MGIC Investment Corporation Reports Third Quarter 2020 Results

MILWAUKEE, Nov. 4, 2020 /PRNewswire/ -- MGIC Investment Corporation (NYSE: MTG) today reported operating and financial results for the third quarter of 2020. Net income for the quarter was $130.8 million, or $0.38 per diluted share, compared with net income of $176.9 million, or $0.49 per diluted share, for the third quarter of 2019.

Adjusted net operating income for the third quarter of 2020 was $149.9  million, or $0.43 per diluted share, compared with $173.6 million, or $0.48 per diluted share, for the third quarter of 2019. 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.

Tim Mattke, CEO of MTG and Mortgage Guaranty Insurance Corporation ("MGIC") said, "Our third quarter financial performance improved compared to the second quarter primarily as a result of a decrease in incurred losses.  Fewer new notices of delinquency reported to us were the primary driver of the lower incurred losses in the third quarter.  During the quarter, we wrote $32.8 billion of new insurance, which despite lower annual persistency, resulted in our September 30th insurance in force, the long-term driver of our revenues, increasing 9.5% from twelve months prior. These results reflect the improved conditions of the economy and strength of the housing market, despite the ongoing challenges presented by the COVID-19 pandemic."  Mattke continued, "We continue to focus on the already strong capital position of MTG and MGIC.  We reduced the amount of holding company debt due in 2023, increased the liquidity at our holding company, and increased MGIC's statutory and PMIERs capital position organically and through intercompany restructurings."

He further stated that, "I admire the dedication of our team who remain focused on executing our business strategies, and providing critical support for our customers and the housing market, especially for first-time homebuyers.  While there is still uncertainty about the timing and pace of the economic recovery and the long-term impact of loss mitigation efforts undertaken by the GSEs and loan servicers, we are cautiously optimistic about the continuing resiliency of the housing market. "

Third Quarter Summary

• We continue to maintain full operations, using the virtual workforce model activated in the first quarter of 2020, in response to the COVID-19 pandemic.
• New insurance written was $32.8 billion, compared to $28.2 billion the second quarter and $19.1 billion in the third quarter of 2019, reflecting the resilience of the purchase mortgage market, the attractive refinance market, and our position in the market.
• Persistency, or the percentage of insurance remaining in force from one year prior, was 64.5% at September 30, 2020, compared with 68.2% at June 30, 2020 and 78.6% at September 30, 2019.
• Insurance in force (IIF) of $238.9 billion at September 30, 2020 increased by 3.6% during the quarter and 9.5% compared to September 30, 2019.
• Primary delinquency inventory of 64,418 loans at September 30, 2020 decreased from 69,326 loans at June 30, 2020, but increased from 30,028 loans at December 31, 2019 and 29,940 loans at September 30, 2019 primarily due to the adverse economic impact of COVID-19.
• As of September 30, 2020 67% of our delinquency inventory were reported to us as subject to a forbearance plans. We believe substantially all of the reported forbearance plans are COVID-19 related.
• Insurance written in 2008 and prior accounted for approximately 10% of the September 30, 2020 primary risk in force but accounted for 31% of the new primary delinquency notices received in the quarter. The primary delinquency inventory for 2008 and prior increased 2% year over year from 21,761 loans at September 30, 2019.
• The percentage of primary loans that were delinquent at September 30, 2020 was 5.79%, compared to 2.78% at December 31, 2019, and 2.78% at September 30, 2019.
• The loss ratio for the third quarter of 2020 was 15.9%, compared to 89.2% for the second quarter of 2020 and 12.7% for the third quarter of 2019.
• The underwriting expense ratio associated with our insurance operations for the third quarter of 2020 was 20.2%, compared to 20.1% for the second quarter of 2020 and 17.7% for the third quarter of 2019.
• Net premium yield was 43.6 basis points in the third quarter of 2020, compared to 42.7 basis points for the second quarter of 2020 and 49.6 basis points for the third quarter of 2019.
• MGIC Investment Corporation paid a $0.06 dividend per common share to shareholders during the third quarter of 2020.
• MGIC Investment Corporation did not repurchase any shares of common stock during the third quarter of 2020.
• Book value per common share outstanding increased by 7.4% from December 31, 2019 to $13.33 and increased by 11.7% from September 30, 2019.

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Fourth Quarter 2020 Activities

• In October, MGIC entered into a $412.9 million excess of loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies issued from January 1, 2020 through July 31, 2020 totaling $9.2 billion of net risk in force as of September 30, 2020.
• $241.0 billion of IIF at October 31, 2020, compared to $238.9 billion of IIF at September 30, 2020.
• 5,228 notices of delinquency received in October 2020, compared to 6,038 notices of delinquency received in September 2020 and 6,423 notices of delinquency received in August 2020.
• 8,020 cures reported in October 2020, compared to 8,126 cures reported in September 2020 and 7,868 cures reported in August 2020.
• 61,521 loans in delinquency inventory at October 31, 2020, compared to 64,418 loans in delinquency inventory at September 30, 2020 and 66,626 loans in delinquency inventory at August 31, 2020.
• MGIC Investment Corporation declared a $0.06 dividend per common share to shareholders.

Revenues

Total revenues for the third quarter of 2020 were $296.0 million, compared to $318.4 million in the third quarter last year. The decrease reflects lower premiums earned, lower net investment income, and a decrease in realized investment gains. Net premiums written for the quarter were $228.0 million, compared to $259.4 million for the same period last year. Net premiums earned for the quarter were $256.1 million, compared to $267.9 million for the same period last year. The decrease in premium written was due to lower premium rates on our insurance in force and a decrease in profit commission that was a result of higher ceded incurred losses.  This was partially offset by higher average insurance in force.   Net premium earned was also impacted by an increase in accelerated premiums earned from single premium policy cancellations.  Investment income for the third quarter decreased to $37.3 million, from $42.7 million for the same period last year, resulting from lower investment yields, partially offset by an increase in the consolidated investment portfolio.

Losses and expenses

Losses incurred 
Net losses incurred were $40.7 million, compared to $34.0 million in the same period last year. Primarily reflecting the impact of the COVID-19 pandemic, in the third quarter of 2020, we received 36,660 fewer new delinquency notices compared to the second quarter of 2020 and 6,905 more new delinquency notices than we did in the same period last year. In the third quarter of 2020, our re-estimation of reserves on previous delinquencies resulted in insignificant loss development  compared to $27 million of favorable loss reserve development in the third quarter of 2019.  In the third quarter of 2020, we also decreased our incurred but not reported, or IBNR, reserve from $61 million to $34 million.

Underwriting and other expenses
Net underwriting and other expenses were $48.5 million in the third quarter of 2020, compared to $48.3 million in the same period last year.

Provision for income taxes
The effective income tax rate was 20.4% in the third quarter of 2020 and 20.7% in the third quarter of 2019.

Capital

• Total consolidated shareholders' equity was $4.5 billion and consolidated outstanding principal on borrowings was $1.3 billion as of September 30, 2020.
• MGIC Investment Corporation issued $650 million of its 5.25% Senior Notes due in 2028 with a 3 year call feature. A portion of the proceeds were used to repurchase $182.7 million of the 5.75% Senior notes due in 2023 and $48.1 million of the 9% Convertible Junior Debentures due in 2063. The balance of the proceeds after expenses were retained at the holding company. The transactions resulted in a pretax loss on debt extinguishment of $26.7 million that was recognized in the quarter.
• MGIC's PMIERs Available Assets totaled $5.0 billion, or $1.4 billion above its Minimum Required Assets as of September 30, 2020.
• MGIC's PMIER assets increased due to organic capital generation and the transfer of approximately $250 million of assets from MGIC Reinsurance of Wisconsin (MRCW) to MGIC
• MGIC received regulatory and GSE approval to dividend to MTG its ownership of $133 million of MTG's 9% Convertible Junior Debentures due 2063, which eliminates approximately $12 million of future annual interest payments by MTG. The debentures were not included in MGIC's PMIERs Available Assets.

Other Balance Sheet and Liquidity Metrics

• Total consolidated assets were $7.1 billion as of September 30, 2020, compared to $6.2 billion as of December 31, 2019, and $6.1 billion as of September 30, 2019.
• The fair value of our consolidated investment portfolio, cash and cash equivalents was $6.8 billion as of September 30, 2020, compared to $5.9 billion as of December 31, 2019, and $5.8 billion as of September 30, 2019.
• Investments, cash and cash equivalents at the holding company were $871 million as of September 30, 2020, compared to $325 million as of December 31, 2019, and $308 million as of September 30, 2019.
• Total consolidated debt as of September 30, 2020 was $1.2 billion, compared to $833 million as of December 31, 2019, and $832 million as of September 30, 2019.

Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call November 5, 2020, 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 1-866-834-4126 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 December 5, 2020 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 September 30, 2020, MGIC had $238.9 billion of primary insurance in force covering over 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 all 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, and via postings on MGIC's website for information related to underwriting and pricing, and intends to continue to do so in the future. Such postings include corrections of previous disclosures, and may be made without any other disclosure. 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 for MGIC Investment Corporation alerts can be found at https://mtg.mgic.com/shareholder-services/email-alerts. For information about our underwriting and rates, see https://www.mgic.com/underwriting.

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. These risk factors, including the discussion of the impact of the COVID-19 pandemic, speak only as of the date of this press release and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. 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 delivered for dissemination to the public.

While we communicate with security analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report, and such reports are not our responsibility.

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.

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 components of pre-tax operating income (loss) are tax effected using a federal statutory tax rate of 21%.

Adjusted net operating income (loss) per diluted share is calculated in a manner consistent with the accounting standard regarding earnings per share by dividing (i) adjusted net operating income (loss) after making adjustments for interest expense on convertible debt, whenever the impact is dilutive, by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the "if-converted" method.

Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these adjustments. Other companies may calculate these measures differently. Therefore, their measures may not be comparable to those used by us.

1. Net realized investment gains (losses). The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.
2. Gains and losses on debt extinguishment. Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and/or reduce potential dilution from our outstanding convertible debt.
3. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

Risk Factors Relating to the COVID-19 Pandemic

The COVID-19 pandemic may continue to materially impact our financial results and may also materially impact our business, liquidity and financial condition.

The COVID-19 pandemic has had a material impact on our 2020 financial results. 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 government initiatives and actions taken by Fannie Mae and Freddie Mac (the "GSEs") (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by COVID-19.

The COVID-19 pandemic may continue to impact our business in various ways, including the following, each of which is described in more detail in the remainder of these risk factors:

• Our incurred losses will increase if the number of insured mortgage delinquencies increases. We establish reserves for insurance losses when delinquency notices are received on loans that are two or more payments past due and for loans we estimate are delinquent prior to the close of the accounting period but for which delinquency notices have not yet been reported to us (this is often referred to as "IBNR").
• We may be required to maintain more capital under the private mortgage insurer eligibility requirements ("PMIERs") of the GSEs, which generally require more capital to be held for delinquent loans than for performing loans and require more capital to be held as the number of payments missed on delinquent loans increases.
• If the number of delinquencies increases, the number of claims that we must pay over time is likely to increase. In addition, our current estimates about the number of delinquencies for which we will receive claims, and the amount, or severity, of each claim, may increase.
• If the number of purchase and/or refinance mortgage originations decreases, the number of mortgages available for us to insure in the near term may decrease.
• Our access to the reinsurance markets may be limited and the terms under which we are able to secure reinsurance may be less attractive than the terms of our previous transactions.
• Our access to the capital markets may be limited and the terms under which we may access the capital markets may be less attractive than the terms of our previous transactions.
• Receipt of a portion of our premiums may be delayed if servicers experience liquidity issues associated with their advancing payments on mortgages that are in forbearance.
• Our operations may be impacted if our management or other employees are unable to perform their duties as a result of COVID-19-related illnesses.

Risk Factors Relating to the Mortgage Insurance Industry and its Regulation

Downturns in the domestic economy or declines in home prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.

Losses result from events that reduce a borrower's ability or willingness to make mortgage payments, such as unemployment, health issues, family status, and whether the home of a borrower who defaults on his mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. A deterioration in economic conditions, including an increase in unemployment, generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect home prices, which in turn can influence the willingness of borrowers with sufficient resources to make mortgage payments when the mortgage balance exceeds the value of the home. Home prices may decline even absent a deterioration in economic conditions due to declines in demand for homes, which in turn may result from changes in buyers' perceptions of the potential for future appreciation, restrictions on and the cost of mortgage credit due to more stringent underwriting standards, higher interest rates, changes to the tax deductibility of mortgage interest, decreases in the rate of household formations, or other factors.

The unemployment rate rose from 3.5% as of December 31, 2019, to 14.7% as of April 30, 2020. It was 7.9% as of September 30, 2020. High levels of unemployment may result in an increasing number of loans in our delinquency inventory and an increasing number of insurance claims; however, the increases are difficult to predict given the uncertainty in the current market environment, including uncertainty about the length and severity of the COVID-19 pandemic; the length of time that measures intended to reduce the transmission of COVID-19 remain in place; effects of forbearance programs enacted by the GSEs, various states and municipalities; and effects of past and future government stimulus programs. Certain past stimulus programs, such as the payment of enhanced unemployment benefits, have expired. Ongoing programs include, among others:

• Payment forbearance on federally-backed mortgages (including those delivered to or purchased by the GSEs) to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance 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 servicer, an extension of up to 180 days. The servicer of the mortgage 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 will be unable to make contact with 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 mortgage loan in a forbearance plan. Approximately 82% of our insurance in force that was written in 2019 and before 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 Consumer Financial Protection Bureau ("CFPB") requires substantial loss mitigation efforts be made prior to servicers initiating foreclosures, therefore, servicers of non-GSE loans may have an incentive to offer forbearance or deferment.
• For those mortgages that are not subject to forbearance, a suspension of foreclosures and evictions until at least December 31, 2020, on mortgages purchased or securitized by the GSEs.

Many loans in our delinquency inventory have entered forbearance 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. The severity of losses associated with loans whose delinquencies do not cure will depend on economic conditions at that time, including home prices.

We may not continue to meet the GSEs' private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility.

We must comply with a GSE's PMIERs to be eligible to insure loans delivered to or purchased by that GSE. The PMIERs include financial requirements, as well as business, quality control and certain transaction approval requirements. The financial requirements of the PMIERs require a mortgage insurer's "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are generally based on an insurer's book of insurance in force and calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance agreements).

Based on our interpretation of the PMIERs, as of September 30, 2020, MGIC's Available Assets totaled $5.0 billion, or $1.4 billion in excess of its Minimum Required Assets. MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs. In calculating these "Minimum Required Assets," the total calculated credit for risk ceded under our reinsurance transactions is subject to a modest reduction. Our reinsurance transactions are discussed in 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." Under PMIERs, credit for excess of loss reinsurance transactions is generally based on the PMIERs requirement of the covered loans and the attachment and detachment point of the coverage. If the PMIERs requirement of the covered loans is less than the detachment point of the coverage, PMIERs credit is generally not given for the reinsured risk above the PMIERs requirement. The GSEs have discretion to further limit reinsurance credit under the PMIERs. Our 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 reinsurance transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit under the PMIERs, under certain circumstances, MGIC may terminate the reinsurance transactions without penalty.

The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases. For delinquent loans whose initial missed payment occurred on or after March 1, 2020 and prior to January 1, 2021 (the "COVID-19 Crisis Period"), the Minimum Required Assets are generally reduced by 70% for at least three months. The 70% reduction will continue, or be newly applied, for delinquent loans that are subject to a forbearance plan that is granted in response to a financial hardship related to COVID-19, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. Under the PMIERs, a forbearance plan on a loan with an initial missed payment occurring during the COVID-19 Crisis Period is assumed to have been granted in response to a financial hardship related to COVID-19. Loans considered to be subject to a forbearance plan include those that are in a repayment plan or loan modification trial period following the forbearance plan. As noted above, if a servicer of a loan is unable to contact the borrower prior to the expiration of the first 180-day forbearance plan term, the forbearance plan will expire. In such case, the 70% reduction in Minimum Required Assets for that loan will no longer be applicable, our Minimum Required Assets will increase and our excess of Available Assets over Minimum Required Assets will decrease.

Despite reducing the Minimum Required Assets for certain delinquent loans by 70%, an increasing number of delinquent loans caused by the COVID-19 pandemic may cause our Minimum Required Assets to exceed our Available Assets. As of September 30, 2020, there were 64,418 loans in our delinquency inventory, of which 67% were reported to us as being subject to a forbearance plan. We believe substantially all of the reported forbearance plans are COVID-19-related. We are unable to predict the ultimate number of loans that will become delinquent as a result of the COVID-19 pandemic.

If our Available Assets fall below our Minimum Required Assets, we would not be in compliance with the PMIERs. The PMIERs provide a list of remediation actions for a mortgage insurer's non-compliance, with additional actions possible in the GSEs' discretion. At the extreme, the GSEs may suspend or terminate our eligibility to insure loans purchased by them. Such suspension or termination would significantly reduce the volume of our new insurance written ("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:

• The GSEs may make the PMIERs more onerous in the future. The PMIERs provide that the factors that determine Minimum Required Assets will be updated periodically, or as needed if there is a significant change in macroeconomic conditions or loan performance. We do not anticipate that the regular periodic updates will occur more frequently than once every two years. The PMIERs state that the GSEs will provide notice 180 days prior to the effective date of updates to the factors; however, the GSEs may amend the PMIERs at any time.
• There may be future implications for PMIERs as a result of changes to the regulatory capital requirements for the GSEs. In May 2020, the FHFA re-proposed a capital rule for the GSEs that, if enacted, would increase their capital requirements for certain assets and transactions. That increase may ultimately result in an increase in the Minimum Required Assets required to be held by mortgage insurers. The re-proposed capital rule included a framework for determining the capital relief allowed to the GSEs for loans with private mortgage insurance and it affords more capital relief to a GSE when its counterparty is a more diversified entity. The proposed changes also decreased the GSEs' capital credit provided by credit risk transfer transactions, which could result in decreased PMIERs credit for existing or future reinsurance or insurance linked notes transactions entered into by a mortgage insurer. Further, any changes to the GSEs' capital and liquidity requirements resulting from the Treasury Housing Reform Plan may have future implications for PMIERs.
• 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.

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.

In accordance with accounting principles generally accepted in the United States, we establish case reserves for insurance losses and loss adjustment expenses only when notices of default are received on insured loans that are two or more payments past due and for loans we estimate are in default but for which notices of default have not yet been received (this is often referred to as "IBNR"). Losses that may occur from loans that are not delinquent are not reflected in our financial statements, except in the case where a premium deficiency exists. A premium deficiency would be recorded if the present value of expected future losses and expenses exceeds the present value of expected future premiums and already established loss reserves on the applicable loans. As a result, future losses on loans that are not currently delinquent may have a material impact on future results as such losses emerge. As of September 30, 2020, we had established case reserves and reported losses incurred for 64,418 loans in our delinquency inventory and our IBNR reserve totaled $34 million. Though not reflected in our September 30, 2020 financial results, as of October 31, 2020, our delinquency inventory had decreased to 61,521 loans. The number of loans in our delinquency inventory may increase from that level as a result of the COVID-19 pandemic, including as a result of high unemployment associated with initiatives intended to reduce the transmission of COVID-19. As a result, our losses incurred may increase in future periods. The impact of the COVID-19 pandemic on the number of delinquencies and our losses incurred will be influenced by various factors, including those 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."

Because loss reserve estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves.

When we establish case reserves, we estimate our ultimate loss on delinquent loans by estimating the number of such loans that will result in a claim payment (the "claim rate"), and further estimating the amount of the claim payment (the "claim severity"). Our estimates incorporate anticipated mitigation from rescissions and curtailments. The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. Our actual claim payments may be substantially different than our loss reserve estimates. Our estimates could be affected by several factors, including a change in regional or national economic conditions, the impact of past and future government initiatives and actions taken by the GSEs (including implementation of foreclosure moratoriums and mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce the transmission of COVID-19, and a change in the length of time loans are delinquent before claims are received.  All else being equal, the longer a loan is delinquent before a claim is received, the greater the severity. In light of the uncertainty caused by the COVID-19 pandemic, including the impact of foreclosure moratoriums and forbearance programs, the average time it takes to receive a claim may increase. The change in economic conditions may include changes in unemployment, including prolonged unemployment as a result of the COVID-19 pandemic, which may affect the ability of borrowers to make mortgage payments, and changes in home prices, which may affect the willingness of borrowers to make mortgage payments when the value of the home is below the mortgage balance. The economic effects of the COVID-19 pandemic may be disproportionately concentrated in certain geographic regions. Information about the geographic dispersion of our insurance in force can be found in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q filed with the SEC. Changes to our claim rate and claim severity estimates could have a material impact on our future results, even in a stable economic environment. In addition, historically, losses incurred have generally followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new default notice activity and a lower cure rate. The effects of the COVID-19 pandemic have affected this pattern in 2020.

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:

• 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,
• lenders using Federal Housing Administration ("FHA"), U.S. Department of Veterans Affairs ("VA") and other government mortgage insurance programs, and
• lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ("LTV") ratio and a second mortgage with a 10%, 15% or 20% LTV ratio rather than a first mortgage with a 90%, 95% or 100% LTV ratio that has private mortgage insurance.

The GSEs' charters generally require credit enhancement for a low down payment mortgage loan (a loan in an amount that exceeds 80% of a home's value) in order for such loan to be eligible for purchase by the GSEs. Private mortgage insurance has generally been purchased by lenders in primary mortgage market transactions to satisfy this credit enhancement requirement. In 2018, the GSEs initiated secondary mortgage market programs with loan level mortgage default coverage provided by various (re)insurers that are not mortgage insurers governed by PMIERs, and that are not selected by the lenders. These programs compete with traditional private mortgage insurance and, due to differences in policy terms, they may offer premium rates th