MGIC Investment Corp. 10-Q Summary (Q3 2008)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. MGIC Investment Corporation is the leading provider of private mortgage insurance in the United States. The company operates primarily through its subsidiary, Mortgage Guaranty Insurance Corporation (MGIC). The reporting period reflects significant deterioration in the housing market, leading to increased delinquencies and losses, particularly on books of business written in 2006 and 2007.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2008) | Value (in millions) |
|---|---|
| Net Premiums Earned | $1,038.1 |
| Total Revenues | $1,310.0 |
| Losses Incurred, Net | $2,168.1 |
| Net Loss | $(245.6) |
| Loss Per Share (Diluted) | $(2.22) |
| Operating Cash Flow | $893.0 |
| Cash and Cash Equivalents | $1,088.0 |
| Total Debt (Short & Long Term) | $698.4 |
| Convertible Debentures | $374.7 |
| Loss Reserves | $4,013.3 |
| Premium Deficiency Reserves | $583.9 |
Material Changes vs. Prior Period
- Losses Incurred: Net losses incurred surged to $2.17 billion for the nine months ended September 30, 2008, compared to $1.02 billion in the same period in 2007. This increase is driven by a significant rise in the default inventory (up ~44,800 loans) and higher claim severity, particularly in California and Florida.
- Premium Deficiency Reserve: The reserve for Wall Street bulk transactions decreased by $627 million to $584 million, reflecting the run-off of this business and changes in assumptions regarding future premiums and losses.
- Investment Portfolio: The company recognized "other than temporary" impairments of approximately $40.2 million for the nine-month period. Realized investment gains were $16.5 million, significantly lower than the $152.2 million in 2007, largely due to the absence of large gains from joint venture sales seen in the prior year.
- Joint Ventures: Income from joint ventures turned positive ($24.5 million) compared to a loss of $244.7 million in 2007. The 2007 loss was driven by the impairment of the C-BASS investment. In Q3 2008, MGIC sold its remaining interest in Sherman Financial Group, recognizing a $62.8 million gain.
- Capital Structure: The company raised approximately $815 million in Q1 2008 via common stock and convertible debentures. In Q3 2008, the company eliminated its common stock dividend.
Outlook, Risks, and Management Commentary
- Loss Outlook: Management expects material losses to continue on the 2006 and 2007 books of business for several years. The view on potential losses has trended upward since Q1 2008. Net paid claims for 2008 are now estimated at approximately $1.5 billion, lower than the previous $1.8–$2.0 billion range due to slower claim processing.
- Regulatory Capital: MGIC's risk-to-capital ratio increased to 13.9:1 (combined) as of September 30, 2008. While currently compliant with the 25:1 limit in many states and the 22:1 covenant on its credit facility, management warns that if loss trends continue, the company could breach regulatory requirements before the end of 2009.
- Capital Raising: The company is considering options to obtain additional capital through equity, debt, or reinsurance to maintain regulatory compliance. Any equity issuance would likely dilute existing shareholders.
- Underwriting Changes: MGIC has tightened underwriting guidelines, reducing exposure to high loan-to-value (LTV) loans (LTV >95% dropped to 7% of flow volume in Q3 2008). The company ceased writing Wall Street bulk transactions in late 2007.
- Legal and Tax Contingencies: The company faces multiple stockholder class action lawsuits regarding disclosures related to C-BASS and subprime exposure. Additionally, an IRS examination regarding REMIC residual interests remains unresolved, with a potential liability of approximately $189.5 million in taxes and penalties (partially paid).
Investor Verification Checklist
- Regulatory Compliance: Verify if the risk-to-capital ratio and Policyholders' Position (MPP) remain within regulatory limits in key jurisdictions (e.g., Wisconsin) given the projected losses for the remainder of 2008.
- Loss Reserve Adequacy: Assess the sensitivity of loss reserves to changes in claim severity and claim rates, particularly in distressed markets like California and Florida.
- Liquidity Position: Confirm the holding company's ability to service its debt obligations ($1.09 billion total indebtedness) given the suspension of dividends from the insurance subsidiary.
- IRS Dispute Resolution: Monitor the status of the IRS appeal regarding REMIC residual interests and the potential impact on future tax provisions.
- Capital Plan Execution: Track the company's progress in executing its remediation plan with Fannie Mae and Freddie Mac and any successful capital raises to avoid regulatory restrictions on writing new business.