Business context and reporting period
MGIC Investment Corporation is a holding company principally engaged in U.S. private mortgage insurance through MGIC, with additional credit-risk-transfer insurance through subsidiary MAC. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $290.4 million | $270.4 million | $838.2 million | $794.6 million |
| Net premiums earned | $250.4 million | $237.1 million | $729.5 million | $697.3 million |
| Investment income, net | $36.4 million | $30.4 million | $103.0 million | $89.6 million |
| Net losses incurred | $(1.5) million | $29.7 million | $8.9 million | $84.7 million |
| Income before tax | $231.9 million | $184.5 million | $649.4 million | $539.0 million |
| Net income | $181.9 million | $120.0 million | $512.4 million | $328.4 million |
| Diluted EPS | $0.49 | $0.32 | $1.36 | $0.86 |
- Management-reported adjusted net operating income, a non-GAAP measure, was $180.9 million for Q3 and $514.7 million for the first nine months, versus $120.7 million and $357.0 million, respectively, in 2017.
- For the first nine months, operating cash flow was $383.5 million (2017: $256.4 million); investing cash flow was $(108.2) million and financing cash flow was $(108.2) million. Cash and equivalents rose to $267.0 million from $99.9 million at year-end 2017.
- At September 30, total assets were $5.66 billion, liabilities $2.17 billion, and shareholders’ equity $3.49 billion. Net loss reserves were $687.8 million, down from $937.2 million at year-end 2017.
- Long-term debt carrying value was $831.3 million, including the FHLB advance, senior notes, and convertible junior subordinated debentures. Holding-company cash and investments were approximately $261 million; it also had $175 million of unused revolving-credit capacity.
- MGIC’s PMIERs Available Assets were about $4.8 billion, approximately $1.0 billion above Minimum Required Assets. Its risk-to-capital ratio was 9.0:1; the combined insurance operations’ ratio was 9.8:1.
- The filing discusses loss and underwriting ratios, but the source text does not provide clear numerical values for those ratios.
Material changes versus the prior comparable period
- Net income rose 52% in Q3 and 56% year to date. Lower incurred losses and income-tax provision were the main drivers; higher investment income and lower diluted share counts also contributed.
- Net premiums earned increased 6% in Q3 and 5% year to date, reflecting higher insurance in force and reduced net ceded premiums as reinsurance profit commissions increased. Premium yield declined to 49.3 basis points in Q3 and 48.9 basis points year to date, from 50.1 and 49.8 basis points.
- Net losses incurred fell substantially, reflecting fewer new delinquency notices, lower estimated claim rates on new notices, and favorable development on earlier delinquencies. The primary delinquent inventory declined 19% year over year to 33,398 loans.
- Other underwriting and operating expenses increased 10% in both comparative periods, principally due to higher share-based and non-executive compensation. Nine-month interest expense declined from 2017 following maturity of 5% notes and conversion of 2% notes.
- Unrealized investment losses reduced other comprehensive income: nine-month OCI was $(85.1) million, compared with $49.0 million of OCI in 2017. The investment portfolio’s unrealized fixed-income losses were attributed primarily to interest-rate changes.
Outlook, management commentary, risks and unusual items
- MGIC said it expected to continue paying quarterly dividends of at least $60 million to the holding company, subject to regulatory and board conditions. It repurchased approximately 9.2 million shares for $100.1 million during Q2 under a $200 million authorization through 2019; a further $6.6 million of repurchases occurred through November 2, 2018.
- Revised PMIERs published in September 2018 take effect March 31, 2019. MGIC estimated that, if effective at September 30, 2018, its excess Available Assets would have been about $600 million rather than $1.0 billion, mainly because future-premium credit for certain older business would be eliminated. October 2018 excess-of-loss reinsurance was not included in that estimate.
- On October 30, MGIC entered fully collateralized excess-of-loss reinsurance with Home Re for up to $318.6 million of coverage on a specified portfolio. MGIC retains the first $168.7 million of aggregate losses. The agreement covers losses from August 1, 2018 and had no material effect on Q3 or nine-month results.
- Management reported increased new business with DTI ratios above 45%: about 20% of NIW in Q3 and year to date, versus approximately 9% and 10% in 2017. MGIC tightened guidelines for these loans and introduced risk-based premium adjustments; it said it would continue monitoring exposure. Higher LTV and DTI mix can increase required capital and claim risk.
- Competitive pricing and lower rates reduced premium yield; certain rates were reduced during 2018, and management expected a loan-level pricing system to launch in 2019. Strong competition, GSE policy changes, and possible changes to the GSE/FHA housing-finance framework could affect volume, pricing, capital needs, and returns.
- The IRS settlement of tax disputes for 2000–2007 was approved by the Tax Court in July 2018. The expected financial impact had previously been recorded; unrecognized tax benefits fell by $144.9 million, leaving none at September 30. The statutory tax rate fell to 21% from 35%, contributing to a lower effective tax rate.
- Claims-paying practices litigation and discussions remain a risk. The company estimated approximately $286 million of maximum exposure for reasonably possible matters, excluding interest and consequential or exemplary damages; it said it could not reasonably estimate a liability or range for these matters.
- Loss reserves are sensitive to claim-rate and severity assumptions. Management estimated that a $1,000 change in average severity would affect reserves by about $13 million, and a one-percentage-point change in average claim rate by about $19 million. The filing cautions that actual claims may differ materially from estimates.
- Management expected some additional delinquency notices from 2018 hurricanes, but said less than 1% of total risk in force was in affected areas and expected most resulting delinquencies to cure. It also cited economic, home-price, foreclosure-timing, reinsurance-counterparty, regulatory-capital, and investment-market risks.
Important facts for investors to verify
- Whether favorable reserve development and improving delinquency trends continue, and how claim severity and cure rates evolve.
- MGIC’s capital cushion under revised PMIERs from March 31, 2019, including the actual effect of the October excess-of-loss reinsurance and any changes in GSE credit for ceded risk.
- The sustainability of premium yield, new-business pricing, market share, and exposure to higher-DTI and higher-LTV loans.
- Available holding-company liquidity, continued subsidiary dividends, debt service and share repurchases, and compliance with statutory capital requirements.
- Developments in claims-practices disputes and the estimated $286 million reasonably possible exposure, as well as any changes to the GSE framework or state capital rules.