 62% of our delinquency inventory were reported to us as subject to forbearance plans. We believe substantially all represent forbearance plans related to COVID-19. Prior to 2020, we experienced a decline in the number of delinquencies in inventory with twelve or more missed payments. Generally, a defaulted loan with fewer missed payments is less likely to result in a claim. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related delinquencies and forbearances on our loss incidence. Whether a loan’s delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time.
(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.
The average direct reserve per default as of December 31, 2020 declined when compared to the average as of December 31, 2019 because the delinquency inventory as of December 31, 2020 included loans with fewer missed payments and loans with lower anticipated paid to exposure rates.
The primary default inventory by policy year at December 31, 2020, and 2019 appears in the table below.
2009 - 2015 % 11 % 13 % 12 % 12 %
We expect that delinquencies will remain at elevated levels in 2021 as a result of the COVID-19 pandemic, including as a result of the increase in unemployment associated with initiatives intended to reduce the transmission of COVID-19. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that time. Forbearance information is based on the most recent information provided by the GSEs, as well as loan servicers, and we believe substantially all forbearance plans reported are related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current.
The losses we have incurred on our 2005 through 2008 books have exceeded our premiums from those books. Although uncertainty remains with respect to the ultimate losses we may experience on those books, as we continue to write new insurance, those books have become a smaller percentage of our total mortgage insurance portfolio. Our 2005 through 2008 books of business represented approximately 8% and 11% of our total primary RIF at December 31, 2020 and 2019, respectively. Approximately 37% and 39% of the remaining primary RIF on our 2005 through 2008 books of business benefited from HARP as of both December 31, 2020 and 2019, respectively.
The underwriting expense ratio increased in 2020 compared with 2019 due to lower NPW partially offset by a decrease in underwriting expenses.
2020 compared to 2019. Interest expense for 2020 was $60 million compared to $53 million for 2019. The increase is due to the issuance of the 5.25% Notes in August 2020, partially offset by the repurchase of a portion of the 5.75% Notes and the 9% Debentures.
è Preserve PMIERs assets è Provide liquidity with minimized realized loss
è Maximize total return with emphasis on yield, subject to our other objectives è Maintain highly liquid, low volatility assets
è Duration 3.5 to 5.5 years è Duration maximum of 2.5 years
To achieve our portfolio objectives, our asset allocation considers the risk and return parameters of the various asset classes in which we invest. This asset allocation is informed by, and based on, the following factors:
The average duration and embedded investment yield of our investment portfolio as of December 31, 2020 and 2019 is shown in the following table.
The credit risk of a security is evaluated through analysis of the security's underlying fundamentals, including the issuer's sector, scale, profitability, debt coverage, and ratings. The investment policy guidelines limit the amount of our credit exposure to any one issue, issuer and type of instrument. The following table shows the security ratings of our fixed income investments as of December 31, 2020 and 2019.
(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 shown; otherwise the lowest rating is shown.
Investing activity will continue to decrease our portfolio yield as long as market yields remain below the current portfolio yield. Any decline in market-based portfolio yield is expected to result in lower net investment income in future periods.
Cash and cash equivalents increased 78%, to $288 million, as of December 31, 2020 (2019: $162 million), as net cash generated from operating and financing activities was only partly offset by net cash used in investing activities.
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 our estimated losses and settlement expenses to calculate a net reserve balance. Loss reserves increased by 59% to $881 million as of December 31, 2020, from $555 million of December 31, 2019. Reinsurance recoverables on our estimated losses and settlement expenses were $95 million and $22 million as of December 31, 2020 and December 31, 2019, respectively. The overall increase in our net loss reserves during 2020 was primarily due to an increase in new delinquency notices as well as IBNR reserves, each due to the impacts of the COVID-19 pandemic.
Other liabilities increased 61% to $245 million as of December 31, 2020 (2019: $152 million), primarily due to increases in our deferred income tax liability, reinsurance premium payable (net of ceding commission and profit commission), investment securities payable, and interest payable. This was partially offset by decreases in accrued salaries and benefits payable.
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 payouts. The following table summarizes these three cash flows on a consolidated basis for the last two years.
The following list highlights the major sources and uses of cash flow from operating activities:
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. Due to the foreclosure moratorium and payment forbearance plans in place, we have experienced a decrease in losses and LAE paid. As the various moratorium and forbearance plans end, we expect net losses and LAE paid to increase, however, the magnitude and timing of the increases are uncertain. We invest our claims paying resources from premiums and other sources 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.
The following list highlights the major sources and uses of cash flow from investing activities:
We maintain an investment portfolio that is primarily invested in a diverse mix of fixed income securities. As of December 31, 2020, our portfolio had a fair value of $6.7 billion, an increase of $0.9 billion, or 16.1% from December 31, 2019. Net cash flows used in investing activities in 2020 and 2019 primarily reflect purchases of fixed income securities in an amount that exceeded our proceeds from sales and maturities of such securities during the year as cash from operations and financing activities 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.
The following list highlights the major sources and uses of cash flow from financing activities:
- Payment of withholding taxes related to share-based compensation net share settlement
Net cash flows used in financing activities in 2020 primarily reflect the issuance of our 5.25% Notes, partially offset by the repurchase of a portion of our 5.75% Notes and 9% Debentures, repurchases of our common stock, 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.
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
Ratio of long-term debt to shareholders' equity 26.7 % 19.4 %
The 5.75% Notes, 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 of December 31, 2020, our 5.25% Notes had $650 million of outstanding principal due in 2028, our 5.75% Notes had $242.3 million of outstanding principal due in August 2023, and our 9% Debentures had $208.8 million of outstanding principal due in April 2063. 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 2020 and 2019.
As of December 31, 2020, and December 31, 2019, we had approximately $847 million and $325 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 interest expense. Investment income and the payment of dividends from our insurance subsidiaries are the principal sources of holding company cash inflow. MGIC is the principal source of dividends, and their payment is restricted by insurance regulation. Under the PMIERs guidance, any dividend paid by MGIC to our holding company, through June 30, 2021 requires approval by the GSEs. See Note 14 - “Statutory Information” to our consolidated financial statement for additional information about MGIC’s dividend restrictions. The payment of dividends from MGIC is also influenced by our view of the appropriate level of excess PMIERs Available Assets to maintain. Raising capital in the public markets is another potential source of holding company liquidity. The ability to raise capital in the public markets is subject to prevailing market conditions, investor demand for the securities to be issued, and our deemed creditworthiness.
During the first quarter of 2020 and for the full year of 2019, we used approximately $120 million and $114 million respectively, of available holding company cash to repurchase shares of our common stock. The repurchase programs may be suspended or discontinued at any time, and in light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases, but may resume them in the future. 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 for a discussion of our share repurchase programs.
•$640 million of net proceeds from the issuance of our 5.25% Notes,
•$59 million of interest payments on our 5.75% Notes and 9% Debentures, of which approximately $12 million was paid for the portion of our 9% Debenture previously owned by MGIC.
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 $17.20 for at least 20 of the 30 trading days preceding notice of the redemption.
As of December 31, 2020, MGIC’s Available Assets under PMIERs totaled approximately $5.3 billion, an excess of approximately $1.8 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.
Our 2021 QSR transaction terms are generally comparable to our existing QSR transactions and will also provide PMIERs capital credit. The excess of loss agreement entered into in February 2021 will also provide additional PMIERs credit. Refer to Note 9 - "Reinsurance" to our consolidated financial statements for additional information on our reinsurance transactions.
Based on the date each loan in our delinquency inventory was reported to us as being in forbearance, we estimate that during the first two quarters of 2021, 69% of those will reach their twelve-month anniversary of having been in forbearance and, as a result, their forbearance plans may end.
all reported forbearances are related to COVID-19. While the forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current. As a result, in some cases, there may be a delay in our ability to take advantage of the 70% reduction.
Earlier this year, Standard and Poor's revised its outlook for the U.S. Mortgage Insurers market segment to "negative,” due to the risks associated with the COVID-19 pandemic and A.M. Best revised its outlook for the U.S. Mortgage Insurers market segment to "negative," but did not change MGIC's or MAC’s outlook at that time. For further information about the importance of MGIC’s ratings, see our risk factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses” in Item 1A.
(In millions) Total 1 year 1-3 years 3-5 years 5 years
Our other long-term liabilities represent case and LAE loss reserves established to recognize the liability for losses and LAE related to existing delinquencies on insured mortgage loans. The timing of the future claim payments associated with the established case loss reserves was determined primarily based on two key assumptions: the length of time it takes for a notice of delinquency to develop into a received claim and the length of time it takes for a received claim to be ultimately paid. The future claim payment periods are estimated based on historical experience, and could emerge differently than this estimate, in part, due to uncertainty regarding the impact of certain factors, such as impacts from the COVID-19 pandemic, loss mitigation protocols established by servicers and changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation process. See Note 8 - “Loss Reserves” to our consolidated financial statements and “Critical Accounting Policies” below for additional information on our loss reserves. In accordance with GAAP for the mortgage insurance industry, we establish case loss reserves only for delinquent loans. Because our reserving method does not take account of the impact of future losses that could occur from loans that are not delinquent, our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our consolidated financial statements or in the table above.
We have a non-contributory defined benefit pension plan covering substantially all domestic employees, as well as a supplemental executive retirement plan. Retirement benefits are based on compensation and years of service. We maintain plan assets to fund our defined benefit pension plan obligations. We did not have a minimum funding requirement for the defined benefit pension plan for 2020 or 2019 and do not anticipate having a minimum funding requirement in 2021. We have significant discretion in making contributions above those necessary to satisfy the minimum funding requirements. In 2020 and 2019, we voluntarily made contributions totaling $5.9 million, and $7.1 million, respectively. We plan to make a voluntary contribution of approximately $6.2 million to the defined benefit pension plan in 2021. In determining future contributions, we will consider the performance of the plan's investment portfolio, the effects of interest rates on the projected benefit obligation of the plan and our other capital requirements. As of December 31, 2020, we had accrued a liability of $10.4 million related to our defined benefit pension plan as the projected obligation was in excess of plan assets. The supplemental executive retirement plan benefits are accrued for and are paid from MGIC assets following employee retirements. We plan to pay benefits of approximately $0.3 million under the supplemental executive retirement plan in 2021.
Our projected benefit obligations under these plans are subject to numerous actuarial assumptions that may change in the future and as a result could substantially increase or decrease our obligations. Plan assets held to pay our defined benefit pension plan obligations are primarily invested in a portfolio of debt securities to preserve capital and to provide monthly cash flows aligned with the liability component of our obligations, with a lesser percentage invested in a mix of equity securities. If the performance of our invested plan assets differs from our expectations, the funded status of the defined benefit pension plan may decline, even with no significant change in the obligations. See Note 11 - "Benefit Plans" to our consolidated financial statements for a complete discussion of these plans and their effect on the consolidated financial statements.
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, 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.
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 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 severity could have a material impact on reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of December 31, 2020, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the reserve amount by approximately +/- $16 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the reserve amount by approximately +/- $34 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:
The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of
regional or national economic conditions, including unemployment, leading to a reduction in borrower income and thus their ability to make mortgage payments, and a drop in housing values, that could result in, among other things, greater losses on loans, and may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance.
Costs directly associated with the successful acquisition of mortgage insurance business, consisting of employee compensation and other policy issuance and underwriting expenses, are initially deferred and reported as deferred insurance policy acquisition costs ("DAC"). The deferred costs are net of any ceding commissions received associated with our reinsurance transactions. For each underwriting year of business, these costs are amortized to income in proportion to estimated gross profits over the estimated life of the policies. We utilize anticipated investment income in our calculation. This includes accruing interest on the unamortized balance of DAC. The estimates for each underwriting year are reviewed quarterly and updated when necessary to reflect actual experience and any changes to key variables such as persistency or loss development.
Fixed income securities. Our fixed income securities are classified as available-for-sale and are reported at fair value. The related unrealized investment gains or losses are, after considering the related tax expense or benefit, recognized as a component of accumulated other comprehensive income (loss) in shareholders' equity. Realized investment gains and losses on fixed income securities are reported in income based upon specific identification of securities sold, as well as any credit allowance (2020), and any "other than temporary" impairments (2019) recognized in earnings.
Other invested assets. Other invested assets are carried at cost. These assets represent our investment in FHLB stock, which due to restrictions, is required to be redeemed or sold only to the security issuer at par value.
Effective January 1, 2020, each quarter we perform reviews of our investments to assess declines in fair value of available-for-sale securities. Any impairment losses on available-for-sale securities are recorded as an allowance for credit losses, subject to reversal, with realized investment gains and losses. In evaluating whether a credit allowance should be established, we consider several factors including, but not limited to:
When a security is considered to be impaired, the losses are separated into the portion of the loss that represents the credit loss and the portion that is due to other factors. An allowance for credit losses is recorded, subject to reversal, for the credit loss portion in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive loss, net of taxes. A credit loss is determined to exist if the
For the years ended December 31, 2020, 2019, and 2018, we did not elect the fair value option for any financial instruments acquired, or issued, such as our outstanding debt obligations, for which the primary basis of accounting is not fair value.
Consolidated statements of comprehensive income for each of the three years in the period ended December 31, 2020
Fixed income, available-for-sale, at fair value (amortized cost, 2020 - $6,317,164; 2019 - $5,562,550)
Equity securities, at fair value (cost, 2020 - $17,522; 2019 - $17,188)
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2020 - 371,353; 2019 - 371,353; outstanding 2020 - 338,573; 2019 - 347,308) 371,353 371,353
Treasury stock (shares at cost 2020 - 32,779; 2019 - 24,045) (393,326) (283,196)
Net common stock issued under share-based compensation plans - - 786
Net common stock issued under share-based compensation plans - - (8,917)
Reissuance of treasury stock, net under share-based compensation plans 9,867 5,989 -
Payment of original issue discount - senior notes (2,969) - -
Payment of withholding taxes related to share-based compensation net share settlement (8,940) (5,726) (8,131)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of year 169,056 155,038 99,851
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation ("MGIC"), is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans. Primary mortgage insurance provides mortgage default protection on individual loans and covers a percentage of the unpaid loan principal, delinquent interest and certain expenses associated with the default and subsequent foreclosure or sale approved by us, of the underlying property. MGIC Assurance Corporation ("MAC") and MGIC Indemnity Corporation ("MIC"), insurance subsidiaries of MGIC, provide insurance for certain mortgages under Fannie Mae and Freddie Mac (the "GSEs") credit risk transfer programs.
The substantial majority of our NIW has been for loans purchased by the GSEs. The current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs include financial requirements, as well as business, quality control and certain transactional approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book of risk in force, calculated from tables of factors with several risk dimensions). Based on our application of the PMIERs, as of December 31, 2020, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs.
è Level 2 Quoted prices for similar instruments in active markets that we can access; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the instrument. The observable inputs are used in valuation models to calculate the fair value of the instruments. Financial assets using Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, asset-backed securities, most municipal bonds, and commercial paper.
Equity securities. Equity securities are reported at fair value, except for certain securities that are carried at cost. Equity securities carried at cost are reported as Other invested assets. Realized investment gains and losses on equity securities are reported in income based upon specific identification of securities sold, as well as any change in fair value of equity securities.
è our intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis;
è the present value of the discounted cash flows we expect to collect compared to the amortized cost basis of the security;
Based on our evaluation, we will record a realized loss on a security if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis, or if the present value of the discounted cash flows we expect to collect is less than the amortized cost basis of the security.
When a security is considered to be impaired, the losses are separated into the portion of the loss that represents the credit loss and the portion that is due to other factors. An allowance for credit losses is recorded, subject to reversal, for the credit loss portion in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive loss, net of taxes. A credit loss is determined to exist if the present value of the discounted cash flows, using the security’s original yield, expected to be collected from the security is less than the cost basis of the security.
For 2019, our evaluation of whether a decline in fair values is other-than-temporary also includes reviewing the extent and
duration of the decline. Based on our evaluation, if the fair value of a security is below its amortized cost at the time of our intent to sell, the security is classified as other-than-temporarily
Home office and equipment is shown net of accumulated depreciation of $51.2 million, $43.0 million and $38.1 million as of December 31, 2020, 2019 and 2018, respectively. Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $6.3 million, $6.5 million and $6.0 million, respectively.
Costs directly associated with the successful acquisition of mortgage insurance business, consisting of employee compensation and other policy issuance and underwriting expenses, are initially deferred and reported as deferred insurance policy acquisition costs ("DAC"). The deferred costs are net of any ceding commissions received associated with our reinsurance agreements. For each underwriting year of business, these costs are amortized to income in proportion to estimated gross profits over the estimated life of the policies. We utilize anticipated investment income in our calculation. This includes accruing interest on the unamortized balance of DAC. The estimates for each underwriting year are reviewed quarterly and updated when necessary to reflect actual experience and any changes to key variables such as persistency or loss development.
Case reserves and loss adjustment expenses ("LAE") reserves are established when notices of delinquency on insured mortgage loans are received. Such loans are referred to as being in our delinquency inventory. For reporting purposes, we consider a loan delinquent when it is two or more payments past due and has not become current or resulted in a claim payment. Even though the accounting standard, ASC 944, regarding accounting and reporting by insurance entities specifically excludes 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 reserves for future claims on insured loans which are not currently delinquent.
Effective, January 1, 2020, we assess whether a credit loss exists for our premium receivable. In determining if a credit loss allowance is required for premium receivable, consideration is given to the life of the premium receivable asset, areas of potential credit loss, and forward-looking predictive indicators. Any estimated credit loss would be immediately recognized.
We offer both medical and dental benefits for retired domestic employees, their eligible spouses and dependents until the retiree reaches the age of 65. Under the plan retirees pay a premium for these benefits. We accrue the estimated costs of retiree medical and dental benefits over the period during which employees render the service that qualifies them for benefits. (See Note 11 - “Benefit Plans.”)
occur if our 9% Debentures result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. For purposes of calculating basic and diluted EPS, vested restricted stock and RSUs are considered outstanding.
In 2020, MGIC Reinsurance Corporation of Wisconsin, a subsidiary of MGIC, merged with MGIC. There were no related party transactions during 2019 or 2018.
Effective January 1, 2020, we adopted FASB guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The updated guidance requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of the updated guidance did not have a material effect on our consolidated financial statement disclosures.
Table 2.1 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.
• ASU 2020-06 - Debt with conversion and other options (Topic 470), derivatives and hedging - contracts in entity’s own equity (Topic 815) January 1, 2022
In January 2020, the FASB issued guidance which clarifies certain interactions of accounting for equity securities under Topic 321, under the equity method of accounting in Topic 323, and accounting for certain forward contracts and purchased options in Topic 815. The amendment clarifies the consideration of observable transactions before applying or discounting the equity method of accounting. The updated guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. We have evaluated the impacts the adoption of this guidance will have on our consolidated financial statements, and determined it will not have a material impact.
In December 2019, the FASB issued guidance which simplifies Accounting for Income Taxes (Topic 740). The ASU intends to reduce complexity through clarification and amendments of existing guidance. The updated guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those annual periods. We have evaluated the impacts the adoption of this guidance will have on our consolidated financial statements, and determined it will not have a material impact.
Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs: ASU 2020-08
(1) Interest expense for the years ended December 31, 2020, 2019 and 2018 has been tax effected at a rate of 21%.
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 264,531 $ - $ 1,164 $ (2) $ 265,693
Details of fixed income investment securities by category as of December 31, 2019
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 195,176 $ 1,237 $ (210) $ 196,203
Obligations of U.S. states and political subdivisions 1,555,394 99,328 (857) 1,653,865
(1)Consists of short-term commercial paper with original maturities greater than ninety days.
Proceeds from the sale of fixed income securities classified as available-for-sale were $803.4 million, $228.1 million, and $365.6 million during the years ended December 31, 2020, 2019, and 2018, respectively. Gross gains of $21.3 million, $7.1 million, and $0.7 million and gross losses of $8.8 million, $3.5 million, and $3.8 million were realized on those sales during the years ended December 31, 2020, 2019, and 2018, respectively.
The cost and fair value of investments in equity securities as of December 31, 2020 and December 31, 2019 are shown in tables 5.3a and 5.3b below.
Other invested assets consists of an investment in Federal Home Loan Bank ("FHLB") stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current FHLB Advance amount is secured by eligible collateral whose fair value is maintained at a minimum of 102% of the outstanding principal balance of the FHLB Advance. As of December 31, 2020, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of $163.9 million.
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 2,690 $ (2) $ - $ - $ 2,690 $ (2)
Obligations of U.S. states and political subdivisions 31,416 (256) - - 31,416 (256)
Total $ 300,911 $ (3,827) $ 80,269 $ (832) $ 381,180 $ (4,659)
Obligations of U.S. states and political subdivisions 74,859 (847) 6,957 (10) 81,816 (857)
Total $ 624,334 $ (5,426) $ 379,411 $ (4,476) $ 1,003,745 $ (9,902)
•Equity securities: Consist of actively traded, exchange-listed equity securities with valuations derived from quoted prices for identical assets in active markets that we can access.
•Cash Equivalents: Consists of money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access. The remaining instruments in this category are valued using market data for comparable instruments and are classified as Level 2.
Corporate Debt & U.S. Government and Agency Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process.
•Real estate acquired is valued at the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.
Assets carried at fair value by hierarchy level as of December 31, 2020
U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 196,203 $ 34,240 $ 161,963 $ -
Obligations of U.S. states and political subdivisions 1,653,865 - 1,653,865 -
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2020
Included in earnings and reported as losses incurred, net - 660
Included in earnings and reported as losses incurred, net - (476)
Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% Notes 5.25% Notes, and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements, and in all cases they are categorized as Level 2. See Note 7 - "Debt" for a description of the financial liabilities in table 6.3.
Other invested assets $ 3,100 $ 3,100 $ 3,100 $ 3,100
The 5.75% Notes, 5.25% Notes, and 9% Debentures are obligations of our holding company, MGIC Investment Corporation.
FHLB Advance - 1.91%, due February 2023 $ 155.0 $ 155.0
In August 2020, we issued $650 million aggregate principal amount of 5.25% Notes, which are due in 2028 and received net proceeds, after the deduction of underwriting fees, of $640.3 million. In addition to underwriting fees, we incurred approximately $2.0 million of other expenses associated with the issuance of these notes.
We repurchased $182.7 million in aggregate principal amount of our 5.75% notes at a purchase price of $197.8 million, plus accrued interest, using proceeds from the 5.25% Notes issuance. The excess of the purchase price over the carrying value, plus the write-off of unamortized issuance costs on the par value, is reflected as a loss on debt extinguishment of $16.5 million on our consolidated statement of operations.
The net proceeds from the 5.25% Notes issuance were used, in part, as (i) cash consideration to purchase $182.7 million of our 5.75% Notes, and (ii) cash consideration to purchase $48.1 million of our 9% Debentures. The balance of the proceeds remains at the holding company.
Interest on the 5.25% Notes is payable semi-annually on February 15 and August 15. Prior to August 15, 2023, we may redeem the 5.25% Notes at an amount equal to the sum of (a) the greater of: (i) the sum of the principal amount and the make-whole amount; and (ii) 102.625% of principal; and (b) accrued and unpaid interest. The make-whole amount is the excess of: (1) the present value of the remaining principal, premium and interest payments that would be payable with respect to the note if such note were redeemed on August 15, 2023 (at 102.625% of principal), computed using a discount rate equal to the treasury rate specified in the notes, plus 50 basis points, over (2) the outstanding principal amount of such note.
On and after August 15, 2023, we may redeem the notes at 102.625% of principal; on or after August 15, 2024, we may redeem the notes at 101.313% of principal; and on or after August 15, 2025, we may redeem the notes at 100% of principal; in each case, plus accrued and unpaid
The 9% Debentures are currently convertible, at the holder's option, at a conversion rate, which is subject to adjustment, of 75.5932 common shares per $1,000 principal amount of the 9% Debentures at any time prior to the maturity date. This represents a conversion price of approximately $13.23 per share. If a holder elects to convert their 9% Debentures, deferred interest, if any, owed on the 9% Debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a 5-day period immediately prior to the election to convert.
The 9% Debentures include a conversion feature that allows us, at our option, to make a cash payment to converting holders in lieu of issuing shares of common stock upon conversion of the 9% Debentures. We may redeem the 9% Debentures in whole or in part from time to time, at our option, at a redemption price equal to 100% of the principal amount of the 9% Debentures being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds $17.20 for at least 20 of the 30 trading days preceding notice of the redemption.
When interest on the 9% Debentures is deferred, we are required, not later than a specified time, to use reasonable commercial efforts to begin selling qualifying securities to persons who are not our affiliates. The specified time is one business day after we pay interest on the 9% Debentures that was not deferred, or if
Interest payments were $54.3 million during 2020, $50.8 million during 2019, and $51.3 million during 2018.
Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment. It is reasonably possible that given the uncertainty of the impacts of the COVID 19 pandemic, our reserve estimate may continue to be impacted.
Losses incurred on delinquencies that occurred in the current year increased in 2020 compared to 2019 due to an increase in the new delinquency notices reported and IBNR reserve estimates, due to the impact of the COVID-19 pandemic. Given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related delinquencies and forbearances on our loss incidence.
Losses incurred on delinquencies that occurred in the current year decreased in 2019 compared to 2018 primarily due to a decrease in the number of new delinquencies, net of cures, as well as a decrease in the estimated claim rate on recently reported delinquencies.
Our estimate of premiums to be refunded on expected claim payments is accrued for separately in "Other liabilities" on our consolidated balance sheets and approximated $30 million each at December 31, 2020 and 2019.
Losses and LAE paid in respect of delinquent notices received in:
Table 8.2 below shows the development of reserves in 2020, 2019 and 2018 for previously received delinquencies.
During 2019 and 2018 our losses paid included amounts paid upon commutation of coverage on policies. The impacts of the commutations of coverage on policies and/or settlements were as follows:
In 2019, our losses paid included $23.5 million paid in connection with settlements of disputes concerning our claims paying practices.
Historically as a delinquency ages it becomes more likely to result in a claim.
(1)Approximately 31%, 36%, and 38% of the delinquent inventory that has been delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of December 31, 2020, 2019 and 2018, respectively.
Pool insurance default inventory was 680 at December 31, 2020, 653 at December 31, 2019, and 859 at December 31, 2018.
Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related earned premiums) we have underwritten to other insurance companies who agree to share these risks. The purpose of ceded reinsurance is to protect us, at a cost, against losses arising from our mortgage guaranty policies covered by the agreement and to manage our capital requirements under PMIERs. Reinsurance is currently placed on a quota share and excess of loss basis, but we also have immaterial captive reinsurance agreements that remain in effect through December 31, 2020.
Quota Share Contract Policy Year Quota Share % Annual Loss Ratio to Exhaust Profit Commission (1)
2015 QSR Prior to 2017 15.0 % 68.0 % December 31, 2031
2020 QSR - 2 Year 2020 - 2021 17.5 % 62.0 % December 31, 2032
(1) We will receive a profit commission provided the annual loss ratio on loans covered under the transaction remains below this ratio.
We can elect to terminate the quota share reinsurance agreements under specified scenarios without penalty upon prior written notice, including if we will receive less than 90% (80% for the Credit Union QSR Transaction ) of the full credit amount under the PMIERs, full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period. Early termination of the QSR agreements can also be elected by us for a fee, or under specified scenarios for no fee upon prior written notice.
Table 9.3 provides additional detail regarding optional termination dates and optional reductions to our quota share percentage. The optional reduction to the quota share percentage would give us an option to reduce our quota share percentage from the original percentage as shown in table 9.2.
2019 QSR December 31, 2021 July 1, 2020 25% or 20%
2020 QSR - 1 Year December 31, 2022 July 1, 2021 10.5% or 8%
2020 QSR - 2 Year December 31, 2023 July 1, 2021 14.5% or 12%
(1) We can elect early termination of the QSR agreement beginning on this date, and bi-annually thereafter for the 2015 QSR, 2019 QSR, and 2020 QSR. Early termination of the 2018 QSR can be elected annually after this date.
(1)Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
Ceded premiums written and earned, net of profit commission, increased in 2020 due to the decrease in profit commission. The decrease in profit commission was a result of higher ceded losses incurred, primarily due to an increase in the delinquency inventory due to the impacts of the COVID-19 pandemic.
We terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and entered into an amended quota share reinsurance agreement with certain participants from the existing reinsurance panel that effectively reduces the quota share cede rate from 30% to 15% on the remaining eligible insurance. During the second quarter of 2019, we incurred a termination fee of $6.8 million, which was paid to participants of the reinsurance panel that are not participating in the amended 2015 QSR Transaction.
The reinsurance recoverable on loss reserves was $95.0 million as of December 31, 2020 and $21.6 million as of December 31, 2019.The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the amount of which is based on the funding requirements of PMIERs. Each of the reinsurers under our quota share reinsurance agreements described above has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three. An allowance for credit losses was not required for 2020.
We have aggregate excess of loss reinsurance agreements (“Home Re Transactions”) with unaffiliated special purpose insurers domiciled in Bermuda (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses, and a Home Re special purpose entity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses in excess of the outstanding reinsurance coverage amount. The aggregate excess of loss reinsurance coverage decreases over a ten-year period, subject to certain conditions, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid.
MGIC has rights to terminate the Home Re Transactions under certain circumstances. The Home Re entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. The ILNs each have ten-year legal maturities and are non-recourse to any assets of MGIC or affiliates. The proceeds of the ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.
(In thousands) Home Re 2020-1, Ltd. Home Re 2019-1, Ltd. Home Re 2018-1, Ltd.
(1)We have the right to terminate the excess-of-loss reinsurance agreements under certain circumstances and on any payment date on or after the respective termination option date.
The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the unpaid portion of the ILNs it issued to raise funds to collateralize its reinsurance obligations to us, and the investment income collected on the collateral assets. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changes in one-month LIBOR, (or the fallback reference rate, as applicable) and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As a result, we concluded that each reinsurance agreement contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at December 31, 2020 and December 31, 2019, were not material to our consolidated balance sheet, and the change in fair values during the year ended December 31, 2020 and December 31, 2019 were not material to our consolidated statements of operations. Total ceded premiums were $20.8 million, $17.6 million, and $2.8 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively.
At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. Given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity, consolidation of neither Home Re Entity is required.
to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to our losses ceded under the reinsurance agreements and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements may have on our consolidated financial statements. As a result, we are unable to quantify our maximum exposure to loss related to our involvement with the VIEs. MGIC has certain termination rights under the reinsurance agreements should its claims not be paid. We consider our exposure to loss from our reinsurance agreements with the VIEs to be remote.
Table 9.6 presents the total assets of Home Re Entities as of December 31, 2020 , December 31, 2019 and December 31, 2018.
The pretax components of our other comprehensive income (loss) and related income tax (expense) benefit for the years ended December 31, 2020, 2019 and 2018 are included in table 10.1 below.
Net changes in benefit plan assets and obligations 13,288 29,129 (19,958)
Total other comprehensive income, net of tax $ 144,113 $ 196,922 $ (80,413)
The pretax and related income tax benefit (expense) components of the amounts reclassified from our accumulated other comprehensive income (loss) ( "AOCI", "AOCL") to our consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018 are included in table 10.2 below.
Reclassification adjustment for net realized gains (losses) included in net income (1)
(2)Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
We have a non-contributory defined benefit pension plan covering substantially all domestic employees, as well as a supplemental executive retirement plan. We also offer both medical and dental benefits for retired domestic employees, their eligible spouses and dependents under a postretirement benefit plan. The following tables 11.1, 11.2, and 11.3 provide the components of aggregate annual net periodic benefit cost for each of the years ended December 31, 2020, 2019, and 2018 and changes in the benefit obligation and the funded status of the pension, supplemental executive retirement and other postretirement benefit plans as recognized in the consolidated balance sheets as of December 31, 2020 and 2019.
6. Net Periodic Benefit Cost 4,570 12,715 9,961 (6,044) (3,344) (8,719)
2. Accumulated Benefit Obligation $ 423,305 $ 412,939 $ 28,714 $ 27,496
4. Total at Year End $ 97,911 $ 98,589 $ (27,892) $ (15,281)
11. Benefit Obligation at End of Year $ 423,713 $ 413,350 $ 28,714 $ 27,496
(1)Includes lump sum payments of $27.5 million and $18.5 million in 2020 and 2019, respectively, from our pension plan to eligible participants, which were former employees with vested benefits.
The increase in our pension and supplemental executive retirement plans obligation in 2020 compared to 2019 was primarily due to a decrease in the discount rate used to calculate the obligation partially offset by benefits paid from the fund. Table 11.7 below includes the actuarial assumptions used to calculate the benefit obligations of our plans for 2020 and 2019.
5. Benefit Payments paid directly by Company (5,953) (3,105) - -
8. Fair Value of Plan Assets at End of Year $ 411,245 $ 402,691 $ 119,024 $ 99,590
a. Recognized during year - Prior Service (Cost)/Credit 247 281 (51) 34
1. Discount Rate 3.30 % 4.40 % 3.20 % 4.25 %
2. Expected Long-term Return on Plan Assets 5.75 % 5.75 % 7.50 % 7.50 %
1. Health Care Cost Trend Rate Assumed for Next Year N/A N/A 6.00 % 6.00 %
2. Rate to Which the Cost Trend Rate is Assumed to Decline (Ultimate Trend Rate) N/A N/A 5.00 % 5.00 %
3. Year That the Rate Reaches the Ultimate Trend Rate N/A N/A 2024 2024
1. Equity Securities 21 % 23 % 100 % 100 %
Pension plan assets at fair value as of December 31, 2019
Total Assets at fair value $ 39,491 $ 363,200 $ 402,691
An improvement in funded status results in the de-risking of the portfolio, allocating more funds to fixed income and less to equity. A decline in funded status would result in a higher allocation to equity. The maximum equity allocation is 40%.
Return seeking bridge Downside protection in the event of a declining equity market ● Enduring asset
Investment in international mutual funds is limited to a maximum of 30% of the equity range. The allocation as of December 31, 2020 included 3% that was primarily invested in equity securities of emerging market countries and another 20% was invested in securities of companies primarily based in Europe and the Pacific Basin.
Table 12.2 includes the components of the net deferred tax (liability) asset as of December 31, 2020 and 2019.
If the federal income tax rate increases, our net deferred tax liability or asset would increase. In addition, we would set up a deferred tax liability related to tax and loss bonds for the difference in the new federal income tax rate and the 21% federal income tax rate at which the tax and loss bonds were purchased.
Current federal income tax payments were$79.6 million, $158.3 million, and $12.2 million in 2020, 2019 and 2018, respectively.
At December 31, 2020 we owned $271.0 million of tax and loss bonds.
Federal statutory income tax rate 21.0 % 21.0 % 21.0 %
The Internal Revenue Service ("IRS") completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits ("REMICs").
We have not recorded any uncertain tax positions during 2019 and 2020 and have no unrecognized tax benefits at December 31, 2019 and December 31, 2020. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. The statute of limitations related to the consolidated federal income tax return is closed for all years prior to 2016.
During the first quarter of 2020 we repurchased approximately 9.6 million shares of our common stock at a weighted average cost per share of $12.47, which included commissions. We may repurchase up to an additional $291 million of our common stock through the end of 2021 under a share repurchase program approved by our Board of Directors in January 2020.
The statutory financial statements of our insurance companies are presented on the basis of accounting principles prescribed, or practices permitted, by the Office of the Commissioner of Insurance of the State of Wisconsin (the "OCI"), which has adopted the National Association of Insurance Commissioners ("NAIC") Statements of Statutory Accounting Principles ("SSAP") as the basis of its statutory accounting principles. In converting from statutory to GAAP, typical adjustments include deferral of policy acquisition costs, the inclusion of net unrealized holding gains or losses in shareholders' equity relating to fixed income securities, and the inclusion of statutory non-admitted assets.
While MGIC currently meets, and expects to continue to meet, the State Capital Requirements of Wisconsin and all other jurisdictions, it could be prevented from writing new business in the future in all jurisdictions if it fails to meet the State Capital Requirements of Wisconsin, or it could be prevented from writing new business in a particular jurisdiction if it fails to meet the State Capital Requirements of that jurisdiction and in each case MGIC does not obtain a waiver of such requirements. It is possible that regulatory action by one or more jurisdictions, including those that do not have specific State Capital Requirements, may prevent MGIC from continuing to write new insurance in such jurisdictions. If we are unable to write business in all jurisdictions, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the future ability of our insurance operations to meet the State Capital Requirements or the PMIERs may affect its willingness to procure insurance from us. A possible future failure by MGIC to meet the State Capital Requirements or the PMIERs will not necessarily mean that MGIC lacks sufficient resources to pay claims on its insurance liabilities. While we believe MGIC has sufficient claims paying resources to meet its claim obligations on its IIF on a timely basis, you should read the rest of these financial statement footnotes for information about matters that could negatively affect MGIC’s claims paying resources, including the effects of the COVID-19 pandemic.
During 2020, MGIC paid $390 million in cash and/or investment security dividends to our holding company. In the third quarter of 2020, MGIC distributed to the holding company, as a dividend, its ownership in the 9% Debentures held at an amortized cost of $139.5 million, which was non-admitted for statutory reporting.
MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without regulatory approval by the OCI is the lesser of adjusted statutory net income or 10% of statutory policyholders' surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three calendar years. Before making any dividend payments in 2021, we will notify the OCI to ensure it does not object.
The OCI recognizes only statutory accounting principles prescribed, or practices permitted, by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those found in other states. Specifically, Wisconsin domiciled companies record changes in the contingency reserves through the income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency
reserves, statutory net income is reduced. For the year ended December 31, 2020, MGIC’s increase in contingency reserves was $559 million and statutory net loss was $643 million. As of December 31, 2020, MGIC's statutory policyholders' surplus was $1,336 million. MGIC's statutory net loss includes a realized loss of $692 million resulting from its merger with MGIC Reinsurance Corporation of Wisconsin. This is eliminated on the consolidated statement of operations.
The compensation cost that has been charged against income for share-based plans was $13.8 million, $18.9 million, and $20.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. The related income tax benefit recognized for share-based plans was $1.7 million, $2.7 million, and $3.0 million for the years ended December 31, 2020, 2019, and 2018, respectively.
As of December 31, 2020, there was $25.8 million of total unrecognized compensation cost related to non-vested share-based compensation agreements granted under the plans. Of this total, $19.8 million of unrecognized compensation costs relate to performance shares and $5.9 million relates to time vested shares. A portion of the unrecognized costs associated with the performance shares may or may not be recognized in future periods, depending upon whether or not the performance and service conditions are met. The cost associated with the time vested shares is expected to be recognized over a weighted-average period of 1.7 years.
Total lease expense under operating leases was $1.9 million in 2020, $2.1 million in 2019, and $1.9 million in 2018.
Under ASC 450-20, until a loss associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. When we determine that a loss is probable and can be reasonably estimated, we record our best estimate of our probable loss. In those cases, until settlement negotiations or legal proceedings are concluded (including the receipt of any necessary GSE approvals), it is reasonably possible that we will record an additional loss. We are currently involved in
Mortgage insurers, including MGIC, have in the past been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act ("RESPA") and the notice provisions of the Fair Credit Reporting Act ("FCRA"). While these proceedings in the aggregate did not result in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse effect on us. To the extent that we are construed to make independent credit decisions in connection with our contract underwriting activities, we also could be subject to increased regulatory requirements under the Equal Credit Opportunity Act (“EOCA”), FCRA, and other laws. Under ECOA, examination may also be made of whether a mortgage insurer’s underwriting decisions have a disparate impact on persons belonging to a protected class in violation of the law.
Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The related contract underwriting remedy expense for each of the years ended December 31, 2020, 2019, and 2018, was immaterial to our consolidated financial statements.
(a)Due to the use of weighted average shares outstanding when calculating earnings per share, the sum of the quarterly per share data may not equal the per share data for the year.
(b)In periods where convertible debt instruments are dilutive to earnings per share the “if-converted” method of computing diluted EPS requires an interest expense adjustment, net of tax, to net income available to shareholders. See Note 4 - “Earnings Per Share” for further discussion on our calculation of diluted EPS.
To the Board of Directors and Shareholders of MGIC Investment Corporation
We have audited the accompanying consolidated balance sheets of MGIC Investment Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive income, of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report On Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of loss reserves, including controls over the development of significant assumptions related to the claim rate and claim severity. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of loss reserves using historical experience and comparing this independent estimate to management’s recorded loss reserves to evaluate the reasonableness of the recorded loss reserves. Developing the independent estimate involved testing the completeness, accuracy, and relevance of data provided by management and independently developing assumptions related to the claim rate and claim severity.