Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
Date of Report (Date of Earliest Event Reported):
 
July 20, 2017
MGIC Investment Corporation
__________________________________________
(Exact name of registrant as specified in its charter)
 
 
 
Wisconsin
1-10816
39-1486475
_____________________
(State or other jurisdiction
_____________
(Commission
______________
(I.R.S. Employer
of incorporation)
File Number)
Identification No.)
  
 
 
250 E. Kilbourn Avenue, Milwaukee, Wisconsin
 
53202
________________________________
(Address of principal executive offices)
 
___________
(Zip Code)
 
 
 
Registrant’s telephone number, including area code:
 
414-347-6480
 
Not Applicable
 
 
Former name or former address, if changed since last report
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
[  ]  Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]





Item 2.02 Results of Operations and Financial Condition.
The Company issued a press release on July 20, 2017 announcing its results of operations for the quarter ended June 30, 2017 and certain other information. The press release is furnished as Exhibit 99.

Item 9.01 Financial Statements and Exhibits.
(d) Exhibits
Pursuant to General Instruction B.2 to Form 8-K, the Company's July 20, 2017 press release is furnished as Exhibit 99 and is not filed.





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
MGIC INVESTMENT CORPORATION
 
 
 
 
 
 
Date:
July 20, 2017
By: \s\ Julie K. Sperber
 
 
 
 
 
Julie K. Sperber
 
 
Vice President, Controller and Chief Accounting Officer





Exhibit Index

 
 
 
Exhibit No.
 
Description
 
 
 
99
 
Press Release dated July 20, 2017. (Pursuant to General Instruction B.2 to Form 8-K, this press release is furnished and is not filed.)



Exhibit



Exhibit 99
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11703522&doc=3
Investor Contact:
Michael J. Zimmerman, Investor Relations, (414) 347-6596, mike_zimmerman@mgic.com

MGIC Investment Corporation Reports Second Quarter 2017 Results
Q2 Net Income of $118.6 million or $0.31 per Diluted Share
Q2 Adjusted Net Operating Income (Non-GAAP) of $119.3 million or $0.31 per Diluted Share


MILWAUKEE (July 20, 2017) - MGIC Investment Corporation (NYSE: MTG) today reported operating and financial results for the quarter ended June 30, 2017. Net income for the quarter ended June 30, 2017 was $118.6 million, or $0.31 per diluted share. Net income for the quarter ended June 30, 2016 was $109.2 million, or $0.26 per diluted share.
 
Adjusted net operating income for the quarter ended June 30, 2017 was $119.3 million or $0.31 per diluted share. Adjusted net operating income for the quarter ended June 30, 2016 was $110.0 million or $0.26 per diluted share. We present the non-GAAP financial measure "Adjusted net operating income" to increase the comparability between periods of our financial results. See “Use of Non-GAAP Financial Measures" below.

Patrick Sinks, CEO of MTG and Mortgage Guaranty Insurance Corporation ("MGIC"), said, "I am pleased to report that our insurance in force continued to increase as a result of modestly higher new insurance written compared to the same quarter last year, and the sequential increase in annual persistency. Also, new delinquent notices received, and the estimated claim rates associated with those notices declined compared to the same period last year. Further, we maintained our traditionally low expense ratio.” Sinks also said, “As we previously announced, the majority of our outstanding 2% Convertible Senior Notes due in 2020 were converted to shares of common stock in the second quarter and the remainder were redeemed. In the quarter, we also retired the remaining $145 million of 5% Senior Notes and repaid the $150 million that was drawn on our credit facility. Finally, in the quarter the holding company received a $30 million dividend from MGIC.”
    
Notable items for the quarter include:
 
 
Q2 2017
 
Q2 2016
 
Change
New Insurance Written (billions)
 
$
12.9

 
$
12.6

 
2.4
 %
Insurance in force (billions) (1)
 
$
187.3

 
$
177.5

 
5.5
 %
Primary Delinquent Inventory (# loans) (1)
 
41,317

 
52,558

 
(21.4
)%
Annual Persistency (1)
 
77.8
%
 
79.6
%
 
 
Consolidated Risk-to-capital Ratio
 
11.3:1

(2)
13:2:1

(1)
 
GAAP Loss Ratio
 
11.8
%
 
20.1
%
 
 
GAAP Underwriting Expense Ratio (3)
 
15.6
%
 
13.9
%
 
 
Book value per share (4)
 
$
8.08

 
$
7.37

 
9.6
 %
 
 
 
 
 
 
 
1) As of June 30, 2) preliminary as of June 30, 2017, 3) insurance operations, 4) based on shares outstanding






Total revenues for the second quarter of 2017 were $263.3 million, compared to $263.5 million in the second quarter last year. Total revenues in the second quarter of 2017 included $0.04 million of net realized investment losses compared to $0.84 million of net realized investment gains in the second quarter of 2016. Net premiums written for the quarter were $245.8 million, compared to $250.0 million for the same period last year. Net premiums earned were $231.1 million compared to $231.5 million for the same period last year.

New insurance written in the second quarter was $12.9 billion, compared to $12.6 billion in the second quarter of 2016. Persistency, or the percentage of insurance remaining in force from one year prior, was 77.8 percent at June 30, 2017, compared to 76.9 percent at December 31, 2016, and 79.9 percent at June 30, 2016. As of June 30, 2017, MGIC's primary insurance in force was $187.3 billion, compared to $182.0 billion at December 31, 2016, and $177.5 billion at June 30, 2016.

The fair value of MGIC Investment Corporation's investment portfolio, cash and cash equivalents was $4.8 billion at June 30, 2017, compared to $4.8 billion at December 31, 2016, and $4.9 billion at June 30, 2016.

At June 30, 2017, the percentage of loans that were delinquent, excluding bulk loans, was 3.23 percent, compared to 4.05 percent at December 31, 2016, and 4.24 percent at June 30, 2016. Including bulk loans, the percentage of loans that were delinquent at June 30, 2017 was 4.11 percent, compared to 5.04 percent at December 31, 2016, and 5.30 percent at June 30, 2016.
    
Losses incurred in the second quarter of 2017 were $27.3 million, compared to $46.6 million in the second quarter of 2016. During the second quarter of 2017 there was a $52.0 million reduction in losses incurred due to positive development on our primary loss reserves compared to $55.0 million in the second quarter of 2016. Losses incurred in the quarter associated with current year delinquent notices reflect a lower level of new notices received and a lower claim rate when compared to the same quarter last year. 

Net underwriting and other expenses were $41.1 million in the second quarter of 2017, compared to $37.6 million reported for the same period last year. 

    





Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call today, July 20, 2017, at 10 a.m. ET to allow securities analysts and shareholders the opportunity to hear management discuss the company’s quarterly results. The conference call number is 1-844-231-8825. The call is being webcast and can be accessed at the company's website at http://mtg.mgic.com/. A replay of the webcast will be available on the company’s website through August 20, 2017 under “Newsroom.”
About MGIC
MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, serves lenders throughout the United States, Puerto Rico, and other locations helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality. At June 30, 2017, MGIC had $187.3 billion of primary insurance in force covering approximately one million mortgages.

This press release, which includes certain additional statistical and other information, including non-GAAP financial information, and a supplement that contains various portfolio statistics are both available on the Company's website at https://mtg.mgic.com/ under “Newsroom.”
    
From time to time MGIC Investment Corporation releases important information via postings on its corporate website without making any other disclosure and intends to continue to do so in the future. Investors and other interested parties are encouraged to enroll to receive automatic email alerts and Really Simple Syndication (RSS) feeds regarding new postings. Enrollment information can be found at https://mtg.mgic.com under “Newsroom.”
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
Our actual results could be affected by the risk factors below. These risk factors should be reviewed in connection with this press release and our periodic reports to the Securities and Exchange Commission (“SEC”). These risk factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make. Forward looking statements consist of statements which relate to matters other than historical fact, including matters that inherently refer to future events. Among others, statements that include words such as “believe,” “anticipate,” “will” or “expect,” or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. No investor should rely on the fact that such statements are current at any time other than the time at which this press release was issued.

In addition, the current period financial results included in this press release may be affected by additional information that arises prior to the filing of our Form 10-Q for the quarter ended June 30, 2017.






Use of Non-GAAP Financial Measures
We believe that use of the Non-GAAP measures of adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with accounting principles generally accepted in the United States of America (GAAP) and should not be viewed as alternatives to GAAP measures of performance. The measures described below have been established to increase transparency for the purpose of evaluating our fundamental operating trends.

Adjusted pre-tax operating income (loss) is defined as GAAP income (loss) before tax, excluding the 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.
    
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 net income (loss) are tax effected using a federal statutory tax rate of 35%.
    
Adjusted net operating income (loss) per diluted share is calculated in a manner consistent with the accounting standard regarding earnings per share by dividing (i) adjusted net operating income (loss) after making adjustments for interest expense on convertible debt, whenever the impact is dilutive, by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the "if-converted" method.

Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Other companies may calculate these measures differently. Therefore, their measures may not be comparable to those used by us.

(1)
Net realized investment gains (losses). The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.

Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized investment gains and losses.
(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.
(4)
Infrequent or unusual non-operating items. Income tax expense related to our IRS dispute is related to past transactions which are non-recurring in nature and are not part of our primary operating activities.







MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(In thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
Net premiums written
 
$
245,834

 
$
250,015

 
$
482,536

 
$
481,296

 
Revenues
 
 
 
 
 
 
 
 
 
Net premiums earned
 
$
231,136

 
$
231,456

 
$
460,239

 
$
452,797

 
Net investment income
 
29,716

 
27,248

 
59,193

 
55,057

 
Net realized investment (losses) gains
 
(42
)
 
836

 
(164
)
 
3,892

 
Other revenue
 
2,502

 
3,994

 
4,924

 
10,367

 
Total revenues
 
263,312

 
263,534

 
524,192

 
522,113

 
Losses and expenses
 
 
 
 
 
 
 
 
 
Losses incurred, net
 
27,339

 
46,590

 
54,958

 
131,602

 
Underwriting and other expenses, net
 
41,095

 
37,593

 
84,090

 
79,331

 
Interest expense
 
14,197

 
12,244

 
30,506

 
26,945

 
Loss on debt extinguishment
 
65

 
1,868

 
65

 
15,308

 
Total losses and expenses
 
82,696

 
98,295

 
169,619

 
253,186

 
Income before tax
 
180,616

 
165,239

 
354,573

 
268,927

 
Provision for income taxes
 
61,994

 
56,018

 
146,153

 
90,515

 
Net income
 
$
118,622

 
$
109,221

 
$
208,420

 
$
178,412

 
Net income per diluted share
 
$
0.31

 
$
0.26

 
$
0.55

 
$
0.43

 






MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE (UNAUDITED)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share data)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
118,622

 
$
109,221

 
$
208,420

 
$
178,412

Interest expense, net of tax:
 
 
 
 
 
 
 
 
2% Convertible Senior Notes due 2020
 
84

 
1,982

 
907

 
3,964

5% Convertible Senior Notes due 2017
 
427

 
1,728

 
1,709

 
4,406

9% Convertible Junior Subordinated Debentures due 2063
 
3,757

 
3,757

 
7,514

 
8,379

Diluted net income available to common shareholders
 
$
122,890

 
$
116,688

 
$
218,550

 
$
195,161

 
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
366,918

 
340,678

 
354,035

 
340,411

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Unvested restricted stock units
 
1,140

 
1,209

 
1,314

 
1,444

2% Convertible Senior Notes due 2020
 
3,827

 
71,917

 
16,771

 
71,917

5% Convertible Senior Notes due 2017
 
3,557

 
13,307

 
7,154

 
15,449

9% Convertible Junior Subordinated Debentures due 2063
 
19,028

 
19,028

 
19,028

 
21,133

Weighted average shares - diluted
 
394,470

 
446,139

 
398,302

 
450,354

Net income per diluted share
 
$
0.31

 
$
0.26

 
$
0.55

 
$
0.43

 
 
 
 
 
 
 
 
 







NON-GAAP RECONCILIATIONS

Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
2017
 
2016
(In thousands, except per share amounts)
 
Pre-tax
 
Tax provision (benefit)
 
Net
(after-tax)
 
Pre-tax
 
Tax provision (benefit)
 
Net
(after-tax)
Income before tax / Net income
 
$
180,616

 
$
61,994

 
$
118,622

 
$
165,239

 
$
56,018

 
$
109,221

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Additional income tax provision related to IRS litigation
 

 
(559
)
 
559

 

 
(152
)
 
152

Net realized investment losses (gains)
 
42

 
15

 
27

 
(836
)
 
(293
)
 
(543
)
Loss on debt extinguishment
 
65

 
23

 
42

 
1,868

 
654

 
1,214

Adjusted pre-tax operating income / Adjusted net operating income
 
$
180,723

 
$
61,473

 
$
119,250

 
$
166,271

 
$
56,227

 
$
110,044

 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - diluted
 
 
 
 
 
394,470

 
 
 
 
 
446,139

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per diluted share
 
 
 
 
 
$
0.31

 
 
 
 
 
$
0.26

Additional income tax provision related to IRS litigation
 
 
 
 
 

 
 
 
 
 

Net realized investment losses (gains)
 
 
 
 
 

 
 
 
 
 

Loss on debt extinguishment
 
 
 
 
 

 
 
 
 
 

Adjusted net operating income per diluted share
 
 
 
 
 
$
0.31

 
 
 
 
 
$
0.26

 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
(In thousands, except per share amounts)
 
Pre-tax
 
Tax provision (benefit)
 
Net
(after-tax)
 
Pre-tax
 
Tax provision (benefit)
 
Net
(after-tax)
Income before tax / Net income
 
$
354,573

 
$
146,153

 
$
208,420

 
$
268,927

 
$
90,515

 
$
178,412

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Additional income tax provision related to IRS litigation
 

 
(27,783
)
 
27,783

 

 
(341
)
 
341

Net realized investment losses (gains)
 
164

 
57

 
107

 
(3,892
)
 
(1,362
)
 
(2,530
)
Loss on debt extinguishment
 
65

 
23

 
42

 
15,308

 
5,358

 
9,950

Adjusted pre-tax operating income / Adjusted net operating income
 
$
354,802

 
$
118,450

 
$
236,352

 
$
280,343

 
$
94,170

 
$
186,173

 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares - diluted
 
 
 
 
 
398,302

 
 
 
 
 
450,354

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per diluted share
 
 
 
 
 
$
0.55

 
 
 
 
 
$
0.43

Additional income tax provision related to IRS litigation
 
 
 
 
 
0.07

 
 
 
 
 

Net realized investment losses (gains)
 
 
 
 
 

 
 
 
 
 
(0.01
)
Loss on debt extinguishment
 
 
 
 
 

 
 
 
 
 
0.02

Adjusted net operating income per diluted share
 
 
 
 
 
$
0.62

 
 
 
 
 
$
0.44

 
 
 
 
 
 
 
 
 
 
 
 
 






MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
 
 
 
 
 
 
 
June 30,
 
December 31,
 
June 30,
(In thousands, except per share data)
 
2017
 
2016
 
2016
ASSETS
 
 
 
 
 
 
Investments (1)
 
$
4,708,420

 
$
4,692,350

 
$
4,566,078

Cash and cash equivalents
 
127,908

 
155,410

 
300,974

Reinsurance recoverable on loss reserves (2)
 
44,783

 
50,493

 
45,215

Home office and equipment, net
 
42,212

 
36,088

 
30,800

Deferred insurance policy acquisition costs
 
18,677

 
17,759

 
16,680

Deferred income taxes, net
 
481,389

 
607,655

 
617,266

Other assets
 
176,779

 
174,774

 
167,773

Total assets
 
$
5,600,168

 
$
5,734,529

 
$
5,744,786

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Loss reserves (2)
 
$
1,187,089

 
$
1,438,813

 
$
1,632,333

Unearned premiums
 
352,010

 
329,737

 
308,424

Senior notes
 
417,983

 
417,406

 

Federal home loan bank advance
 
155,000

 
155,000

 
155,000

Convertible senior notes
 

 
349,461

 
636,324

Convertible junior debentures
 
256,872

 
256,872

 
256,872

Other liabilities
 
236,153

 
238,398

 
244,154

Total liabilities
 
2,605,107

 
3,185,687

 
3,233,107

Shareholders' equity
 
2,995,061

 
2,548,842

 
2,511,679

Total liabilities and shareholders' equity
 
$
5,600,168

 
$
5,734,529

 
$
5,744,786

Book value per share (3)
 
$
8.08

 
$
7.48

 
$
7.37

 
 
 
 
 
 
 
(1) Investments include net unrealized (losses) gains on securities
 
$
26,274

 
$
(32,006
)
 
$
138,488

(2) Loss reserves, net of reinsurance recoverable on loss reserves
 
$
1,142,306

 
$
1,388,320

 
$
1,587,118

(3) Shares outstanding
 
370,557

 
340,663

 
340,636







Additional Information
 
 Q2 2017
 
 Q1 2017
 
 Q4 2016
 
 Q3 2016
 
 Q2 2016
 
 Q1 2016
 
New primary insurance written (NIW) (billions)
$
12.9

 
$
9.3

 
$
12.8

 
$
14.2

 
$
12.6

 
$
8.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly premium plans (1)
10.6

 
7.8

 
10.6

 
11.7

 
9.9

 
6.5

 
Single premium plans
2.3

 
1.5

 
2.2

 
2.5

 
2.7

 
1.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct average premium rate (bps) on NIW
 
 
 
 
 
 
 
 
 
 
 
 
Monthly (1)
63.5

 
60.8

 
57.5

 
58.3

 
60.5

 
64.5

 
Singles
177.4

 
172.2

 
163.0

 
167.2

 
166.3

 
166.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
New primary risk written (billions)
$
3.2

 
$
2.3

 
$
3.1

 
$
3.5

 
$
3.1

 
$
2.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product mix as a % of primary flow NIW
 
 
 
 
 
 
 
 
 
 
 
 
>95% LTVs
10
%
 
8
%
 
7
%
 
6
%
 
5
%
 
5
%
 
Singles
18
%
 
17
%
 
17
%
 
18
%
 
21
%
 
22
%
 
Refinances
9
%
 
17
%
 
24
%
 
19
%
 
17
%
 
18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary Insurance In Force (IIF) (billions)
$
187.3

 
$
183.5

 
$
182.0

 
$
180.1

 
$
177.5

 
$
175.0

 
Flow only
$
178.6

 
$
174.5

 
$
172.8

 
$
170.5

 
$
167.5

 
$
164.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annual Persistency
77.8
%
 
76.9
%
 
76.9
%
 
78.3
%
 
79.6
%
 
79.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary Risk In Force (RIF) (billions)
$
48.5

 
$
47.5

 
$
47.2

 
$
46.8

 
$
46.2

 
$
45.6

 
Flow only
$
46.0

 
$
45.0

 
$
44.6

 
$
44.1

 
$
43.4

 
$
42.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Primary RIF by FICO (%)
 
 
 
 
 
 
 
 
 
 
 
 
FICO 740 & >
50
%
 
50
%
 
49
%
 
49
%
 
48
%
 
47
%
 
FICO 700-739
25
%
 
24
%
 
25
%
 
24
%
 
24
%
 
24
%
 
FICO 660-699
15
%
 
15
%
 
15
%
 
15
%
 
16
%
 
16
%
 
FICO 659 & <
10
%
 
11
%
 
11
%
 
12
%
 
12
%
 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Coverage Ratio (RIF/IIF)
25.9
%
 
25.9
%
 
25.9
%
 
26.0
%
 
26.1
%
 
26.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Loan Size of IIF (thousands)
$
186.09

 
$
183.91

 
$
182.35

 
$
180.71

 
$
178.89

 
$
177.08

 
Flow only
$
188.70

 
$
186.52

 
$
184.90

 
$
183.18

 
$
181.23

 
$
179.32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary IIF - # of loans
1,006,392

 
997,650

 
998,294

 
996,816

 
992,076

 
988,512

 
Flow only
946,435

 
935,470

 
934,350

 
931,047

 
924,474

 
919,229

 
 
 
 
 
 
 
 
 
 
 
 
 
 






 
 Q2 2017
 
 Q1 2017
 
 Q4 2016
 
 Q3 2016
 
 Q2 2016
 
 Q1 2016
 
Primary IIF - Default Roll Forward - # of Loans
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Default Inventory
45,349

 
50,282

 
51,433

 
52,558

 
55,590

 
62,633

 
New Notices
14,463

 
14,939

 
17,016

 
17,607

 
16,080

 
16,731

 
Cures
(14,708
)
 
(17,128
)
 
(15,267
)
 
(15,556
)
 
(15,640
)
 
(19,053
)
 
Paids (including those charged to a deductible or captive)
(2,573
)
 
(2,635
)
 
(2,748
)
 
(3,051
)
 
(3,195
)
 
(3,373
)
 
Rescissions and denials
(100
)
 
(95
)
 
(152
)
 
(125
)
 
(142
)
 
(210
)
 
Items removed from inventory
(1,114
)
 
(14
)
 

 

 
(135
)
 
(1,138
)
 
Ending Default Inventory
41,317

 
45,349

 
50,282

 
51,433

 
52,558

 
55,590

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary claim received inventory included in ending default inventory
1,258

 
1,390

 
1,385

 
1,636

 
1,829

 
2,267

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of Cures
 
 
 
 
 
 
 
 
 
 
 
 
Reported delinquent and cured intraquarter
3,854

 
5,476

 
4,543

 
4,986

 
4,306

 
6,248

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of payments delinquent prior to cure
 
 
 
 
 
 
 
 
 
 
 
 
3 payments or less
6,803

 
7,585

 
7,006

 
6,455

 
7,002

 
8,413

 
4-11 payments
2,964

 
3,036

 
2,580

 
2,786

 
3,099

 
3,077

 
12 payments or more
1,087

 
1,031

 
1,138

 
1,329

 
1,233

 
1,315

 
Total Cures in Quarter
14,708

 
17,128

 
15,267

 
15,556

 
15,640

 
19,053

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of Paids
 
 
 
 
 
 
 
 
 
 
 
 
Number of payments delinquent at time of claim payment
 
 
 
 
 
 
 
 
 
 
 
 
3 payments or less
8

 
13

 
6

 
16

 
18

 
25

 
4-11 payments
279

 
306

 
273

 
325

 
320

 
389

 
12 payments or more
2,286

 
2,316

 
2,469

 
2,710

 
2,857

 
2,959

 
Total Paids in Quarter
2,573

 
2,635

 
2,748

 
3,051

 
3,195

 
3,373

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aging of Primary Default Inventory
 
 
 
 
 
 
 
 
 
 
 
 
Consecutive months in default
 
 
 
 
 
 
 
 
 
 
 
 
      3 months or less
10,299

25
%
9,184

20
%
12,194

24
%
12,333

24
%
11,547

22
%
10,120

18
%
      4-11 months
11,018

27
%
13,617

30
%
13,450

27
%
12,648

25
%
12,680

24
%
15,319

28
%
      12 months or more
20,000

48
%
22,548

50
%
24,638

49
%
26,452

51
%
28,331

54
%
30,151

54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of payments delinquent
 
 
 
 
 
 
 
 
 
 
 
 
      3 payments or less
15,858

38
%
15,692

35
%
18,419

36
%
18,374

36
%
17,299

33
%
16,864

30
%
      4-11 payments
10,560

26
%
12,275

27
%
12,892

26
%
12,282

24
%
12,746

24
%
14,595

26
%
      12 payments or more
14,899

36
%
17,382

38
%
18,971

38
%
20,777

40
%
22,513

43
%
24,131

44
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary IIF - # of Delinquent Loans
41,317

 
45,349

 
50,282

 
51,433

 
52,558

 
55,590

 
Flow only
30,571

 
33,850

 
37,829

 
38,552

 
39,177

 
41,440

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Primary IIF Default Rates
4.11
%
 
4.55
%
 
5.04
%
 
5.16
%
 
5.30
%
 
5.62
%
 
Flow only
3.23
%
 
3.62
%
 
4.05
%
 
4.14
%
 
4.24
%
 
4.51
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 






 
 Q2 2017
 
 Q1 2017
 
 Q4 2016
 
 Q3 2016
 
 Q2 2016
 
 Q1 2016
 
Reserves
 
 
 
 
 
 
 
 
 
 
 
 
  Primary
 
 
 
 
 
 
 
 
 
 
 
 
Direct Loss Reserves (millions)
$
1,165

 
$
1,311

 
$
1,413

 
$
1,493

 
$
1,574

 
$
1,683

 
Average Direct Reserve Per Default
$
28,206

 
$
28,911

 
$
28,104

 
$
29,027

 
$
29,939

 
$
30,268

 
  Pool
 
 
 
 
 
 
 
 
 
 
 
 
Direct loss reserves (millions)
$
21

 
$
23

 
$
25

 
$
32

 
$
37

 
$
38

 
Ending default inventory
1,511

 
1,714

 
1,883

 
1,979

 
2,024

 
2,247

 
Pool claim received inventory included in ending default inventory
63

 
64

 
72

 
87

 
95

 
72

 
Reserves related to Freddie Mac settlement (millions)
$

 
$

 
$

 
$
10

 
$
21

 
$
31

 
Other Gross Reserves (millions)
$
1

 
$
1

 
$
1

 
$

 
$

 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Paid Claims (millions) (3)
$
173

 
$
128

 
$
149

 
$
161

 
$
172

 
$
222

 
Total primary (excluding settlements)
126

 
130

 
133

 
147

 
153

 
166

 
Rescission and NPL settlements
45

 

 
1

 
1

 
4

 
47

 
Pool - with aggregate loss limits
2

 
1

 
2

 
1

 
2

 
1

 
Pool - without aggregate loss limits
2

 
1

 
2

 
2

 
2

 
2

 
Pool - Freddie Mac settlement

 

 
10

 
11

 
10

 
11

 
Reinsurance
(6
)
 
(9
)
 
(4
)
 
(5
)
 
(4
)
 
(10
)
 
Other (2)
4

 
5

 
5

 
4

 
5

 
5

 
Reinsurance terminations (3)

 

 

 
(3
)
 

 

 
Primary Average Claim Payment (thousands) (2)
$
49.1


$
49.1

 
$
48.3

 
$
48.1

 
$
48.0

 
$
49.3

 
Flow only (2)
$
45.0


$
45.2

 
$
44.0

 
$
44.8

 
$
45.9

 
$
45.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance excluding captives
 
 
 
 
 
 
 
 
 
 
 
 
% insurance inforce subject to reinsurance
77.6
%
 
76.8
%
 
76.3
%
 
75.3
%
 
74.7
%
 
73.7
%
 
% quarterly NIW subject to reinsurance
88.2
%
 
85.9
%
 
89.3
%
 
88.4
%
 
90.2
%
 
89.1
%
 
Ceded premium written and earned (millions)
$
28.9

 
$
28.9

 
$
32.1

 
$
31.7

 
$
30.0

 
$
31.7

 
Ceded losses incurred (millions)
$
4.4

 
$
4.7

 
$
8.2

 
$
7.4

 
$
6.1

 
$
8.5

 
Ceding commissions (millions) (included in underwriting and other expenses)
$
12.2

 
$
12.0

 
$
12.0

 
$
12.1

 
$
11.9

 
$
11.6

 
Profit commission (millions) (included in ceded premiums)
$
32.3

 
$
31.1

 
$
27.7

 
$
29.0

 
$
29.8

 
$
26.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct Pool RIF (millions)
 
 
 
 
 
 
 
 
 
 
 
 
With aggregate loss limits
$
239

 
$
242

 
$
244

 
$
247

 
$
249

 
$
251

 
Without aggregate loss limits
$
267

 
$
284

 
$
303

 
$
321

 
$
343

 
$
365

 
 
 
 
 
 
 
 
 
 
 
 
 
 






 
 Q2 2017
 
 Q1 2017
 
 Q4 2016
 
 Q3 2016
 
 Q2 2016
 
 Q1 2016
 
Bulk Primary Insurance Statistics
 
 
 
 
 
 
 
 
 
 
 
 
Insurance in force (billions)
$
8.7

 
$
9.0

 
$
9.2

 
$
9.6

 
$
10.0

 
$
10.2

 
Risk in force (billions)
$
2.5

 
$
2.5

 
$
2.6

 
$
2.7

 
$
2.8

 
$
2.9

 
Average loan size (thousands)
$
144.93

 
$
144.68

 
$
145.05

 
$
145.73

 
$
146.84

 
$
147.42

 
Number of delinquent loans
10,746

 
11,499

 
12,453

 
12,881

 
13,381

 
14,150

 
Default rate
17.92
%
 
18.49
%
 
19.48
%
 
19.59
%
 
19.79
%
 
20.42
%
 
Primary paid claims (millions)
$
31


$
33

 
$
35

(2
)
$
37

(2
)
$
35

 
$
43

(2
)
Average claim payment (thousands)
$
67.7


$
66.6

 
$
65.8

(2
)
$
61.4

(2
)
$
56.8

 
$
65.1

(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Guaranty Insurance Corporation - Risk to Capital
10.2:1

(4
)
10.4:1

 
10.7:1

 
11.1:1

 
11.6:1

 
12.3:1

 
Combined Insurance Companies - Risk to Capital
11.3:1

(4
)
11.6:1

 
12.0:1

 
12.6:1

 
13.2:1

 
13.8:1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP loss ratio
(insurance operations only)
11.8
%
 
12.1
%
 
20.3
%
 
25.7
%
 
20.1
%
 
38.4
%
 
GAAP underwriting expense ratio (insurance operations only)
15.6
%
 
17.0
%
 
15.8
%
 
14.7
%
 
13.9
%
 
16.9
%
 

Note: The FICO credit score for a loan with multiple borrowers is the lowest of the borrowers’ “decision FICO scores.” A borrower’s “decision FICO score” is determined as follows: if there are three FICO scores available, the middle FICO score is used; if two FICO scores are available, the lower of the two is used; if only one FICO score is available, it is used.

Note: Average claim paid may vary from period to period due to amounts associated with mitigation efforts.

(1) Includes loans with annual and split payments.

(2) Excludes claims paying practices and non-performing loan settlements

(3) Net paid claims, as presented, does not include amounts received in conjunction with terminations or commutations of reinsurance agreements.

(4) Preliminary





Risk Factors

As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires, and “MGIC” refers to Mortgage Guaranty Insurance Corporation.
Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.
Our private mortgage insurance competitors include:
Arch Mortgage Insurance Company,
Essent Guaranty, Inc.,
Genworth Mortgage Insurance Corporation,
National Mortgage Insurance Corporation, and
Radian Guaranty Inc.
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 pricing, underwriting requirements, financial strength (including based on credit or financial strength ratings), customer relationships, name recognition, reputation, the strength of our management team and field organization, the ancillary products and services provided to lenders (including contract underwriting services), the depth of our databases covering insured loans and the effective use of technology and innovation in the delivery and servicing of our mortgage insurance products.
Much of the competition in the industry has centered on pricing practices which, in the last few years included: (i) reductions in standard filed rates on borrower-paid policies, (ii) use by certain competitors of a spectrum of filed rates to allow for formulaic, risk-based pricing (commonly referred to as “black-box” pricing); and (iii) use of customized rates (discounted from published rates) on lender-paid, single premium policies. The willingness of mortgage insurers to offer reduced pricing (through filed or customized rates) has been met with an increased demand from various lenders for reduced rate products. There can be no assurance that pricing competition will not intensify further, which could result in a decrease in our new insurance written and/or returns.
In 2016 and the first half of 2017, approximately 5% and 4%, respectively, of our new insurance written was for loans for which one lender was the original insured. Our relationships with our customers could be adversely affected by a variety of factors, including if our premium rates are higher than those of our competitors, our underwriting requirements result in our declining to insure some of the loans originated by our customers, or our insurance rescissions and curtailments affect the customer.
Substantially all of our insurance written since 2008 has been for loans purchased by Fannie Mae and Freddie Mac (the "GSEs"). The current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs require a mortgage insurer to maintain a minimum amount of assets to support its insured risk, as discussed in our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility.” The PMIERs do not require an insurer to maintain minimum financial strength ratings; however, our financial strength ratings can affect us in the following ways:
A downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by our customers, potentially resulting in a decrease in the amount of our new insurance written.
Our ability to participate in the non-GSE mortgage market (which has been limited since the financial crisis, but may grow in the future), could depend on our ability to maintain and improve our investment grade ratings for our mortgage insurance subsidiaries. We could be competitively disadvantaged with





some market participants because the financial strength ratings of our insurance subsidiaries are lower than those of some competitors. MGIC's financial strength rating from Moody’s is Baa3 (with a stable outlook) and from Standard & Poor’s is BBB+ (with a stable outlook).
Financial strength ratings may also play a greater role if the GSEs no longer operate in their current capacities, for example, due to legislative or regulatory action. In addition, although the PMIERs do not require minimum financial strength ratings, the GSEs consider financial strength ratings to be important when utilizing forms of credit enhancement other than traditional mortgage insurance, including in the credit risk transfer offering discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance." If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our insurance subsidiaries, our future new insurance written could be negatively affected.
The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance.
Alternatives to private mortgage insurance include:

lenders using FHA, VA and other government mortgage insurance programs,

investors using risk mitigation and credit risk transfer techniques other than private mortgage insurance,

lenders and other investors holding mortgages in portfolio and self-insuring, and

lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio that has private mortgage insurance.
The GSEs (and other investors) have used risk mitigation and credit risk transfer techniques other than private mortgage insurance, such as obtaining insurance from non-mortgage insurers, engaging in credit-linked note transactions executed in the capital markets, or using other forms of debt issuances or securitizations that transfer credit risk directly to other investors; using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage; or accepting credit risk without credit enhancement. Although the risk mitigation and credit risk transfer techniques used by the GSEs in the past several years have not displaced primary mortgage insurance, the techniques continue to evolve.
The FHA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was an estimated 38.9% in the first quarter of 2017, 35.5% in 2016, and 39.3% in 2015. In the past ten years, the FHA’s share has been as low as 17.1% in 2007 and as high as 68.7% in 2009. Factors that influence the FHA’s market share include relative rates and fees, underwriting guidelines and loan limits of the FHA, VA, private mortgage insurers and the GSEs; lenders' perceptions of legal risks under FHA versus GSE programs; flexibility for the FHA to establish new products as a result of federal legislation and programs; returns expected to be obtained by lenders for Ginnie Mae securitization of FHA-insured loans compared to those obtained from selling loans to Fannie Mae or Freddie Mac for securitization; and differences in policy terms, such as the ability of a borrower to cancel insurance coverage under certain circumstances. We cannot predict how the factors that affect the FHA’s share of new insurance written will change in the future.
The VA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was an estimated 27.2% in the first quarter of 2017, 26.6% in 2016, and 23.9% in 2015. The VA’s market share in the first quarter of 2017 was its highest in the past ten years and its lowest market share in the past ten years was 5.4% in 2007. We believe that the VA’s market share has generally been increasing because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount but no additional monthly expense, and because of an increase in the number of borrowers who are eligible for the VA’s program.





Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.
The GSEs’ charters generally require credit enhancement for a low down payment mortgage loan (a loan amount that exceeds 80% of a home’s value) in order for such loan to be eligible for purchase by the GSEs. Lenders generally have used private mortgage insurance to satisfy this credit enhancement requirement and low down payment mortgages purchased by the GSEs generally are insured with private mortgage insurance. As a result, the business practices of the GSEs greatly impact our business and include:

private mortgage insurer eligibility requirements of the GSEs (for information about the financial requirements included in the PMIERs, see our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility”),
the level of private mortgage insurance coverage, subject to the limitations of the GSEs’ charters (which may be changed by federal legislation), when private mortgage insurance is used as the required credit enhancement on low down payment mortgages,
the amount of loan level price adjustments and guaranty fees (which result in higher costs to borrowers) that the GSEs assess on loans that require private mortgage insurance,
whether the GSEs influence the mortgage lender’s selection of the mortgage insurer providing coverage and, if so, any transactions that are related to that selection,
the underwriting standards that determine which loans are eligible for purchase by the GSEs, which can affect the quality of the risk insured by the mortgage insurer and the availability of mortgage loans,
the terms on which mortgage insurance coverage can be canceled before reaching the cancellation thresholds established by law,
the programs established by the GSEs intended to avoid or mitigate loss on insured mortgages and the circumstances in which mortgage servicers must implement such programs,
the terms that the GSEs require to be included in mortgage insurance policies for loans that they purchase,
the terms on which the GSEs offer lenders relief on their representations and warranties made at the time of sale of a loan to the GSEs, which creates pressure on mortgage insurers to limit their rescission rights to conform to such relief, and the extent to which the GSEs intervene in mortgage insurers’ claims paying practices, rescission practices or rescission settlement practices with lenders, and
the maximum loan limits of the GSEs in comparison to those of the FHA and other investors.
The Federal Housing Finance Agency (“FHFA”) has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorship may increase the likelihood that the business practices of the GSEs change in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation. In the past, members of Congress have introduced several bills intended to change the business practices of the GSEs and the FHA; however, no legislation has been enacted. The Administration has indicated that the conservatorship of the GSEs should end; however, it is unclear whether and when that would occur and how that would impact us. As a result of the matters referred to above, it is uncertain what role the GSEs, FHA and private capital, including private mortgage insurance, will play in the residential housing finance system in the future or the impact of any such changes on our business. In addition, the timing of the impact of any resulting changes on our business is uncertain. Most meaningful changes would require Congressional action to implement and it is difficult to estimate when Congressional action would be final and how long any associated phase-in period may last.





We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility.
We must comply with the PMIERs to be eligible to insure loans purchased by the GSEs. The PMIERs include financial requirements, as well as business, quality control and certain transaction approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s “Available Assets” (generally only the most liquid assets of an insurer) to equal or exceed its “Minimum Required Assets” (which are based on an insurer’s book and are calculated from tables of factors with several risk dimensions and are subject to a floor amount). Based on our interpretation of the PMIERs, as of June 30, 2017, MGIC’s Available Assets totaled $4.7 billion, or $0.8 billion in excess of its Minimum Required Assets. MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs.
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 new business writings. Factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:
The GSEs could make the PMIERs more onerous in the future; in this regard, the PMIERs provide that the factors that determine Minimum Required Assets will be updated every two years and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. The GSEs have informed us that they currently do not expect any updates to be effective before the fourth quarter of 2018 and we expect the GSEs will provide notice 180 days prior to the effective date of such updates. The GSEs may amend the PMIERs at any time.
The GSEs may reduce the amount of credit they allow under the PMIERs for the risk ceded under our quota share reinsurance transactions. The GSEs’ ongoing approval of those transactions is subject to several conditions and the transactions will be reviewed under the PMIERs at least annually by the GSEs. For more information about the transactions, see our risk factor titled “The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring.”
Our future operating results may be negatively impacted by the matters discussed in the rest of these risk factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets.
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.
While on an overall basis, the amount of Available Assets MGIC must hold in order to continue to insure GSE loans increased under the PMIERs over what state regulation currently requires, our reinsurance transactions mitigate the negative effect of the PMIERs on our returns. In this regard, see the second bullet point above.
The benefit of our net operating loss carryforwards may become substantially limited.
As of June 30, 2017, we had approximately $1.2 billion of net operating losses for tax purposes that we can use in certain circumstances to offset future taxable income and thus reduce our federal income tax liability. Any unutilized carryforwards are scheduled to expire at the end of tax years 2031 through 2033. Our ability to utilize these net operating losses to offset future taxable income may be significantly limited if we experience an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in our ownership by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. A corporation that experiences an ownership change will generally be subject to an annual limitation on the corporation’s subsequent use of net operating loss carryovers that arose from pre-ownership change periods and use of losses that are subsequently recognized with respect to assets that had a built-in-loss on the date of the ownership change. The amount of the annual limitation generally equals the fair value of the corporation immediately before the ownership change multiplied by the long-term tax-exempt interest rate (subject to certain adjustments). To the extent that the limitation in a post-





ownership-change year is not fully utilized, the amount of the limitation for the succeeding year will be increased.
While we have adopted our Amended and Restated Rights Agreement to minimize the likelihood of transactions in our stock resulting in an ownership change, future issuances of equity-linked securities or transactions in our stock and equity-linked securities that may not be within our control may cause us to experience an ownership change. If we experience an ownership change, we may not be able to fully utilize our net operating losses, resulting in additional income taxes and a reduction in our shareholders’ equity.
As of June 30, 2017, our deferred tax asset is recorded at $481.4 million, which relates primarily to the future tax effects of our prior year net operating losses expected to be carried forward to offset future taxable income. A decrease in the federal statutory income tax rate will result in a one-time reduction in the amount at which our deferred tax asset is recorded, thereby reducing our net income and book value in that period; however, such a decrease will also reduce our effective income tax rate, thereby increasing net income in future periods.
We are involved in legal proceedings and are subject to the risk of additional legal proceedings in the future.
Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. In our SEC reports, we refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, all of our insurance policies provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call such reduction of claims “curtailments.” In recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In each of 2016 and the first half of 2017, curtailments reduced our average claim paid by approximately 5.5%.
Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission, curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
When the insured disputes our right to rescind coverage or curtail claims, we generally engage in discussions in an attempt to settle the dispute. If we are unable to reach a settlement, the outcome of a dispute ultimately would be determined by legal proceedings.
Under ASC 450-20, until a liability 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. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimate of our probable loss. If we are not able to implement settlements we consider probable, we intend to defend MGIC vigorously against any related legal proceedings.
In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matter