MTG

MGIC Investment Corp. 10-Q Summary: Quarter Ended September 30, 2006

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, for MGIC Investment Corporation, the leading provider of private mortgage insurance in the United States. The company operates primarily through its subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), offering primary and pool mortgage insurance. Results are also significantly influenced by equity earnings from two joint ventures: Credit-Based Asset Servicing and Securitization LLC (C-BASS) and Sherman Financial Group LLC (Sherman).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net premiums earned decreased to $890.4 million (9 months 2006) from $933.6 million (9 months 2005), driven by lower average premium rates and a decline in average insurance in force.
• Profitability Pressure: Net income fell to $443.3 million from $498.8 million year-over-year. The loss ratio increased to 47.9% from 40.9%, and the expense ratio rose to 16.9% from 15.6%, resulting in a combined ratio increase to 64.8% from 56.5%.
• Losses Incurred: Net losses incurred increased to $426.3 million from $382.0 million. This was due to higher estimated claim severities and a smaller decrease in claim rates, particularly in the Midwest (Michigan, Ohio, Indiana) where employment cuts in the auto industry impacted performance.
• Joint Venture Growth: Income from joint ventures increased to $122.5 million from $110.5 million, offsetting some underwriting weakness. This was driven by higher earnings from both C-BASS and Sherman.
• Debt Issuance: In September 2006, the company issued $200 million in 5.625% Senior Notes due in 2011.

Guidance, Outlook, and Risks

• Outlook: Management anticipates net premiums written and earned in the fourth quarter of 2006 will be lower than the comparable 2005 period due to lower average premium rates, though this may be offset by slight growth in insurance in force.
• Dividends: Following extraordinary dividends totaling $350 million paid by the MGIC subsidiary in the first nine months, the subsidiary cannot currently pay dividends without regulatory approval. Approval was received in November 2006 for a $55 million quarterly dividend.
• Stock Repurchases: The company repurchased 5.9 million shares for $373.0 million during the first nine months of 2006. Approximately 4.9 million shares remain authorized for repurchase.
• Risks:
  • Economic Sensitivity: Deterioration in the domestic economy or home prices could increase defaults. The Midwest region remains a specific area of concern.
  • Regulatory/Litigation: Ongoing investigations by state insurance departments (e.g., New York, Minnesota) regarding captive mortgage reinsurance arrangements and potential litigation under RESPA and FCRA.
  • Joint Venture Exposure: C-BASS faces credit risk from subprime mortgages and liquidity risk from short-term financing; Sherman faces competition in purchasing delinquent receivables.

Investor Verification Checklist

• Loss Reserve Adequacy: Verify the sensitivity of loss reserves to changes in claim rates and severity, noting the specific exposure in the Midwest region.
• Premium Rate Trends: Confirm the trajectory of average premium rates and the impact of bulk channel deductibles on future revenue.
• Joint Venture Performance: Review the specific credit quality and liquidity positions of C-BASS and Sherman, given their significant contribution to net income.
• Regulatory Status: Monitor the outcome of state insurance department inquiries regarding captive reinsurance and premium rate filings.
• Capital Structure: Assess the impact of recent debt issuance and the restrictions on dividend flows from the MGIC subsidiary to the parent company.