News Release MGIC Investment Corporation

Transcription

1 News Release MGIC Investment Corporation New York Stock Exchange Common Stock Symbol - MTG MGIC Plaza, P.O. Box 488, Milwaukee, WI MGIC Homeownership Today Investor Contact: Media Contact: Michael J. Zimmerman, Investor Relations, (414) , mike.zimmerman@mgic.com Katie Monfre, Corporate Communications, (414) , katie.monfre@mgic.com MGIC Investment Corporation Reports Fourth Quarter 2015 Results Records Fourth Quarter 2015 Net Income of $102.4 Million or $0.24 Diluted Net Income per Share Full Year 2015 Earnings of $2.60 Per Diluted Share, Including $1.47 from the Reversal of the Company's Deferred Tax Asset Valuation Allowance Adjusted Full Year 2015 Earnings of $1.13 Per Diluted Share, Excluding the Deferred Tax Asset Valuation Allowance Reversal MILWAUKEE (January 21, 2016) - MGIC Investment Corporation (NYSE: MTG) today reported net income for the quarter ended December 31, 2015 of $102.4 million, or $0.24 per diluted share, including the $11.5 million impact relating to an adjustment to the reversal of the Company s deferred tax asset valuation allowance in the third quarter of Excluding the impact of the adjustment to the deferred tax asset valuation allowance reversal, adjusted net income for the fourth quarter of 2015, would have been $113.9 million, or $0.26 per diluted share, compared with net income of $75.1 million, or $0.19 per diluted share for the same quarter a year ago. Net income for the full year 2015 was $1,172.0 million, or $2.60 per diluted share, including the $686.7 million impact relating to the reversal of the Company's deferred tax asset valuation allowance. Excluding the impact of the deferred tax asset valuation allowance reversal, adjusted net income for the full year 2015, would have been $485.3 million, or $1.13 per diluted share, compared with net income of $251.9 million, or $0.64 per diluted share for the full year We are presenting a non-gaap financial measure "Adjusted net income" to increase the comparability between periods of our financial results. Patrick Sinks, CEO of MTG and Mortgage Guaranty Insurance Corporation ("MGIC"), said, "In 2015 we focused our efforts on positioning the company for growth and this is best reflected in the addition of $43.0 billion of high quality new insurance to our growing insurance in force. We also continued to experience positive trends on pre-2009 business relative to new delinquent notices, paid claims, and the declining delinquent inventory and I am pleased to report that as of December 31, 2015 we are compliant with the financial requirements of PMIERs. Sinks added, We will be revising our premium rate cards and expect that the new premium rate structure will generate comparable returns across the spectrum of loans we insure. Importantly we expect that the revised rates will result in life-time after tax returns that are consistent with, not lower than, the mid-teens returns we expect to earn after considering reinsurance. The revisions will also reflect the associated capital charges of PMIERs and the current marketplace dynamics. As a result of these changes we expect to write modestly less business than we did in 2015, however, we expect modest growth in the insurance in force portfolio. Further we anticipate that the number of new notices, claims paid and delinquent inventory should continue to decline and we are well positioned to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers, now, and in the future. 1

2 Notable items for the quarter include: Q Q Change New Insurance Written (billions) $ 9.8 $ % Insurance in force (billions) $ $ % Primary Delinquent Inventory (# loans) 62,633 79,901 (21.6)% Annual Persistency (1) 79.7% 82.8% Consolidated Risk-to-capital ratio 13.6:1 (2) 16.4:1 GAAP Loss Ratio 42.0% 54.8% GAAP Underwriting Expense Ratio (3) 13.9% 13.9% 1) As of December 31, 2) preliminary as of December 31, 2015, 3) insurance operations Total revenues for the fourth quarter were $257.9 million, compared with $240.4 million in the fourth quarter last year. Net premiums written for the quarter were $241.1 million, compared with $227.7 million for the same period last year. Net premiums written for the full year 2015 were $1,020.3 million, compared with $882.0 million for the full year New insurance written in the fourth quarter was $9.8 billion, compared to $9.5 billion in the fourth quarter New insurance written for the full year 2015 was $43.0 billion compared to $33.4 billion for the full year Persistency, or the percentage of insurance remaining in force from one year prior, was 79.7 percent at December 31, 2015, compared with 82.8 percent at December 31, 2014, and 79.5 percent at December 31, As of December 31, 2015, MGIC's primary insurance in force was $174.5 billion, compared with $164.9 billion at December 31, 2014, and $158.7 billion at December 31, The fair value of MGIC Investment Corporation's investment portfolio, cash and cash equivalents was $4.8 billion at December 31, 2015, compared with $4.8 billion at December 31, 2014, and $5.2 billion at December 31, At December 31, 2015, the percentage of loans that were delinquent, excluding bulk loans, was 5.11 percent, compared with 6.65 percent at December 31, 2014, and 8.92 percent at December 31, Including bulk loans, the percentage of loans that were delinquent at December 31, 2015 was 6.31 percent, compared to 8.25 percent at December 31, 2014, and percent at December 31, Losses incurred in the fourth quarter were $95.1 million, compared to $117.1 million in the fourth quarter of For the full year 2015, losses incurred were $343.5 million compared to $496.1 million in The decrease in losses incurred is primarily a result of fewer new delinquency notices received, a lower claim rate on new notices, and favorable reserve development. Net underwriting and other expenses were $37.0 million in the fourth quarter, compared to $35.8 million reported for the same period last year. For the full year 2015 net underwriting and other expenses were $164.4 million compared to $146.1 million in Conference Call and Webcast Details MGIC Investment Corporation will hold a conference call today, January 21, 2016, 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 The call is being webcast and can be accessed at the company's website at by clicking on the Investor Information button. A replay of the webcast will be available on the company s website through February 21, 2016 under Investor Information. About MGIC MGIC ( 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 lowdown-payment mortgages a reality. At December 31, 2015, MGIC had $174.5 billion of primary insurance in force covering approximately one million mortgages. 2

3 From time to time MGIC Investment Corporation releases important information via postings on its corporate website, including corrections of previous disclosures, 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 alerts and Really Simple Syndication (RSS) feeds regarding new postings. Enrollment information can be found at under Investor Information. 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 annual report Form 10-K for the year ended December 31,

4 MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended December 31, Year Ended December 31, (In thousands, except per share data) Net premiums written $ 241,061 $ 227,652 $ 1,020,277 $ 881,962 Net premiums earned $ 226,192 $ 213,589 $ 896,222 $ 844,371 Investment income 27,926 23, ,741 87,647 Net realized investment gains: Total other-than-temporary impairment losses (144) (144) Portion of loss recognized in other comprehensive income (loss), before taxes Net impairment losses recognized in earnings (144) (144) Other realized investment gains 1, ,361 1,501 Net realized investment gains 1, ,361 1,357 Other revenue 2,580 2,385 12,457 8,422 Total revenues 257, ,364 1,040, ,797 Losses and expenses: Losses incurred 95, , , ,077 Change in premium deficiency reserve (4,960) (23,751) (24,710) Underwriting and other expenses, net 37,023 35, , ,059 Interest expense 16,835 17,374 68,932 69,648 Total losses and expenses 148, , , ,074 Income before tax 109,002 75, , ,723 Provision for (benefit from) income taxes 6, (684,313) 2,774 Net income $ 102,418 $ 74,428 $ 1,172,000 $ 251,949 Diluted earnings per share $ 0.24 $ 0.19 $ 2.60 $

5 MGIC INVESTMENT CORPORATION AND SUBSIDIARIES EARNINGS PER SHARE (UNAUDITED) Three Months Ended December 31, Year Ended December 31, (In thousands, except per share data) Net income $ 102,418 $ 74,428 $ 1,172,000 $ 251,949 Interest expense, net of tax (1): 2% Convertible Senior Notes due ,982 3,049 7,928 12,197 5% Convertible Senior Notes due ,078 4,692 12,228 9% Convertible Junior Subordinated Debentures due ,696 22,786 Diluted income available to common shareholders $ 113,174 $ 82,169 $ 1,214,942 $ 264,146 Weighted average shares - basic 339, , , ,523 Effect of dilutive securities: Unvested restricted stock units 2,071 3,125 2,113 3,082 2% Convertible Senior Notes due ,942 71,942 71,942 71,942 5% Convertible Senior Notes due ,385 25,670 25,599 9% Convertible Junior Subordinated Debentures due ,854 28,854 Weighted average common shares outstanding - diluted 467, , , ,547 Diluted income per share $ 0.24 $ 0.19 $ 2.60 $ 0.64 (1) Due to the valuation allowance, the three months and year ended December 31, 2014 were not tax effected. The three months and year ended December 31, 2015 have been tax effected at a rate of 35%. Presentation of Non-GAAP Financial Measures: In addition to the GAAP financial measures, we have presented a non-gaap financial measure "Adjusted net income" to increase the comparability between periods of our financial results. Adjusted net income adjusts GAAP Net income to remove the effects of substantial non-recurring items that are not viewed as part of the operating performance of our primary activities. We have also presented the impact on our diluted earnings per share from net realized gains (losses) on investments, which are highly discretionary in nature and can vary significantly between periods. Three Months Ended December 31, Year Ended December 31, Non-GAAP Financial Measures: Adjusted net income and adjusted diluted earnings per share (EPS): Net income $ 102,418 $ 74,428 $ 1,172,000 $ 251,949 Discrete change in the valuation allowance for deferred tax assets (DTAs) realizable in future years (11,480) 686,655 Adjusted net income $ 113,898 $ 74,428 $ 485,345 $ 251,949 Weighted average common shares outstanding - diluted 467, , , ,547 Diluted EPS $ 0.24 $ 0.19 $ 2.60 $ 0.64 Diluted EPS contribution from change in the valuation allowance (0.02)

6 Adjusted diluted EPS $ 0.26 $ 0.19 $ 1.13 $ 0.64 Diluted EPS contribution from realized gains: Net realized investment gains $ 1,228 $ 434 $ 28,361 $ 1,357 Income taxes at 35% (2) (430) (9,926) After tax realized gains, net $ 798 $ 434 $ 18,435 $ 1,357 Weighted average common shares outstanding - diluted 467, , , ,547 Diluted EPS contribution from net realized gains $ $ $ 0.04 $ (2) Due to the valuation allowance, prior year income taxes provided were not affected by realized gains or losses. 6

7 MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, December 31, December 31, (In thousands, except per share data) ASSETS Investments (1) $ 4,663,206 $ 4,612,669 $ 4,866,819 Cash and cash equivalents 181, , ,132 Prepaid reinsurance premiums ,623 36,243 Reinsurance recoverable on loss reserves (2) 44,487 57,841 64,085 Home office and equipment, net 30,095 28,693 26,185 Deferred insurance policy acquisition costs 15,241 12,240 9,721 Deferred income taxes, net 762,080 Other assets 183, , ,205 Total assets $ 5,879,545 $ 5,266,434 $ 5,601,390 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loss reserves (2) $ 1,893,402 $ 2,396,807 $ 3,061,401 Premium deficiency reserve 23,751 48,461 Unearned premiums 279, , ,479 Senior notes 61,918 82,773 Convertible senior notes 833, , ,000 Convertible junior debentures 389, , ,522 Other liabilities 247, , ,216 Total liabilities 3,643,405 4,229,531 4,856,852 Shareholders' equity 2,236,140 1,036, ,538 Total liabilities and shareholders' equity $ 5,879,545 $ 5,266,434 $ 5,601,390 Book value per share (3) $ 6.58 $ 3.06 $ 2.20 (1) Investments include net unrealized gains (losses) on securities $ (26,567) $ 7,152 $ (84,634) (2) Loss reserves, net of reinsurance recoverable on loss reserves $ 1,848,915 $ 2,338,966 $ 2,997,316 (3) Shares outstanding 339, , ,758 7

8 Additional Information Q Q Q Q Q Q New primary insurance written (NIW) (billions) $ 10.4 $ 9.5 $ 9.0 $ 11.8 $ 12.4 $ 9.8 Monthly premium plans (1) Single premium plans Direct average premium rate (bps) Monthly (1) Singles New primary risk written (billions) $ 2.7 $ 2.4 $ 2.2 $ 3.0 $ 3.2 $ 2.5 Product mix as a % of primary flow NIW >95% LTVs 2% 2% 3% 5% 5% 5% Singles 15% 17% 23% 20% 18% 22% Refinances 12% 17% 29% 20% 12% 17% Primary Insurance In Force (IIF) (billions) (2) $ $ $ $ $ $ Flow $ $ $ $ $ $ Bulk $ 12.2 $ 11.9 $ 11.6 $ 11.3 $ 10.9 $ 10.5 Prime (620 & >) $ $ $ $ $ $ A minus ( ) $ 6.2 $ 6.0 $ 5.8 $ 5.6 $ 5.4 $ 5.2 Sub-Prime (< 575) $ 1.8 $ 1.7 $ 1.7 $ 1.6 $ 1.6 $ 1.5 Reduced Doc (All FICOs) $ 7.9 $ 7.6 $ 7.4 $ 7.1 $ 6.8 $ 6.5 Annual Persistency 82.8% 82.8% 81.6% 80.4% 80.0% 79.7% Primary Risk In Force (RIF) (billions) (2) $ 42.3 $ 42.9 $ 43.2 $ 44.0 $ 45.0 $ 45.5 Prime (620 & >) $ 38.0 $ 38.7 $ 39.1 $ 40.1 $ 41.2 $ 41.8 A minus ( ) $ 1.7 $ 1.6 $ 1.6 $ 1.5 $ 1.5 $ 1.4 Sub-Prime (< 575) $ 0.5 $ 0.5 $ 0.5 $ 0.5 $ 0.5 $ 0.5 Reduced Doc (All FICOs) $ 2.1 $ 2.1 $ 2.0 $ 1.9 $ 1.8 $ 1.8 RIF by FICO FICO 620 & > 94.1% 94.4% 94.6% 94.9% 95.1% 95.4% FICO % 4.3% 4.1% 3.9% 3.7% 3.5% FICO < % 1.3% 1.3% 1.2% 1.2% 1.1% Average Coverage Ratio (RIF/IIF) (2) Total 26.0% 26.0% 26.0% 26.0% 26.1% 26.1% Prime (620 & >) 25.9% 25.9% 25.9% 25.9% 25.9% 25.9% A minus ( ) 27.6% 27.6% 27.6% 27.6% 27.6% 27.6% Sub-Prime (< 575) 29.0% 29.0% 29.0% 29.0% 29.0% 29.0% Reduced Doc (All FICOs) 26.9% 27.0% 26.9% 27.0% 27.0% 27.0% Average Loan Size (thousands) (2) Total IIF $ $ $ $ $ $

9 Flow $ $ $ $ $ $ Bulk $ $ $ $ $ $ Prime (620 & >) $ $ $ $ $ $ A minus ( ) $ $ $ $ $ $ Sub-Prime (< 575) $ $ $ $ $ $ Reduced Doc (All FICOs) $ $ $ $ $ $ Primary IIF - # of loans (2) 960, , , , , ,188 Prime (620 & >) 853, , , , , ,518 A minus ( ) 48,727 47,165 45,755 44,015 42,163 40,713 Sub-Prime (< 575) 15,264 14,853 14,577 13,978 13,440 13,070 Reduced Doc (All FICOs) 43,370 41,888 40,794 39,274 37,362 35,887 Primary IIF - Default Roll Forward - # of Loans Beginning Default Inventory 85,416 83,154 79,901 72,236 66,357 64,642 New Notices 22,927 21,393 18,896 17,451 19,509 18,459 Cures (19,582) (19,196) (21,767) (17,897) (17,036) (16,910) Paids (including those charged to a deductible or captive) (5,288) (5,074) (4,573) (4,140) (3,958) (3,333) Rescissions and denials (319) (183) (221) (172) (230) (225) Items removed from inventory resulting from rescission settlement (6) (193) (1,121) Ending Default Inventory 83,154 79,901 72,236 66,357 64,642 62,633 (5) Primary claim received inventory included in ending default inventory 5,194 4,746 4,448 3,440 2,982 2,769 (5) Composition of Cures (7) Reported delinquent and cured intraquarter 6,205 5,674 6,887 4,620 5,185 5,110 Number of payments delinquent prior to cure 3 payments or less 7,989 8,420 9,516 7,721 7,146 7, payments 3,651 3,463 3,688 3,789 3,005 2, payments or more 1,737 1,639 1,676 1,767 1,700 1,250 Total Cures in Quarter 19,582 19,196 21,767 17,897 17,036 16,910 Composition of Paids (7) Number of payments delinquent at time of claim payment 3 payments or less payments payments or more 4,713 4,535 4,011 3,689 3,564 3,011 Total Paids in Quarter 5,288 5,074 4,573 4,140 3,958 3,333 Aging of Primary Default Inventory Consecutive months in default 3 months or less 16,209 19% 15,319 19% 11,604 16% 12,545 19% 13,991 22% 13,053 21% (5) 4-11 months 18,890 23% 19,710 25% 18,940 26% 15,487 23% 14,703 23% 15,763 25% (5) 12 months or more 48,055 58% 44,872 56% 41,692 58% 38,325 58% 35,948 55% 33,817 54% (5) 9

10 Number of payments delinquent 3 payments or less 23,769 28% 23,253 29% 19,159 27% 19,274 29% 20,637 32% 20,360 33% (5) 4-11 payments 18,985 23% 19,427 24% 18,372 25% 15,710 24% 14,890 23% 15,092 24% (5) 12 payments or more 40,400 49% 37,221 47% 34,705 48% 31,373 47% 29,115 45% 27,181 43% (5) Primary IIF - # of Delinquent Loans (2) 83,154 79,901 72,236 66,357 64,642 62,633 Flow 61,323 59,111 53,390 49,507 48,436 47,088 Bulk 21,831 20,790 18,846 16,850 16,206 15,545 Prime (620 & >) 52,301 50,307 45,416 42,233 41,284 40,214 A minus ( ) 13,474 13,021 11,639 10,921 10,764 10,451 Sub-Prime (< 575) 5,477 5,228 4,654 4,274 4,177 4,080 Reduced Doc (All FICOs) 11,902 11,345 10,527 8,929 8,417 7,888 Primary IIF Default Rates (2) 8.65% 8.25% 7.44% 6.78% 6.54% 6.31% Flow 6.97% 6.65% 5.98% 5.48% 5.29% 5.11% Bulk 26.89% 26.23% 24.33% 22.42% 22.26% 21.89% Prime (620 & >) 6.13% 5.82% 5.22% 4.79% 4.61% 4.46% A minus ( ) 27.65% 27.61% 25.44% 24.81% 25.53% 25.67% Sub-Prime (< 575) 35.88% 35.2% 31.93% 30.58% 31.08% 31.22% Reduced Doc (All FICOs) 27.44% 27.08% 25.81% 22.74% 22.53% 21.98% Reserves Primary Direct Loss Reserves (millions) $ 2,362 $ 2,246 $ 2,112 $ 1,993 $ 1,877 $ 1,807 Average Direct Reserve Per Default $ 28,404 $ 28,107 $ 29,233 $ 30,033 $ 29,032 $ 28,859 Pool Direct loss reserves (millions) $ 69 $ 65 $ 57 $ 52 $ 49 $ 43 Ending default inventory 4,525 3,797 3,350 3,129 2,950 2,739 Pool claim received inventory included in ending default inventory Reserves related to Freddie Mac settlement (millions) $ 94 $ 84 $ 73 $ 63 $ 52 $ 42 Other Gross Reserves (millions) (4) $ 3 $ 2 $ 3 $ 3 $ 2 $ 1 Net Paid Claims (millions) (2) (8) $ 263 $ 248 $ 232 $ 222 $ 207 $ 188 Flow $ 196 $ 189 $ 167 $ 150 $ 143 $ 125 Bulk $ 46 $ 36 $ 50 $ 46 $ 47 $ 39 Prior rescission settlement (6) $ 6 $ 10 $ $ Pool - with aggregate loss limits $ 6 $ 3 $ 4 $ 5 $ 3 $ 4 Pool - without aggregate loss limits $ 3 $ 3 $ 2 $ 3 $ 3 $ 2 Pool - Freddie Mac settlement $ 11 $ 10 $ 11 $ 10 $ 11 $ 10 Reinsurance $ (7) $ (7) $ (8) $ (8) $ (5) $ (2) Other (4) $ 8 $ 8 $ 6 $ 6 $ 5 $ 10 Reinsurance terminations (8) $ $ $ $ $ (15) $ Prime (620 & >) $ 168 $ 168 $ 146 $ 132 $ 123 $

11 A minus ( ) $ 28 $ 25 $ 27 $ 24 $ 24 $ 20 Sub-Prime (< 575) $ 9 $ 7 $ 9 $ 12 $ 9 $ 7 Reduced Doc (All FICOs) $ 37 $ 31 $ 35 $ 38 $ 34 $ 28 Primary Average Claim Payment (thousands) (2) $ 45.8 $ 45.0 $ 47.4 $ 48.6 $ 48.2 $ 49.1 Flow $ 43.5 $ 44.6 $ 44.2 $ 45.1 $ 44.8 $ 45.6 Bulk $ 59.2 $ 47.3 $ 61.8 $ 63.3 $ 62.2 $ 65.7 Prime (620 & >) $ 43.7 $ 45.0 $ 44.7 $ 45.9 $ 44.8 $ 46.0 A minus ( ) $ 43.3 $ 43.4 $ 47.8 $ 44.5 $ 45.4 $ 50.3 Sub-Prime (< 575) $ 45.7 $ 46.0 $ 48.4 $ 53.6 $ 53.6 $ 48.1 Reduced Doc (All FICOs) $ 63.1 $ 59.4 $ 62.1 $ 67.2 $ 67.3 $ 68.5 Reinsurance excluding captives % insurance inforce subject to reinsurance 54.3% 56% 57.1% 59.5% 71.9% 72.9% % Quarterly NIW subject to reinsurance 90.1% 87.4% 85.2% 97.9% 90.6% 89.5% Ceded premium written (millions) $ 27.7 $ 27.6 $ 27.1 $ 30.9 $ (46.8) (10) $ 30.0 Ceded premium earned (millions) $ 23.7 $ 24.2 $ 24.6 $ 23.0 $ 11.0 (10) $ 30.0 Ceded losses incurred (millions) $ 4.7 $ 4.8 $ 4.9 $ 1.2 $ 4.2 $ 7.2 Ceding commissions (millions) (included in underwriting and other expenses) $ 9.9 $ 10.0 $ 10.1 $ 11.7 $ (2.4) (10) $ 11.4 Profit commission (millions) (included in ceded premiums) $ 21.9 $ 22.5 $ 23.5 $ 27.5 $ 34.9 (10) $ 27.0 Direct Pool RIF (millions) With aggregate loss limits $ 331 $ 303 $ 287 $ 282 $ 279 $ 271 Without aggregate loss limits $ 536 $ 505 $ 479 $ 456 $ 418 $ 388 Mortgage Guaranty Insurance Corporation - Risk to Capital 15.0:1 14.6:1 13.7:1 13.2:1 12.3:1 12.1:1 (9) MGIC Indemnity Corporation - Risk to Capital 1.1:1 1.1:1 1.0:1 0.9:1 0.9:1 3.6:1 (9) Combined Insurance Companies - Risk to Capital 17.0:1 16.4:1 15.4:1 14.8:1 13.6:1 13.6:1 (9) GAAP loss ratio (insurance operations only) (3) 55.1% 54.8% 37.6% 42.3% 32.0% 42.0% GAAP underwriting expense ratio (insurance operations only) 14.9% 13.9% 16.4% 15.0% 14.4% 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: The results of our operations in Australia are included in the financial statements in this document but the additional information in this document does not include our Australian operations, unless otherwise noted, which are immaterial. 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) In accordance with industry practice, loans approved by GSE and other automated underwriting (AU) systems under "doc waiver" programs that do not require verification of borrower income are classified by MGIC as "full doc." Based in part on information provided by the GSEs, MGIC estimates full doc loans of this type were approximately 4% of 2007 NIW. Information for other periods is not available. MGIC understands these AU systems grant such doc waivers for loans they judge to have higher credit quality. MGIC also understands that the GSEs terminated their "doc waiver" programs in the second half of Reduced documentation loans only appear in the reduced documentation category and do not appear in any of the other categories. (3) As calculated, does not reflect any effects due to premium deficiency. 11

12 (4) Includes Australian operations (5) Includes rescissions of coverage on loans covered by a probable settlement, which as of December 31, 2015, was approximately 435 loans. (6) Refer to our risk factor titled "We are involved in legal proceedings and are subject to the risk of additional legal proceedings in the future" for information about our rescission settlements. (7) Q and Q exclude items associated with rescission settlements. (8) Net paid claims, as presented, does not include amounts received in conjunction with terminations or commutations of reinsurance agreements. In a termination or commutation, the agreement is cancelled, with no future premium ceded and funds for any incurred but unpaid losses transferred to us. The transferred funds result in an increase in the investment portfolio (including cash and cash equivalents) and there is a corresponding decrease in reinsurance recoverable on loss reserves. This results in an increase in net loss reserves, which is offset by a decrease in net losses paid. (9) Preliminary (10) In the third quarter of 2015, the April 2013 quota share reinsurance agreement was restructured via a commutation and new agreement. The effects of the new agreement for the third quarter of 2015 were as follows (in millions): Ceded premium written $ 22.6 Ceded premium earned $ 22.6 Ceding commissions $ 9.2 Profit commissions $ 23.3 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; MGIC refers to Mortgage Guaranty Insurance Corporation; and MIC refers to MGIC Indemnity 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, Radian Guaranty Inc., and United Guaranty Residential Insurance Company. The level of competition, including price competition, within the private mortgage insurance industry has intensified over the past several years and is not expected to diminish. Lender demand and the discounted pricing for lender-paid single premium policies, have generally increased the percentage of the industry s and MGIC s new insurance written under those policies over the past several years. During most of 2013, when almost all of our lender-paid single premium rates were above those most commonly used in the market, lender-paid single premium policies were approximately 4% of our total new insurance written; they were approximately 11% in 2014; and 17% in The increases compared to 2014 were primarily a result of our 12

13 selectively matching reduced rates. Prior to the fourth quarter of 2014, we did not use our rate card s authority to adjust premiums to offer significant discounts from our standard lender-paid single premium policy rate card. The average discount from our rate card on lender-paid single premium policies was 5% in the fourth quarter of 2014 and 13% in Given the 2015 pricing environment, an increase in the percentage of business written as lender-paid single premium policies, all other things equal, decreased our weighted average premium rates on new insurance written. The private mortgage insurer eligibility requirements (the PMIERs ) of Fannie Mae and Freddie Mac (the GSEs ) require more Minimum Required Assets be maintained by a private mortgage insurer for loans dated on or after January 1, 2016, that are insured under lender-paid mortgage insurance policies or other policies that are not subject to automatic termination under the Homeowners Protection Act ( HPA ) or an automatic termination consistent with the HPA termination requirements for borrower-paid mortgage insurance. This requirement may reduce our future returns because we will be required to maintain more Available Assets in connection with a portion of our business. In January 2016, we announced our intention to revise our premium rate cards in the near future. We expect that this will result in a decrease in premium rates on some higher-fico loans and an increase in premium rates on some lower-fico loans. If we do not revise our premium rates in this manner, we believe lenders may select our competitors to insure higher-fico loans because, in many cases, they currently offer lower premiums rates for those loans and lenders may select MGIC to insure lower-fico loans because, in many cases, we currently offer lower rates for those loans. We expect that our premium rate changes will modestly decrease our new insurance written and premium yield on new insurance written from 2015 levels, but will result in returns on a portfolio basis that are comparable to those we expect to earn on the business we wrote in 2015, after considering the effects of reinsurance. During 2014 and 2015, approximately 4% and 5%, 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 premium rates higher than can be obtained from competitors, tightening of and adherence to our underwriting requirements, which may result in our declining to insure some of the loans originated by our customers, and insurance rescissions that affect the customer. We have ongoing discussions with lenders who are significant customers regarding their objections to our rescissions. In the past several years, we believe many lenders considered financial strength and compliance with the State Capital Requirements (discussed below) as important factors when selecting a mortgage insurer. Lenders may consider expected future compliance with the PMIERs important when selecting a mortgage insurer in the future. As noted below, MGIC is in compliance with the financial requirements of the PMIERs and we expect MGIC s Available Assets to continue to exceed its Minimum Required Assets under the PMIERs and its risk-to-capital ratio to continue to comply with the current State Capital Requirements. However, we cannot assure you that we will continue to comply with such requirements or that we will comply with any revised State Capital Requirements proposed by the National Association of Insurance Commissioners ( NAIC ). For more information, see our risk factors titled We may not continue to meet the GSEs 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. We believe that financial strength ratings may be a significant consideration for participants seeking to secure credit enhancement in the non-gse mortgage market, which includes most loans that are not Qualified Mortgages (for more information about Qualified Mortgages, see our risk factor titled Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the 13

14 GSEs could reduce our revenues or increase our losses ). While this market has been limited since the financial crisis, it may grow in the future. The financial strength ratings of our insurance subsidiaries are lower than those of some competitors and below investment grade levels; therefore, we may be competitively disadvantaged with some market participants. For each of MGIC and MIC, the financial strength rating from Moody s is Ba1 (with a positive outlook) and from Standard & Poor s is BB+ (with a positive outlook). It is possible that MGIC s and MIC s financial strength ratings could decline from these levels. Our ability to participate in the non-gse market could depend on our ability to secure investment grade ratings for our mortgage insurance subsidiaries. If the GSEs no longer operate in their current capacities, for example, due to legislative or regulatory action, we may be forced to compete in a new marketplace in which financial strength ratings play a greater role. 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 mortgage 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, lenders and other investors holding mortgages in portfolio and self-insuring, investors (including the GSEs) using risk mitigation techniques other than private mortgage insurance, such as obtaining insurance from non-mortgage insurers and engaging in credit-linked note transactions executed in the capital markets; using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage; or accepting credit risk without credit enhancement, 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 , or loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio that has private mortgage insurance. The FHA increased its share of the low down payment residential mortgages that were subject to FHA, VA or primary private mortgage insurance in each of the first three quarters of In the third quarter of 2015, the FHA accounted for 40.5% of all such mortgages, up from 32.5% in In the past ten years, the FHA s share has been as low as 15.5% in 2006 and as high as 68.7% in 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; flexibility for the FHA to establish new products as a result of federal legislation and programs; returns 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 these factors or the FHA s share of new insurance written will change in the future. In each of the second and third quarters of 2015, the VA accounted for 22.8% of all low down payment residential mortgages that were subject to FHA, VA or primary private mortgage insurance, down from 28.2% 14

15 in the first quarter of 2015 (which had been its highest level in ten years), and down from 24.4% in The VA s lowest market share in the past ten years was 5.4% in 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 that 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 business practices of the GSEs affect the entire relationship between them, lenders and mortgage insurers and include: 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 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 what 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 extent to which the GSEs intervene in mortgage insurers rescission practices or rescission settlement practices with lenders. For additional information, see our risk factor titled We are involved in legal proceedings and are subject to the risk of additional legal proceedings in the future, and the maximum loan limits of the GSEs in comparison to those of the FHA and other investors. The Federal Housing Finance Agency ( FHFA ) is the conservator of the GSEs 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. The financial reform legislation that was passed in July 2010 (the Dodd-Frank Act or Dodd-Frank ) required the U.S. Department of the Treasury to report its recommendations regarding options for ending the conservatorship of the GSEs. This report did not provide any definitive timeline for GSE reform; however, it did recommend using a combination of federal housing policy changes to wind down the GSEs, shrink the government s footprint in housing finance (including FHA insurance), and help bring private capital back to the mortgage market. Since then, Members of Congress 15

16 introduced several bills intended to change the business practices of the GSEs and the FHA; however, no legislation has been enacted. 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. Dodd-Frank requires lenders to consider a borrower s ability to repay a home loan before extending credit. The Consumer Financial Protection Bureau ( CFPB ) rule defining Qualified Mortgage ( QM ) for purposes of implementing the ability to repay law became effective in January 2014 and included a temporary category of QMs for mortgages that satisfy the general product feature requirements of QMs and meet the GSEs underwriting requirements (the temporary category ). The temporary category will phase out when the GSEs conservatorship ends, or if sooner, on January 21, Dodd-Frank requires a securitizer to retain at least 5% of the risk associated with mortgage loans that are securitized, and in some cases the retained risk may be allocated between the securitizer and the lender that originated the loan. The final rule implementing that requirement became effective on December 24, 2015 for asset-backed securities collateralized by residential mortgages. The final rule exempts securitizations of qualified residential mortgages ( QRMs ) from the risk retention requirement and generally aligns the QRM definition with that of QM. Because there is a temporary category of QMs for mortgages that satisfy the general product feature requirements of QMs and meet the GSEs underwriting requirements, lenders that originate loans that are sold to the GSEs while they are in conservatorship would not be required to retain risk associated with those loans. The final rule requires the agencies that implemented the rule to review the QRM definition no later than four years after its effective date and every five years thereafter, and allows each agency to request a review of the definition at any time. We estimate that for our new risk written in 2014 and 2015, 83% and 85%, respectively, was for loans that would have met the CFPB s general QM definition and, therefore, the QRM definition. We estimate that approximately 99% of our new risk written in each of 2014 and 2015, was for loans that would have met the temporary category in CFPB s QM definition. Changes in the treatment of GSE-guaranteed mortgage loans in the regulations defining QM and QRM, or changes in the conservatorship or capital support provided to the GSEs by the U.S. Government, could impact the manner in which the risk-retention rules apply to GSE securitizations, originators who sell loans to GSEs and our business. We may not continue to meet the GSEs mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility. Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. The GSEs each revised its PMIERs effective December 31, 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 December 31, 2015, MGIC s preliminary Available Assets are $5.0 billion and its preliminary Minimum Required Assets are $4.5 billion; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs. Our Available Assets do not include approximately $100 million of statutory capital in excess of MIC s minimum policyholder position that remained after MIC repatriated $387 million to MGIC in the fourth quarter of

17 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 may reduce the amount of credit they allow under the PMIERs for the risk ceded under our quota share reinsurance transaction. The GSEs ongoing approval of that transaction is subject to several conditions and the transaction will be reviewed under the PMIERs at least annually by the GSEs. For more information about the transaction, see our risk factor titled The mix of business we write affects the likelihood of losses occurring, our Minimum Required Assets under the PMIERs, and our premium yields. The GSEs could make the PMIERs more onerous in the future; in this regard, the PMIERs provide that the tables of 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 will provide notice 180 days prior to the effective date of table updates. In addition, the GSEs may amend the PMIERs at any time. 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 additional capital be needed by MGIC in the future, additional 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 transaction mitigates the negative effect of the PMIERs on our returns. In this regard, see the first bullet point above. The benefit of our net operating loss carryforwards may become substantially limited. As of December 31, 2015, we had approximately $1.9 billion of net operating losses for tax purposes that we can use in certain circumstances to offset future taxable income and thus reduce our federal income tax liability. 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 17

18 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. We are involved in legal proceedings and are subject to the risk of additional legal proceedings in the future. Before paying a claim, we review the loan and servicing files to determine the appropriateness of the claim amount. 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, including the requirement to mitigate our loss by performing reasonable loss mitigation efforts or, for example, diligently pursuing a foreclosure or bankruptcy relief in a timely manner. We call such reduction of claims submitted to us curtailments. In each of 2014 and 2015, curtailments reduced our average claim paid by approximately 6.7%. After we pay a claim, servicers and insureds sometimes object to our curtailments and other adjustments. We review these objections if they are sent to us within 90 days after the claim was paid. When reviewing the loan file associated with a claim, 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 recent quarters, approximately 5% of claims received in a quarter have been resolved by rescissions, down from the peak of approximately 28% in the first half of Our loss reserving methodology incorporates our estimates of future rescissions and reversals of rescissions. A variance between ultimate actual rescission and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses. If the insured disputes our right to rescind coverage, we generally engage in discussions in an attempt to settle the dispute. As part of those discussions, we may voluntarily suspend rescissions we believe may be part of a settlement. Certain settlements require GSE approval. The GSEs consented to settlement agreements we entered into with Countrywide Home Loans, Inc. ( CHL ) and its affiliate, Bank of America, N.A., as successor to Countrywide Home Loans Servicing LP, but there is no guarantee they will approve others. We have reached and implemented settlement agreements that do not require GSE approval, but they have not been material in the aggregate. If we are unable to reach a settlement, the outcome of a dispute ultimately would be determined by legal proceedings. Under our policies in effect prior to October 1, 2014, legal proceedings disputing our right to rescind coverage may be brought up to three years after the lender has obtained title to the property (typically through a foreclosure) or the property was sold in a sale that we approved, whichever is applicable, and under our master policy effective October 1, 2014, such proceedings may be brought up to two years from the date of the notice of rescission. In a few jurisdictions there is a longer time to bring such proceedings. Until a liability associated with a settlement agreement or litigation becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes even though discussions and legal proceedings may have been initiated and are ongoing. Under ASC , an estimated loss from such discussions and proceedings is accrued for only if we determine that the loss is probable and can be reasonably estimated. The estimated impact that we have recorded is our best estimate of our loss from these matters. 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 the probable settlements for which we have recorded a loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. In addition, holders of loans covered by our previously implemented settlement agreement with CHL that did not consent to that agreement (approximately 11% of the dollar amount of exposure under that agreement) may bring legal 18