MGIC Investment Corporation — Q2 2020 Form 10-Q
Business context and period: MGIC Investment Corporation, through its subsidiaries, provides private mortgage insurance and related credit-risk coverage. This filing reports the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless otherwise noted. Figures below are in U.S. dollars.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $294.0 million | $292.3 million | $600.9 million | $584.0 million |
| Net premiums earned | $243.6 million | $247.1 million | $504.5 million | $496.9 million |
| Losses incurred, net | $217.4 million | $21.8 million | $278.3 million | $60.9 million |
| Income before tax | $16.5 million | $211.2 million | $204.7 million | $402.1 million |
| Net income | $14.0 million | $167.8 million | $163.9 million | $319.7 million |
| Diluted EPS | $0.04 | $0.46 | $0.48 | $0.87 |
| Loss ratio | 89.2% | 8.8% | 55.2% | 12.3% |
- Cash flow: First-half operating cash flow was $420.1 million, versus $281.6 million a year earlier. Investing activities used $47.5 million and financing activities used $170.3 million. Cash and restricted cash ended June at $371.4 million, up from $169.1 million at year-end 2019.
- Balance sheet and debt: June 30 total assets were $6.57 billion, liabilities $2.19 billion, and shareholders’ equity $4.38 billion. Consolidated debt carrying value was $833.3 million: a $155 million FHLB advance, $421.4 million of 5.75% senior notes, and $256.9 million of 9% convertible debentures. The company reported compliance with debt covenants.
- Liquidity and capital: The holding company had approximately $529.6 million in cash and investments against $815 million of holding-company debt principal. MGIC reported $4.5 billion of PMIERs available assets, $1.1 billion above minimum required assets; its risk-to-capital ratio was 9.6:1, below the commonly applicable 25:1 maximum.
- Margins and portfolio: Net premium yield was 42.7 basis points in Q2, down from 46.5 basis points; the underwriting expense ratio was 20.1%, up from 17.6%. Investment income declined 6% in Q2 to $39.7 million. The fixed-income portfolio’s embedded pre-tax yield was 2.8%, versus 3.1% at year-end 2019.
Material changes versus the prior period
- COVID-19 drove a sharp rise in new delinquency notices: 57,584 in Q2, versus 12,915 in Q2 2019. Delinquency inventory reached 69,326 loans at June 30, compared with 30,028 at year-end 2019; 67% of the inventory was reported subject to COVID-related forbearance.
- Loss reserves rose to $797.4 million gross; the net reserve was $734.0 million, up 38% from $533.7 million at year-end. Q2 included approximately $10 million of adverse development on previously reported delinquencies; first-half prior-year development was $12.8 million adverse.
- Q2 net income fell 92%, primarily because of higher incurred losses. Revenue was nearly flat: investment gains offset lower investment income and net premiums earned. First-half net income fell 49%.
- New insurance written increased to $28.2 billion in Q2 from $14.9 billion, and $46.1 billion for the first half from $25.0 billion. Refinances represented 43.2% of Q2 primary new insurance written, versus 10.8% a year earlier.
- Unrealized investment gains increased accumulated other comprehensive income; Q2 comprehensive income was $158.2 million despite $14.0 million of net income. These unrealized gains are not equivalent to operating earnings.
Outlook, risks and unusual items
- Management expects delinquencies to continue increasing and anticipates higher future losses, while emphasizing that the scale and timing are uncertain. Forbearance and foreclosure moratoriums may defer claims and reduce near-term claim payments; ultimate cures and claim severity depend on borrowers’ circumstances, unemployment, housing prices, and government and GSE programs. The company issued no quantified earnings guidance.
- PMIERs capital requirements generally rise with delinquency severity, although qualifying COVID-period delinquencies receive a 70% minimum-required-assets reduction under specified conditions. MGIC said it remained compliant at quarter-end, but noted that delayed or incomplete forbearance data, revised GSE requirements, or reduced reinsurance credit could pressure compliance.
- MGIC paid no dividend to its holding company in Q2, citing pandemic uncertainty. Share repurchases were also temporarily suspended; approximately $291 million remained authorized through 2021. Shareholders continued to receive a $0.06-per-share quarterly dividend.
- Management identified risks from competitive pricing and declining premium yields, reinsurance availability and counterparty exposure, GSE and regulatory changes, and low investment yields. Standard & Poor’s outlook for MGIC was negative; Moody’s and A.M. Best outlooks were stable.
- Claims-paying-practices disputes and proceedings remain unresolved. The company estimated approximately $39 million of maximum exposure where a loss was reasonably possible, but could not reasonably estimate a potential liability range. The estimate excludes interest and consequential or exemplary damages.
- COVID-related economic and market uncertainty contributed to unrealized investment losses; management considered them primarily spread-driven and reported no credit-loss allowance on available-for-sale securities at June 30. Newly adopted CECL guidance also resulted in no allowance for the specified receivables or securities at that date.
Important facts for investors to verify
- Subsequent delinquency, cure, forbearance and claim trends, and whether reserve estimates adequately reflect eventual claim frequency and severity.
- PMIERs available-asset cushion and any changes in capital treatment, GSE eligibility, or credit granted for reinsurance.
- Holding-company liquidity and the timing or amount of future subsidiary dividends, given regulatory and GSE approval constraints.
- Reinsurance recoverability, counterparty quality, and the terms and availability of future quota-share or insurance-linked-note coverage.
- Developments in claims-paying-practices litigation and the potential for exposure beyond the disclosed estimate.
- Investment portfolio credit quality, unrealized losses, and sensitivity to credit spreads and interest rates; the filing estimates a 100-basis-point parallel rate increase would reduce fixed-income fair value by about 4.0%.