The federal government, including through the U.S. Department of the Treasury and the GSEs, and several lenders have modification programs to make loans more affordable to borrowers with the goal of reducing the number of foreclosures. During 2014 and 2015, we were notified of modifications that cured delinquencies that had they become paid claims would have resulted in approximately $0.8 billion and $0.6 billion, respectively, of estimated claim payments. These levels are down from a high of $3.2 billion in 2010.
The amount of our primary new insurance written during the years ended December 31, 2015, 2014 and 2013 was as follows:
The portfolio's average pre-tax investment yield was 2.5% with duration of 4.7 years as of December 31, 2015 compared to an average pre-tax investment yield of 2.2% and duration of 3.9 years as of December 31, 2014.
Losses incurred for 2014 decreased by $343 million compared to 2013. The decrease was primarily due to a decrease in the number of new default notices received, net of cures, and favorable development on prior year losses. The primary default inventory decreased by 23,427 delinquencies in 2014 compared to a decrease of 36,517 in 2013. The claim rate and estimated severity on our default inventory as of December 31, 2014 increased slightly compared to the rates and amounts as of December 31, 2013.
(1) We define prime loans as those having FICO credit scores of 620 or greater, A-minus loans as those having FICO credit scores of 575-619, and subprime credit loans as those having FICO credit scores of less than 575, all as reported to us at the time a commitment to insure is issued. However, we classify all loans without complete documentation as “reduced documentation” loans regardless of FICO score rather than as a prime, “A-minus” or “subprime” loan; in the table above, such loans appear only in the reduced documentation category and they do not appear in any of the other categories.
In addition to the previously discussed operating and investing activities, we also engage in financing activities to manage our capital structure. The following list highlights the major sources and uses of cash flow from financing activities:
During the third quarter of 2015 our insurance subsidiary, MGIC, became a member of the FHLBC. Membership in the Federal Home Loan Bank System will provide MGIC access to an additional source of liquidity via a secured lending facility. As of December 31, 2015, no amounts were outstanding with FHLBC. For information about the first quarter 2016 borrowing by MGIC under that facility to purchase of a portion of our outstanding 9% Junior Convertible Debentures, see “Debt at Our Holding Company and Holding Company Capital Resources” below.
The estimated claim rates and claim severities represent what we estimate will actually be paid on the loans in default 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 successful loan modifications that result in a cure being reported to us, the cure reduces the historical claim rate used in establishing reserves. Our methodology to estimate claim rates and claim amounts is based on our review of recent trends in the default inventory. 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 claim paid compared to our loan exposure, as well as the risk in force 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, the change in the level of defaults by geography and the change in average loan exposure. As a result, the process to determine reserves does not include quantitative ranges of outcomes that are reasonably likely to occur.
Based on our evaluation, we will record an other-than-temporary impairment adjustment 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 costs basis of the security. 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 impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, when a security is considered to be other-than-temporarily 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. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive income (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.
Certain reclassifications have been made in the accompanying consolidated financial statements to 2014 and 2013 amounts to conform to the 2015 presentation. For the years ended December 31, 2014 and 2013 cash used for additions to property and equipment was previously presented as "Other" within cash flows from operating activities and is presented separately as "Additions to property and equipment" within cash flows from investing activities for the year ended December 31, 2015. This revision is not material to amounts reported or disclosed by us in prior years.
Reserves also provide for the estimated costs of settling claims, including legal and other expenses and general expenses of administering the claims settlement process. Reserves are also ceded to reinsurers under our reinsurance agreements. (See Note 9 - “Loss Reserves” and Note 11 - “Reinsurance.”)
The computation of diluted EPS for the years ended December 31, 2015 and 2014 include the weighted average unvested restricted stock units outstanding of 2.1 million and 3.1 million, respectively. As a result of reporting a net loss in 2013, unvested restricted stock awards were anti-dilutive for the year and accordingly not included in the computation of diluted weighted average shares.
In January 2016, the Financial Accounting Standards Board ("FASB") issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and will require recognition of a cumulative effect adjustment at adoption. We do not currently expect the adoption of this guidance to impact our financial position or liquidity.
We had $18.9 million and $20.2 million of investments at fair value on deposit with various states as of December 31, 2015 and 2014, respectively, due to regulatory requirements of those state insurance departments.
Additional fair value disclosures related to our investment portfolio are included in Note 6 - “Investments.”
The Convertible Senior Notes and Convertible Junior Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. At December 31, 2015, we had approximately $402 million in cash and investments at our holding company. The net unrealized losses on our holding company investment portfolio were approximately $2.7 million at December 31, 2015. The modified duration of the holding company investment portfolio, excluding cash and cash equivalents, was 3.1 years at December 31, 2015.
level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.
The effect of all reinsurance agreements on premiums earned and losses incurred is as follows:
(3) See Note 14 - “Income Taxes” for a discussion of the valuation allowance recorded against deferred tax assets.
As previously disclosed, 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”). The IRS indicated that it did not believe that, for various reasons, we had established sufficient tax basis in the REMIC residual interests to deduct the losses from taxable income. We appealed these assessments within the IRS and in August 2010, we reached a tentative settlement agreement with the IRS which was not finalized.
The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue, which would affect our effective tax rate is $93.9 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. During 2015, we recognized $0.9 million in interest. As of December 31, 2015 and 2014, we had $27.8 million and $26.9 million of accrued interest related to uncertain tax positions, respectively. The statute of limitations related to the consolidated federal income tax return is closed for all years prior to 2000. It is reasonably possible that our 2000-2007 federal tax case will be resolved, other than through litigation. If it is resolved under terms similar to our tentative settlement agreement that was not finalized, our total unrecognized tax benefits would be reduced by $107.1 million during 2016. After taking into account prior payments and the effect of available net operating loss carrybacks, any net cash outflows would approximate $26 million.