MGIC Investment Corp. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. MGIC provides private mortgage insurance and related mortgage-credit services, primarily through Mortgage Guaranty Insurance Corporation (MGIC).
Key financial and operating metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $1.186 billion | $1.199 billion |
| Net premiums earned | $1.014 billion | $1.022 billion |
| Net income | $635.0 million | $446.1 million |
| Diluted EPS | $1.85 | $1.29 |
| Losses incurred, net | $64.6 million | $364.8 million |
| Net investment income | $156.4 million | $154.4 million |
| Operating cash flow | $696.3 million | $732.3 million |
| Year-end total assets | $7.325 billion | $7.355 billion |
| Year-end shareholders’ equity | $4.861 billion | $4.699 billion |
| Year-end investment portfolio | $6.607 billion | $6.683 billion |
| Year-end cash and cash equivalents | $284.7 million | $288.0 million |
| Year-end loss reserves | $883.5 million | $880.5 million |
| Debt carrying value | $1.147 billion | $1.243 billion |
| Loss ratio | 6.4% | 35.7% |
| Underwriting expense ratio | 20.6% | 19.2% |
| Net premium yield | 38.9 basis points | 43.6 basis points |
Net income rose 42%, principally because losses incurred fell sharply. Total revenue edged down about 1%; net premiums earned declined about 1%, while net premiums written increased 4% to $969.0 million. Adjusted net operating income, a non-GAAP measure, was $658.6 million, or $1.91 per diluted share, versus $456.8 million, or $1.32, in 2020.
Operating cash flow was positive but decreased year over year. Investing activities used $160.7 million and financing activities used $527.3 million; cash and restricted cash together increased $8.3 million. At year-end, total liabilities were $2.464 billion. Holding-company cash and investments were approximately $663 million, compared with $847 million a year earlier; these resources are distinct from the consolidated cash balance.
Business performance and changes versus 2020
- Primary new insurance written (NIW) increased to $120.2 billion from $112.1 billion. Primary insurance in force (IIF) grew 11.3% to $274.4 billion, and risk in force (RIF) rose to $69.3 billion.
- Purchase mortgages were 79.7% of NIW, up from 64.3%; refinances fell to 20.3% from 35.7%. MGIC’s reported private-insurer market share was 20.5% for the first nine months of 2021, compared with 18.7% for full-year 2020; the periods are not directly comparable.
- New delinquency notices fell to 42,432 from 106,099. Year-end primary delinquency inventory declined to 33,290 loans from 57,710, and the default rate fell to 2.84% from 5.11%. About 33% of year-end delinquent loans were reported in forbearance, versus 62% in 2020.
- Net losses incurred fell to $64.6 million, including $60.0 million of favorable prior-year reserve development, mainly reflecting lower estimated claim rates on pre-COVID and peak-COVID delinquencies. In 2020, reserve development was adverse by $19.6 million.
- Net premium yield declined to 38.9 basis points from 43.6, reflecting lower rates on newer business and less accelerated premium recognition from single-premium policy cancellations. Management expects continued pressure as higher-rate older policies run off.
- Shareholders’ equity increased by $162 million. MGIC repurchased approximately 19.0 million shares for about $291 million in the second half and paid $94 million in shareholder dividends. It also repurchased $98.6 million principal amount of 9% convertible debentures for $135.5 million, recording a $36.9 million extinguishment loss and reducing potential dilution by approximately 7.5 million shares.
Outlook, management commentary and risks
Management expected 2022 NIW to decline from 2021, primarily because mortgage-originations forecasts implied substantially lower refinance activity. It expected IIF to continue growing, but more slowly; direct earned premiums to be lower; net premiums written to be comparable; investment income to be comparable; and underwriting and operating expenses to increase as the company invests in technology, data and analytics. Management expected an approximately 21% effective tax rate and a slower reduction in delinquency inventory, with claims received and paid likely to rise as forbearance programs and foreclosure restrictions ended. The timing and magnitude of claims were described as uncertain.
- Capital and liquidity: MGIC reported $5.7 billion of PMIERs Available Assets, $2.2 billion above Minimum Required Assets, and remained eligible to insure GSE loans. Its statutory risk-to-capital ratio was 9.5:1; its policyholder position exceeded the required minimum by $3.4 billion. Insurance-subsidiary dividends are regulator-restricted. Management said holding-company liquidity was sufficient for foreseeable obligations, while noting competing demands and reliance on subsidiary dividends.
- Debt: Holding-company obligations included $242.3 million principal of 5.75% notes due 2023, $650 million of 5.25% notes due 2028 and $110.2 million of 9% convertible debentures due 2063. MGIC also had a $155 million FHLB advance due in 2023. The filing reported approximately $58 million of annual holding-company debt service based on year-end debt.
- COVID-19 and claims: Forbearance and foreclosure delays deferred claims, and prolonged delinquency can increase claim severity. The company cautioned that economic conditions, borrower cures, home prices and the end of relief measures could materially alter losses and reserves. Reserve estimates are judgmental; a one-percentage-point change in the estimated claim rate would change reserves by about $19 million, and a $1,000 change in the average severity factor by about $16 million.
- Industry and regulatory exposure: Results depend on housing, employment, interest rates, mortgage originations and competition from other insurers, government programs and alternative credit-risk products. Changes to GSE practices, PMIERs, state capital rules, housing policy or FHA pricing could affect business volume, capital needs and returns. Proposed state mortgage-insurer capital rules remained unsettled.
- Reinsurance: Reinsurance covered substantial portions of the portfolio and supported capital relief, but availability, counterparty performance and the GSEs’ recognition of ceded-risk credit are not assured. Trigger events had occurred on the Home Re 2018-1, 2019-1 and 2021-2 transactions; management reported that coverage remained in place under the stated transaction terms.
- Legal matters: The company recorded a $6.3 million probable loss related to claims-paying-practice litigation. It estimated approximately $27 million of additional maximum exposure for reasonably possible matters, excluding interest and consequential or exemplary damages; it could not reasonably estimate a range of potential liability.
- Other risks and unusual items: Investment fair values were exposed to rising rates and credit spreads; 2021 other comprehensive income included a $122.1 million after-tax unrealized investment loss. The company also cited cyber and technology risks, LIBOR transition exposure, and model and underwriting uncertainty. Adoption of convertible-debt accounting guidance produced a $68.3 million beginning-equity reclassification in 2021.
Important facts for investors to verify
- Whether delinquency cures and claim severity remain favorable as pandemic-related forbearance and foreclosure measures expire, and whether reserve assumptions prove adequate.
- Current PMIERs capital headroom, statutory capital position, and the effect of future rule changes or reduced reinsurance credit.
- How lower premium yields, competitive pricing, mortgage-originations trends and policy persistency affect premium revenue and returns.
- Holding-company liquidity and debt refinancing or repayment capacity, considering regulated subsidiary dividends, share repurchases and the 2023 maturities.
- Progress and eventual outcomes in claims-paying-practice disputes, including potential losses beyond amounts accrued.
- Clarification of cash and debt measures: consolidated cash differs from holding-company liquidity, and debt amounts vary by carrying value versus principal amount.