MGIC Investment Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 6, 2017. MGIC Investment, through its subsidiary MGIC, provides private mortgage insurance, principally on low-down-payment U.S. residential mortgages. Unless noted, figures below are consolidated.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $270.4 million | $273.9 million | $794.6 million | $796.0 million |
| Net premiums earned | $237.1 million | $237.4 million | $697.3 million | $690.2 million |
| Net investment income | $30.4 million | $27.5 million | $89.6 million | $82.6 million |
| Net losses incurred | $29.7 million | $60.9 million | $84.7 million | $192.5 million |
| Income before tax | $184.5 million | $83.7 million | $539.0 million | $352.7 million |
| Net income | $120.0 million | $56.6 million | $328.4 million | $235.0 million |
| Diluted EPS | $0.32 | $0.14 | $0.86 | $0.58 |
- Management-reported non-GAAP adjusted net operating income was $120.7 million, or $0.32 per diluted share, for Q3; and $357.0 million, or $0.93 per diluted share, year to date. The company cautions that these non-GAAP measures are not substitutes for GAAP results.
- Q3 effective tax rate was 34.9%; the nine-month rate was 39.1%, including a $28.4 million additional tax and interest provision related to the IRS dispute. Excluding that provision, management reported a year-to-date effective rate of approximately 33.8%.
- At September 30, total assets were $5.68 billion, total liabilities $2.55 billion, and shareholders’ equity $3.13 billion. Cash and equivalents were $250.7 million; the investment portfolio was $4.72 billion.
- For the first nine months, operating cash flow was $256.4 million, investing cash flow was negative $2.5 million, and financing cash flow was negative $158.5 million. Cash increased $95.3 million to $250.7 million.
- Consolidated debt carrying value was $830.1 million, down from $1.18 billion at year-end 2016. Long-term debt to equity was approximately 27%, versus 47% at year-end. Holding-company cash and investments were approximately $182 million.
- MGIC reported $4.7 billion of PMIERs Available Assets, $0.8 billion above Minimum Required Assets, and a 10.1:1 risk-to-capital ratio. Its policyholder position exceeded the required minimum by $1.9 billion. The filing does not provide a clear precise loss-ratio value in the supplied text.
Changes versus prior periods
- GAAP net income rose 112% in Q3 and 40% year to date, principally reflecting lower incurred losses and the absence of the large 2016 debt-extinguishment losses. Adjusted net operating income increased 18% in Q3 and 24% year to date.
- Net losses incurred fell 51% in Q3 and 56% year to date. Management attributed the decline to fewer new delinquency notices, lower estimated claim rates on new notices, and favorable prior-year reserve development.
- Year-to-date net premiums earned increased 1%; Q3 was essentially flat. Premium yield declined to 50.1 basis points in Q3 and 49.8 basis points year to date, from 53.1 and 51.9 basis points, respectively, in 2016.
- Primary insurance in force increased to $191.0 billion from $180.1 billion a year earlier; primary risk in force was $49.4 billion versus $46.8 billion. Nine-month new insurance written was $36.3 billion, compared with $35.1 billion.
- Primary default inventory declined to 41,235 loans from 50,282 at year-end 2016 and 51,433 a year earlier. Net loss reserves declined to $1.06 billion, primarily because losses paid exceeded losses incurred.
- In 2017, approximately $202.5 million of 2% convertible notes converted into about 29.1 million common shares; the remainder was redeemed. The $145 million 5% notes matured and were repaid. These transactions reduced debt but increased common shares outstanding.
Outlook, risks, and unusual items
- No formal earnings guidance is provided. Management expected default inventory to continue declining, anticipated lower new-notice claim rates for the remainder of 2017 than in comparable 2016 periods, and expected losses paid to decline as the portfolio’s credit profile improved.
- After quarter-end, October default notices totaled 7,943 versus 5,519 in October 2016; notices from FEMA-designated hurricane disaster areas were 3,394 versus 637. Management expected most hurricane-related defaults to cure and did not expect a material increase in incurred losses or paid claims, but identified uncertainty around flooding, home values, local economic conditions, claim disputes, and delayed foreclosures. More delinquent loans can also increase PMIERs capital requirements and reduce excess Available Assets.
- Loss reserves depend on estimates of claim frequency and severity. The company estimated that a $1,000 change in its average severity reserve factor would change reserves by about $20 million; a one-percentage-point change in the average claim-rate reserve factor would change reserves by about $23 million.
- The IRS tax dispute remained subject to a proposed settlement in principle and Joint Committee on Taxation review; completion was not assured. IRS notices included $197.5 million of taxes and penalties plus approximately $200.3 million of interest, and additional disputed amounts and potential state taxes were described. These are disputed assessments, not a stated final liability. The company recorded an additional $28.4 million provision in 2017 and disclosed $141.8 million of unrecognized tax benefits, including related interest.
- Separately, the company estimated maximum exposure of approximately $289 million for reasonably possible claims-practices matters, excluding interest and consequential or exemplary damages; it said it could not reasonably estimate a range of potential liability and expected to resolve matters for significantly less, without assurance.
- Other risks include changes to GSE eligibility or PMIERs requirements, reinsurance credit treatment, state capital rules, housing or economic deterioration, investment interest-rate and credit-spread risk, and uncertainty around GSE reform. Management said MGIC was compliant with PMIERs and current state capital requirements at quarter-end.
- Management stated it expected MGIC to continue paying quarterly dividends; MGIC paid a $40 million dividend to the holding company in Q3, subject to regulatory requirements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final terms, if any, of the IRS settlement, including resulting cash payments, tax expense, and statutory-capital effects.
- Subsequent hurricane-related delinquencies, cure rates, paid claims, reserve changes, and the effect on PMIERs Available Assets and required assets.
- Whether favorable reserve development and declining default inventory persist, and how claim frequency, severity, and foreclosure timing evolve.
- MGIC’s continuing PMIERs and state-capital compliance, including the impact of future GSE rule changes and reinsurance-credit decisions.
- Debt maturities, holding-company liquidity, dividend capacity, and the share-count and dilution effects of convertible debt and equity issuance.
- Exposure and developments in claims-practices litigation and the assumptions supporting loss reserves and other contingencies.