Business Context and Reporting Period
Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2003
Business Overview: MGIC is a holding company for MGIC, a private mortgage insurer. The company provides mortgage guaranty insurance, contract underwriting, and invests in joint ventures related to mortgage servicing and consumer assets.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2003 | 9 Months Ended Sep 30, 2002 | 3 Months Ended Sep 30, 2003 | 3 Months Ended Sep 30, 2002 |
|---|---|---|---|---|
| Net Premiums Earned | $1,015,896 | $871,571 | $346,605 | $298,953 |
| Total Revenues | $1,328,089 | $1,150,209 | $445,591 | $390,806 |
| Net Income | $390,016 | $491,693 | $105,129 | $151,570 |
| Diluted EPS | $3.94 | $4.66 | $1.06 | $1.47 |
| Operating Cash Flow | $535,716 | $477,290 | N/A | N/A |
| Total Assets | $5,741,412 | $5,300,303 | N/A | N/A |
| Total Debt | $604,717 | $677,246 | N/A | N/A |
| Shareholders' Equity | $3,699,004 | $3,395,192 | N/A | N/A |
Key Ratios (Q3 2003):
- Loss Ratio: 63.7% (vs. 33.8% in Q3 2002)
- Combined Ratio: 77.7% (vs. 47.9% in Q3 2002)
- Effective Tax Rate: 23.7% (vs. 29.5% in Q3 2002)
Material Changes vs. Prior Period
- Profitability Decline: Net income for the nine months ended September 30, 2003, decreased 21% to $390.0 million from $491.7 million in the prior year. Q3 net income fell 31% to $105.1 million.
- Surge in Losses: Net losses incurred increased 138% year-over-year for the nine-month period ($536.1 million vs. $225.2 million). This was driven by a 118% increase in Q3 losses due to higher delinquency rates and paid losses.
- Revenue Growth: Total revenues increased 15% year-over-year for the nine-month period, driven by a 16% increase in net premiums written and higher realized investment gains ($33.4 million vs. $22.0 million).
- Default Rates: The primary default rate rose to 5.41% at September 30, 2003, from 4.04% at September 30, 2002. Bulk loan delinquency rates were significantly higher at 11.41%.
- Persistency Drop: Persistency (percentage of insurance remaining in force) declined to a record low of 44.9% at September 30, 2003, from 58.9% a year prior, largely due to refinancing activity.
Guidance, Outlook, and Risks
- Outlook: Management expects new insurance written on a flow basis to decrease substantially in Q4 2003 due to a decline in mortgage refinance commitments. Incurred losses and paid losses are expected to increase in Q4 2003.
- Rating Watch: On October 16, 2003, Standard & Poor's placed MGIC's claims-paying ability rating (AA+) on CreditWatch with negative implications, indicating a potential downgrade by one notch. Maintenance of a rating of at least AA-/Aa3 is critical for writing new business.
- Market Share: The company's flow market share declined to 20.8% in Q3 2003 from 24.5% in Q4 2002, attributed to the company's decision to limit participation in excess of loss risk-sharing arrangements with large lenders.
- Litigation Risks:
- FCRA Class Action: A nationwide class action filed in March 2003 alleges violations of the Fair Credit Reporting Act regarding notice of adverse action. Statutory damages could range from $100 to $1,000 per class member.
- RESPA Settlement: A settlement regarding the Real Estate Settlement Procedures Act became final in October 2003, including an injunction expiring at the end of 2003.
- Joint Ventures: The company holds significant equity interests in C-BASS (mortgage investment/servicing) and Sherman (consumer asset servicing). Results from these ventures are sensitive to asset valuations and collection estimates.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions used for loss reserves given the 138% year-over-year increase in incurred losses and rising default rates in bulk and subprime segments.
- Rating Agency Impact: Monitor the outcome of the S&P CreditWatch review; a downgrade could materially impact the company's ability to compete for new business.
- Persistency Trends: Assess the long-term revenue impact of the record-low persistency rate (44.9%) and the expected decline in new flow volume.
- Litigation Exposure: Review the potential financial impact of the pending FCRA class action lawsuit, which seeks statutory damages per class member.
- Joint Venture Valuations: Scrutinize the valuation methods for C-BASS and Sherman assets, as they lack readily ascertainable market values and rely on management estimates.