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Press Release

MGIC Investment Corporation Reports Third Quarter 2017 Results

Oct 18, 2017
Q3 Net Income of $120.0 million or $0.32 per Diluted Share
Q3 Adjusted Net Operating Income (Non-GAAP) of $120.7 million or $0.32 per Diluted Share

MILWAUKEE, Oct. 18, 2017 /PRNewswire/ -- MGIC Investment Corporation (NYSE: MTG) today reported operating and financial results for the quarter ended September 30, 2017. Net income for the quarter ended September 30, 2017 was $120.0 million, or $0.32 per diluted share. Net income for the quarter ended September 30, 2016 was $56.6 million, or $0.14 per diluted share.

Adjusted net operating income for the quarter ended September 30, 2017 was $120.7 million or $0.32 per diluted share. Adjusted net operating income for the quarter ended September 30, 2016 was $102.4 million or $0.25 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 we continue to make good progress in executing on our business strategies.  Over the last year we prudently grew our insurance in force by 6 percent, and during the quarter we were able to increase the dividend payment from MGIC to the holding company to $40 million. Further, we maintained our traditionally low expense ratio." Sinks added that, "Reflecting the current economic conditions and underwriting quality of recently written business, new delinquent notices received in the third quarter, and the estimated claim rate associated with those notices declined compared to the same period last year."       

Notable items for the quarter include:

   

Q3 2017

 

Q3 2016

 

Change

New Insurance Written (billions)

 

$

14.1

   

$

14.2

   

(0.7)

%

Insurance in force (billions) (1)

 

$

191.0

   

$

180.1

   

6.1

%

Primary Delinquent Inventory (# loans) (1)

 

41,235

   

51,433

   

(19.8)

%

Annual Persistency (1)

 

78.8

%

 

78.3

%

   

Consolidated Risk-to-Capital Ratio

 

11.1:1

 

(2)

12:6:1

 

(1)

 

GAAP Loss Ratio

 

12.5

%

 

25.7

%

   

GAAP Underwriting Expense Ratio (3)

 

15.7

%

 

14.7

%

   

Book Value per Share (4)

 

$

8.45

   

$

7.48

   

13.0

%

             

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

Total revenues for the third quarter of 2017 were $270.4 million, compared to $273.9 million in the third quarter last year. Total revenues in the third quarter of 2017 included $0.05 million of net realized investment losses compared to $5.09 million of net realized investment gains in the third quarter of 2016. Net premiums written for the quarter were $255.9 million, compared to $250.3 million for the same period last year. Net premiums earned were $237.1 million compared to $237.4 million for the same period last year.

New insurance written in the third quarter was $14.1 billion, compared to $14.2 billion in the third quarter of 2016. Persistency, or the percentage of insurance remaining in force from one year prior, was 78.8 percent at September 30, 2017, compared to 76.9 percent at December 31, 2016, and 78.3 percent at September 30, 2016. As of September 30, 2017, MGIC's primary insurance in force was $191.0 billion, compared to $182.0 billion at December 31, 2016, and $180.1 billion at September 30, 2016.

The fair value of MGIC Investment Corporation's investment portfolio, cash and cash equivalents was $5.0 billion at September 30, 2017, compared to $4.8 billion at December 31, 2016, and $5.0 billion at September 30, 2016.

At September 30, 2017, the percentage of loans that were delinquent, excluding bulk loans, was 3.19 percent, compared to 4.05 percent at December 31, 2016, and 4.14 percent at September 30, 2016. Including bulk loans, the percentage of loans that were delinquent at September 30, 2017 was 4.07 percent, compared to 5.04 percent at December 31, 2016, and 5.16 percent at September 30, 2016.

Losses incurred in the third quarter of 2017 were $29.7 million, compared to $60.9 million in the third quarter of 2016. During the third quarter of 2017 there was a $38 million reduction in losses incurred due to positive development on our primary loss reserves for previously received delinquencies compared to a reduction of $30 million in the third quarter of 2016. Losses incurred in the quarter associated with delinquent notices received in the quarter 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 $42.9 million in the third quarter of 2017, compared to $40.4 million reported for the same period last year. 

Conference Call and Webcast Details

MGIC Investment Corporation will hold a conference call today, October 18, 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 November 18, 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 September 30, 2017, MGIC had $191.0 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 September 30, 2017.

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. 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 components of pre-tax operating 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. 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.

   

(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 September 30,

 

Nine Months Ended September 30,

 

(In thousands, except per share data)

 

2017

 

2016

 

2017

 

2016

 
                   

Net premiums written

 

$

255,896

   

$

250,324

   

$

738,432

   

$

731,620

   

Revenues

                 

Net premiums earned

 

$

237,083

   

$

237,376

   

$

697,322

   

$

690,173

   

Net investment income

 

30,402

   

27,515

   

89,595

   

82,572

   

Net realized investment (losses) gains

 

(47)

   

5,092

   

(211)

   

8,984

   

Other revenue

 

2,922

   

3,867

   

7,846

   

14,234

   

Total revenues

 

270,360

   

273,850

   

794,552

   

795,963

   

Losses and expenses

                 

Losses incurred, net

 

29,747

   

60,897

   

84,705

   

192,499

   

Underwriting and other expenses, net

 

42,873

   

40,445

   

126,963

   

119,776

   

Interest expense

 

13,273

   

13,536

   

43,779

   

40,481

   

Loss on debt extinguishment

 

   

75,223

   

65

   

90,531

   

Total losses and expenses

 

85,893

   

190,101

   

255,512

   

443,287

   

Income before tax

 

184,467

   

83,749

   

539,040

   

352,676

   

Provision for income taxes

 

64,440

   

27,131

   

210,593

   

117,646

   

Net income

 

$

120,027

   

$

56,618

   

$

328,447

   

$

235,030

   

Net income per diluted share

 

$

0.32

   

$

0.14

   

$

0.86

   

$

0.58

   

 

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

EARNINGS PER SHARE (UNAUDITED)

                 
   

Three Months Ended September 30,

 

Nine Months Ended September 30,

(In thousands, except per share data)

 

2017

 

2016

 

2017

 

2016

Net income

 

$

120,027

   

$

56,618

   

$

328,447

   

$

235,030

 

Interest expense, net of tax:

               

  2% Convertible Senior Notes due 2020

 

   

1,324

   

907

   

5,288

 

  5% Convertible Senior Notes due 2017

 

   

673

   

1,709

   

5,080

 

  9% Convertible Junior Subordinated Debentures due 2063

 

3,757

   

   

11,270

   

 

Diluted net income available to common shareholders

 

$

123,784

   

$

58,615

   

$

342,333

   

$

245,398

 
                 

Weighted average shares - basic

 

370,586

   

349,376

   

359,613

   

343,403

 

Effect of dilutive securities:

               

  Unvested restricted stock units

 

1,473

   

1,395

   

1,367

   

1,428

 

  2% Convertible Senior Notes due 2020

 

   

44,488

   

11,119

   

62,707

 

  5% Convertible Senior Notes due 2017

 

   

10,791

   

4,743

   

13,885

 

  9% Convertible Junior Subordinated Debentures due 2063

 

19,028

   

   

19,028

   

 

Weighted average shares - diluted

 

391,087

   

406,050

   

395,870

   

421,423

 

Net income per diluted share

 

$

0.32

   

$

0.14

   

$

0.86

   

$

0.58

 
                 

 

NON-GAAP RECONCILIATIONS

 

Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income

                         
   

Three Months Ended September 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

 

$

184,467

   

$

64,440

   

$

120,027

   

$

83,749

   

$

27,131

   

$

56,618

 

Adjustments:

                       

  Additional income tax provision related to IRS litigation

 

   

(619)

   

619

   

   

(194)

   

194

 

  Net realized investment losses (gains)

 

47

   

16

   

31

   

(5,092)

   

(1,782)

   

(3,310)

 

  Loss on debt extinguishment

 

   

   

   

75,223

   

26,328

   

48,895

 

Adjusted pre-tax operating income / Adjusted net operating income

 

$

184,514

   

$

63,837

   

$

120,677

   

$

153,880

   

$

51,483

   

$

102,397

 
                         

Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share

                         

Weighted average shares - diluted

         

391,087

           

406,050

 
                         

Net income per diluted share

         

$

0.32

           

$

0.14

 

Additional income tax provision related to IRS litigation

         

           

 

Net realized investment losses (gains)

         

           

(0.01)

 

Loss on debt extinguishment

         

           

0.12

 

Adjusted net operating income per diluted share

         

$

0.32

           

$

0.25

 
                         

Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income

                         
   

Nine Months Ended September 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

 

$

539,040

   

$

210,593

   

$

328,447

   

$

352,676

   

$

117,646

   

$

235,030

 

Adjustments:

                       

  Additional income tax provision related to IRS litigation

 

   

(28,402)

   

28,402

   

   

(535)

   

535

 

  Net realized investment losses (gains)

 

211

   

74

   

137

   

(8,984)

   

(3,144)

   

(5,840)

 

  Loss on debt extinguishment

 

65

   

23

   

42

   

90,531

   

31,686

   

58,845

 

Adjusted pre-tax operating income / Adjusted net operating income

 

$

539,316

   

$

182,288

   

$

357,028

   

$

434,223

   

$

145,653

   

$

288,570

 
                         

Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share

                         

Weighted average shares - diluted

         

395,870

           

421,423

 
                         

Net income per diluted share

         

$

0.86

           

$

0.58

 

Additional income tax provision related to IRS litigation

         

0.07

           

 

Net realized investment losses (gains)

         

           

(0.01)

 

Loss on debt extinguishment

         

           

0.14

 

Adjusted net operating income per diluted share

         

$

0.93

           

$

0.71

 
                         

 

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

             
   

September 30,

 

December 31,

 

September 30,

(In thousands, except per share data)

 

2017

 

2016

 

2016

ASSETS

           

Investments (1)

 

$

4,717,392

   

$

4,692,350

   

$

4,725,843

 

Cash and cash equivalents

 

250,701

   

155,410

   

274,743

 

Reinsurance recoverable on loss reserves (2)

 

45,878

   

50,493

   

46,863

 

Home office and equipment, net

 

43,157

   

36,088

   

32,009

 

Deferred insurance policy acquisition costs

 

19,024

   

17,759

   

17,408

 

Deferred income taxes, net

 

416,167

   

607,655

   

602,142

 

Other assets

 

183,549

   

174,774

   

174,041

 

    Total assets

 

$

5,675,868

   

$

5,734,529

   

$

5,873,049

 
             

LIABILITIES AND SHAREHOLDERS' EQUITY

           

Liabilities:

           

  Loss reserves (2)

 

$

1,105,151

   

$

1,438,813

   

$

1,535,483

 

  Unearned premiums

 

370,816

   

329,737

   

321,326

 

  Senior notes

 

418,271

   

417,406

   

417,087

 

  Federal home loan bank advance

 

155,000

   

155,000

   

155,000

 

  Convertible senior notes

 

   

349,461

   

349,073

 

  Convertible junior debentures

 

256,872

   

256,872

   

256,872

 

  Other liabilities

 

239,609

   

238,398

   

255,129

 

    Total liabilities

 

2,545,719

   

3,185,687

   

3,289,970

 

Shareholders' equity

 

3,130,149

   

2,548,842

   

2,583,079

 

    Total liabilities and shareholders' equity

 

$

5,675,868

   

$

5,734,529

   

$

5,873,049

 

Book value per share (3)

 

$

8.45

   

$

7.48

   

$

7.48

 
             

(1) Investments include net unrealized gains (losses) on securities

 

$

44,027

   

$

(32,006)

   

$

116,291

 

(2) Loss reserves, net of reinsurance recoverable on loss reserves

 

$

1,059,273

   

$

1,388,320

   

$

1,488,620

 

(3) Shares outstanding

 

370,562

   

340,663

   

345,474

 

 

 

Additional Information

 

Q3 2017

 

Q2 2017

 

Q1 2017

 

Q4 2016

 

Q3 2016

 

Q2 2016

 

New primary insurance written (NIW) (billions)

$

14.1

   

$

12.9

   

$

9.3

   

$

12.8

   

$

14.2

   

$

12.6

   
                         

Monthly premium plans (1)

11.4

   

10.6

   

7.8

   

10.6

   

11.7

   

9.9

   

Single premium plans

2.7

   

2.3

   

1.5

   

2.2

   

2.5

   

2.7

   
                         

Direct average premium rate (bps) on NIW

                       

Monthly (1)

65.3

   

63.5

   

60.8

   

57.5

   

58.3

   

60.5

   

Singles

176.8

   

177.4

   

172.2

   

163.0

   

167.2

   

166.3

   
                         

New primary risk written (billions)

$

3.5

   

$

3.2

   

$

2.3

   

$

3.1

   

$

3.5

   

$

3.1

   
                         

Product mix as a % of primary flow NIW

                       

>95% LTVs

12

%

 

10

%

 

8

%

 

7

%

 

6

%

 

5

%

 

Singles

20

%

 

18

%

 

17

%

 

17

%

 

18

%

 

21

%

 

Refinances

9

%

 

9

%

 

17

%

 

24

%

 

19

%

 

17

%

 
                         

Primary Insurance In Force (IIF) (billions)

$

191.0

   

$

187.3

   

$

183.5

   

$

182.0

   

$

180.1

   

$

177.5

   

Flow only

$

182.7

   

$

178.6

   

$

174.5

   

$

172.8

   

$

170.5

   

$

167.5

   
                         

Annual Persistency

78.8

%

 

77.8

%

 

76.9

%

 

76.9

%

 

78.3

%

 

79.6

%

 
                         

Primary Risk In Force (RIF) (billions)

$

49.4

   

$

48.5

   

$

47.5

   

$

47.2

   

$

46.8

   

$

46.2

   

Flow only

$

47.0

   

$

46.0

   

$

45.0

   

$

44.6

   

$

44.1

   

$

43.4

   
                         

Total Primary RIF by FICO (%)

                       

FICO 740 & >

51

%

 

50

%

 

50

%

 

49

%

 

49

%

 

48

%

 

FICO 700-739

25

%

 

25

%

 

24

%

 

25

%

 

24

%

 

24

%

 

FICO 660-699

14

%

 

15

%

 

15

%

 

15

%

 

15

%

 

16

%

 

FICO 659 & <

10

%

 

10

%

 

11

%

 

11

%

 

12

%

 

12

%

 
                         

Average Coverage Ratio (RIF/IIF)

25.9

%

 

25.9

%

 

25.9

%

 

25.9

%

 

26.0

%

 

26.1

%

 
                         

Average Loan Size of IIF (thousands)

$

188.36

   

$

186.09

   

$

183.91

   

$

182.35

   

$

180.71

   

$

178.89

   

Flow only

$

190.94

   

$

188.70

   

$

186.52

   

$

184.90

   

$

183.18

   

$

181.23

   
                         

Primary IIF - # of loans

1,014,092

   

1,006,392

   

997,650

   

998,294

   

996,816

   

992,076

   

Flow only

956,772

   

946,435

   

935,470

   

934,350

   

931,047

   

924,474

   
                         

Primary IIF - Default Roll Forward - # of Loans

                       

Beginning Default Inventory

41,317

   

45,349

   

50,282

   

51,433

   

52,558

   

55,590

   

New Notices

15,950

   

14,463

   

14,939

   

17,016

   

17,607

   

16,080

   

Cures

(13,546)

   

(14,708)

   

(17,128)

   

(15,267)

   

(15,556)

   

(15,640)

   

Paids (including those charged to a deductible or captive)

(2,195)

   

(2,573)

   

(2,635)

   

(2,748)

   

(3,051)

   

(3,195)

   

Rescissions and denials

(82)

   

(100)

   

(95)

   

(152)

   

(125)

   

(142)

   

Items removed from inventory

(209)

   

(1,114)

   

(14)

   

   

   

(135)

   

Ending Default Inventory

41,235

   

41,317

   

45,349

   

50,282

   

51,433

   

52,558

   
                         
   
 

Q3 2017

   

Q2 2017

   

Q1 2017

   

Q4 2016

   

Q3 2016

   

Q2 2016

   

Primary claim received inventory included in ending default inventory

1,063

   

1,258

   

1,390

   

1,385

   

1,636

   

1,829

   
                         

Composition of Cures

                       

Reported delinquent and cured intraquarter

4,347

   

3,854

   

5,476

   

4,543

   

4,986

   

4,306

   
                         

Number of payments delinquent prior to cure

                       

      3 payments or less

6,011

   

6,803

   

7,585

   

7,006

   

6,455

   

7,002

   

      4-11 payments

2,374

   

2,964

   

3,036

   

2,580

   

2,786

   

3,099

   

      12 payments or more

814

   

1,087

   

1,031

   

1,138

   

1,329

   

1,233

   

Total Cures in Quarter

13,546

   

14,708

   

17,128

   

15,267

   

15,556

   

15,640

   
                         

Composition of Paids

                       

Number of payments delinquent at time of claim payment

                       

     3 payments or less

13

   

8

   

13

   

6

   

16

   

18

   

     4-11 payments

222

   

279

   

306

   

273

   

325

   

320

   

     12 payments or more

1,960

   

2,286

   

2,316

   

2,469

   

2,710

   

2,857

   

Total Paids in Quarter

2,195

   

2,573

   

2,635

   

2,748

   

3,051

   

3,195

   
                         

Aging of Primary Default Inventory

                       

Consecutive months in default

                       

        3 months or less

11,331

 

27

%

10,299

 

25

%

9,184

 

20

%

12,194

 

24

%

12,333

 

24

%

11,547

 

22

%

        4-11 months

11,092

 

27

%

11,018

 

27

%

13,617

 

30

%

13,450

 

27

%

12,648

 

25

%

12,680

 

24

%

        12 months or more

18,812

 

46

%

20,000

 

48

%

22,548

 

50

%

24,638

 

49

%

26,452

 

51

%

28,331

 

54

%

                         

Number of payments delinquent

                       

        3 payments or less

16,916

 

41

%

15,858

 

38

%

15,692

 

35

%

18,419

 

36

%

18,374

 

36

%

17,299

 

33

%

        4-11 payments

10,583

 

26

%

10,560

 

26

%

12,275

 

27

%

12,892

 

26

%

12,282

 

24

%

12,746

 

24

%

        12 payments or more

13,736

 

33

%

14,899

 

36

%

17,382

 

38

%

18,971

 

38

%

20,777

 

40

%

22,513

 

43

%

                         

Primary IIF - # of Delinquent Loans

41,235

   

41,317

   

45,349

   

50,282

   

51,433

   

52,558

   

Flow only

30,501

   

30,571

   

33,850

   

37,829

   

38,552

   

39,177

   
                         

Primary IIF Default Rates

4.07

%

 

4.11

%

 

4.55

%

 

5.04

%

 

5.16

%

 

5.30

%

 

Flow only

3.19

%

 

3.23

%

 

3.62

%

 

4.05

%

 

4.14

%

 

4.24

%

 
                         

Reserves

                       

  Primary

                       

    Direct Loss Reserves (millions)

$

1,090

   

$

1,165

   

$

1,311

   

$

1,413

   

$

1,493

   

$

1,574

   

    Average Direct Reserve Per Default

$

26,430

   

$

28,206

   

$

28,911

   

$

28,104

   

$

29,027

   

$

29,939

   

  Pool

                       

    Direct loss reserves (millions)

$

15

   

$

21

   

$

23

   

$

25

   

$

32

   

$

37

   

    Ending default inventory

1,426

   

1,511

   

1,714

   

1,883

   

1,979

   

2,024

   

    Pool claim received inventory included in ending default inventory

42

   

63

   

64

   

72

   

87

   

95

   

    Reserves related to Freddie Mac settlement (millions)

$

   

$

   

$

   

$

   

$

10

   

$

21

   

    Other Gross Reserves (millions)

$

   

$

1

   

$

1

   

$

1

   

$

   

$

   
                         
   
 

Q3 2017

 

Q2 2017

   

Q1 2017

 

Q4 2016

 

Q3 2016

 

Q2 2016

 

Net Paid Claims (millions) (3)

$

113

   

$

173

   

$

128

   

$

149

   

$

161

   

$

172

   

Total primary (excluding settlements)

101

   

126

   

130

   

133

   

147

   

153

   

Rescission and NPL settlements

9

   

45

   

   

1

   

1

   

4

   

Pool - with aggregate loss limits

1

   

2

   

1

   

2

   

1

   

2

   

Pool - without aggregate loss limits

1

   

2

   

1

   

2

   

2

   

2

   

Pool - Freddie Mac settlement

   

   

   

10

   

11

   

10

   

Reinsurance

(3)

   

(6)

   

(9)

   

(4)

   

(5)

   

(4)

   

Other (2)

4

   

4

   

5

   

5

   

4

   

5

   

Reinsurance terminations (3)

   

   

   

   

(3)

   

   

Primary Average Claim Payment (thousands) (2)

$

46.4

   

$

49.1

   

$

49.1

   

$

48.3

   

$

48.1

   

$

48.0

   

Flow only (2)

$

43.7

   

$

45.0

   

$

45.2

   

$

44.0

   

$

44.8

   

$

45.9

   
                         

Reinsurance excluding captives

                       

% insurance inforce subject to reinsurance

78.3

%

 

77.6

%

 

76.8

%

 

76.3

%

 

75.3

%

 

74.7

%

 

% quarterly NIW subject to reinsurance

86.1

%

 

88.2

%

 

85.9

%

 

89.3

%

 

88.4

%

 

90.2

%

 

Ceded premium written and earned (millions)

$

30.9

   

$

28.9

   

$

28.9

   

$

32.1

   

$

31.7

   

$

30.0

   

Ceded losses incurred (millions)

$

5.9

   

$

4.4

   

$

4.7

   

$

8.2

   

$

7.4

   

$

6.1

   

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

$

12.5

   

$

12.2

   

$

12.0

   

$

12.0

   

$

12.1

   

$

11.9

   

Profit commission (millions) (included in ceded premiums)

$

31.6

   

$

32.3

   

$

31.1

   

$

27.7

   

$

29.0

   

$

29.8

   
                         

Direct Pool RIF (millions)

                       

With aggregate loss limits

$

238

   

$

239

   

$

242

   

$

244

   

$

247

   

$

249

   

Without aggregate loss limits

$

251

   

$

267

   

$

284

   

$

303

   

$

321

   

$

343

   
                         

Bulk Primary Insurance Statistics

                       

Insurance in force (billions)

$

8.3

   

$

8.7

   

$

9.0

   

$

9.2

   

$

9.6

   

$

10.0

   

Risk in force (billions)

$

2.4

   

$

2.5

   

$

2.5

   

$

2.6

   

$

2.7

   

$

2.8

   

Average loan size (thousands)

$

145.37

   

$

144.93

   

$

144.68

   

$

145.05

   

$

145.73

   

$

146.84

   

Number of delinquent loans

10,734

   

10,746

   

11,499

   

12,453

   

12,881

   

13,381

   

Default rate

18.73

%

 

17.92

%

 

18.49

%

 

19.48

%

 

19.59

%

 

19.79

%

 

Primary paid claims (millions)

$

26

   

$

31

   

$

33

   

$

35

 

(2)

 

$

37

 

(2)

 

$

35

   

Average claim payment (thousands)

$

56.1

   

$

67.7

   

$

66.6

   

$

65.8

 

(2)

 

$

61.4

 

(2)

 

$

56.8

   
                         

Mortgage Guaranty Insurance Corporation - Risk to Capital

10.1:1

 

(4)

 

10.2:1

   

10.4:1

   

10.7:1

   

11.1:1

   

11.6:1

   

Combined Insurance Companies - Risk to Capital

11.1:1

 

(4)

 

11.3:1

   

11.6:1

   

12.0:1

   

12.6:1

   

13.2:1

   
                         

GAAP loss ratio
(insurance operations only)

12.5

%

 

11.8

%

 

12.1

%

 

20.3

%

 

25.7

%

 

20.1

%

 

GAAP underwriting expense ratio (insurance operations only)

15.7

%

 

15.6

%

 

17.0

%

 

15.8

%

 

14.7

%

 

13.9

%

 
 

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 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 nine months 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 policy rescissions and claim curtailments affect the customer.

Certain of our competitors have access to capital at a lower cost of capital than we do (including, as a result of off-shore reinsurance vehicles, which are also tax-advantaged). As a result, they may be better positioned to compete outside of traditional mortgage insurance, including if Fannie Mae and Freddie Mac (the "GSEs") pursue alternative forms of credit enhancement. In addition, because of their tax advantages, certain competitors may be able to achieve higher after-tax rates of return on their NIW compared to us, which could allow them to leverage reduced pricing to gain market share.

Substantially all of our insurance written since 2008 has been for loans purchased by 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 the GSEs and/or 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 Baa2 (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, as 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 alternative forms of credit enhancement 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 alternative forms of credit enhancement used by the GSEs in the past several years have not displaced primary mortgage insurance, the forms 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 37.6% in the first half 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 24.2% in the first half of 2017, 26.6% in 2016, and 23.9% in 2015. In the past ten years, the VA's share has been as low as 5.4% in 2007 and as high as 26.6% in 2016. 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 September 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 September 30, 2017, we had approximately $987.6 million 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 2032 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 September 30, 2017, our deferred tax asset is recorded at $416.2 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 nine months 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 matters where a loss is reasonably possible to be approximately $289 million, although we believe (but can give no assurance that) we will ultimately resolve these matters for significantly less than this amount. This estimate of our maximum exposure does not include interest or consequential or exemplary damages.

Mortgage insurers, including MGIC, have been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA.  While these proceedings in the aggregate have not resulted in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse affect on us. In addition, various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.

In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or results of operations.

We are subject to comprehensive regulation and other requirements, which we may fail to satisfy.

We are subject to comprehensive, detailed regulation by state insurance departments. These regulations are principally designed for the protection of our insured policyholders, rather than for the benefit of investors. Although their scope varies, state insurance laws generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. State insurance regulatory authorities could take actions, including changes in capital requirements, that could have a material adverse effect on us. For more information about state capital requirements, see our risk factor titled "State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis." To the extent that we are construed to make independent credit decisions in connection with our contract underwriting activities, we also could be subject to increased regulatory requirements under the Equal Credit Opportunity Act, commonly known as ECOA, the FCRA, and other laws. For more details about the various ways in which our subsidiaries are regulated, see "Regulation" in Item 1 of our Annual Report on Form 10-K filed with the SEC on February 21, 2017. In addition to regulation by state insurance regulators, the CFPB may issue additional rules or regulations, which may materially affect our business.

In December 2013, the U.S. Treasury Department's Federal Insurance Office released a report that calls for federal standards and oversight for mortgage insurers to be developed and implemented. It is uncertain what form the standards and oversight will take and when they will become effective.

Resolution of our dispute with the Internal Revenue Service could adversely affect us.

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.

In 2014, we received Notices of Deficiency (commonly referred to as "90 day letters") covering the 2000-2007 tax years. The Notices of Deficiency reflect taxes and penalties related to the REMIC matters of $197.5 million and at September 30, 2017, there would also be interest related to these matters of approximately $200.3 million. In 2007, we made a payment of $65.2 million to the United States Department of the Treasury which will reduce any amounts we would ultimately owe. The Notices of Deficiency also reflect additional amounts due of $261.4 million, which are primarily associated with the disallowance of the carryback of the 2009 net operating loss to the 2004-2007 tax years. We believe the IRS included the carryback adjustments as a precaution to keep open the statute of limitations on collection of the tax that was refunded when this loss was carried back, and not because the IRS actually intends to disallow the carryback permanently. Depending on the outcome of this matter, additional state income taxes and state interest may become due when a final resolution is reached. As of September 30, 2017, those state taxes and interest would approximate $84.1 million. In addition, there could also be state tax penalties. Our total amount of unrecognized tax benefits as of September 30, 2017 is $141.8 million, which represents the tax benefits generated by the REMIC portfolio included in our tax returns that we have not taken benefit for in our financial statements, including any related interest.

We filed a petition with the U.S. Tax Court contesting most of the IRS' proposed adjustments reflected in the Notices of Deficiency and the IRS filed an answer to our petition which continued to assert their claim. The case has twice been scheduled for trial and in each instance, the parties jointly filed, and the U.S. Tax Court approved (most recently in February 2016), motions for continuance to postpone the trial date. Also in February 2016, the U.S. Tax Court approved a joint motion to consolidate for trial, briefing, and opinion, our case with similar cases of Radian Group, Inc., as successor to Enhance Financial Services Group, Inc., et al. The parties informed the Tax Court in August 2017 that they had reached agreement in principle on all issues in the case and were preparing the documentation reflecting the terms of their agreement. The agreed settlement terms will be subject to review by the Joint Committee on Taxation ("JCT") before a settlement can be completed and there is no assurance that a settlement will be completed. Based on information that we currently have regarding the status of our ongoing dispute, we recorded a provision for additional taxes and interest of $28.4 million in 2017.

Should a settlement not be completed, ongoing litigation to resolve our dispute with the IRS could be lengthy and costly in terms of legal fees and related expenses. We would need to make further adjustments, which could be material, to our tax provision and liabilities if our view of the probability of success in this matter changes, and the ultimate resolution of this matter could have a material negative impact on our effective tax rate, results of operations, cash flows, available assets and statutory capital. In this regard, see our risk factors 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" and "State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis."

If the models used in our businesses are inaccurate, it could have a material adverse impact on our business, results of operations and financial condition.

We employ proprietary and third party models to project returns, price products, calculate reserves, generate projections used to estimate future pre-tax income and to evaluate loss recognition testing, evaluate risk, determine internal capital requirements, perform stress testing, and for other uses. These models rely on estimates and projections that are inherently uncertain and may not operate as intended. In addition, from time to time we seek to improve certain models, and the conversion process may result in material changes to assumptions, including those about returns, and financial results. The models we employ are complex, which increases our risk of error in their design, implementation or use. Also, the associated input data, assumptions and calculations may not be correct, and the controls we have in place to mitigate that risk may not be effective in all cases. The risks related to our models may increase when we change assumptions and/or methodologies, or when we add or change modeling platforms. We have enhanced, and we intend to continue to enhance, our modeling capabilities. Moreover, we may use information we receive through enhancements to refine or otherwise change existing assumptions and/or methodologies.

Because we establish loss reserves only upon a loan default 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, commonly referred to as GAAP, we establish reserves for insurance losses and loss adjustment expenses only when notices of default on insured mortgage loans are received and for loans we estimate are in default but for which notices of default have not yet been reported to us by the servicers (this is often referred to as "IBNR"). Because our reserving method does not take account of losses that could occur from loans that are not delinquent, such losses are not reflected in our financial statements, except in the case where a premium deficiency exists. As a result, future losses on loans that are not currently delinquent may have a material impact on future results as such losses emerge.

Recent hurricanes may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs.

We expect an increase in the number of borrowers missing their mortgage payments in the areas affected by recent hurricanes in Texas, Florida and Puerto Rico. Despite the associated increase in our inventory of notices of default, based on our analysis and past experience, we do not expect the recent hurricane activity to result in a material increase in our incurred losses or paid claims. However, the following factors could cause our actual results to differ from our expectation in the forward looking statement in the preceding sentence:

  • Third party reports that indicate the extent of flooding in the hurricane-affected areas may be understated.
  • Home values in hurricane-affected areas may decrease at the time claims are filed from their current levels thereby adversely affecting our ability to mitigate loss.
  • Hurricane-affected areas may experience deteriorating economic conditions resulting in more borrowers defaulting on their loans in the future (or failing to cure existing defaults) than we currently expect.
  • If an insured contests our claim denial or curtailment, there can be no assurance we will prevail. We describe how claims under our policy are affected by damage to the borrower's home in our Current Report on Form 8-K filed with the SEC on September 14, 2017.

Due to the suspension of certain foreclosures by the GSEs, our receipt of claims associated with foreclosed mortgages in the hurricane-affected areas may be delayed.

The PMIERs require us to maintain significantly more "Minimum Required Assets" for delinquent loans than for performing loans. An increase in default notices may result in an increase in "Minimum Required Assets" and a decrease in the level of our excess "Available Assets" which is 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."

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

When we establish reserves, we estimate the ultimate loss on delinquent loans using estimated claim rates and claim amounts. The estimated claim rates and claim amounts represent our best estimates of what we will actually pay on the loans in default as of the reserve date and incorporate anticipated mitigation from rescissions and curtailments. The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. The actual amount of the 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, and a change in the length of time loans are delinquent before claims are received. The change in conditions may include changes in unemployment, affecting borrowers' income and thus their ability to make mortgage payments, and changes in housing values, which may affect borrower willingness to cont