MGIC Investment Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. MGIC principally provides mortgage insurance on low-down-payment residential loans. The COVID-19 pandemic materially affected 2020 results, chiefly through increased mortgage delinquencies and loss reserves.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $296.0M | $318.4M | $896.9M | $902.4M |
| Net premiums earned | $256.1M | $267.9M | $760.6M | $764.7M |
| Losses incurred, net | $40.7M | $34.0M | $319.0M | $94.9M |
| Net income | $130.8M | $176.9M | $294.7M | $496.7M |
| Diluted EPS | $0.38 | $0.49 | $0.85 | $1.36 |
| Loss ratio | 15.9% | 12.7% | 41.9% | 12.4% |
| Underwriting expense ratio | 20.2% | 17.7% | 19.1% | 18.1% |
- Cash flow: Nine-month operating cash flow was $508.9M, investing cash outflow $478.1M, and financing cash inflow $189.0M. Cash and restricted cash rose $219.8M to $388.8M.
- Balance sheet: Total assets were $7.15B, liabilities $2.64B, and shareholders’ equity $4.51B at September 30. Investments totaled $6.37B. Loss reserves were $840.4M, including $757.3M net of reinsurance.
- Debt and liquidity: Long-term debt carrying value was $1.24B, up from $832.7M at year-end 2019. The company issued $650M of 5.25% notes due 2028 and used part of the proceeds to repurchase 5.75% notes and 9% debentures. The parent holding company reported $871M of cash and investments. The company was in compliance with debt covenants.
- Capital: MGIC reported $5.0B in PMIERs Available Assets, $1.4B above Minimum Required Assets, and a 9.4:1 risk-to-capital ratio. Its policyholder position exceeded the required minimum by $3.1B.
Changes versus comparable periods
- Q3 net income fell 26%; nine-month net income fell 41%. Nine-month losses incurred rose by $224.1M, reflecting pandemic-related defaults, higher IBNR reserves, and less favorable prior-year reserve development.
- Q3 new delinquency notices were 20,924 versus 14,019 a year earlier. The ending delinquency inventory was 64,418, up 115% from September 2019; 67% was reported subject to forbearance.
- Higher average insurance in force and accelerated premiums from single-premium cancellations partly offset lower premium rates and reduced QSR profit commissions. Net premium yield declined to 43.6 basis points in Q3 from 49.6 basis points.
- New insurance written increased to $32.8B in Q3 from $19.1B and to $78.9B for nine months from $44.1B. Refinances represented 31.3% of Q3 new insurance written, versus 20.2% a year earlier.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expects delinquency levels to remain elevated and said the pandemic’s future effect on business, results, liquidity, and financial condition could be material. The timing and extent of eventual claims remain uncertain.
- Forbearance and foreclosure moratoriums have delayed claims and reduced near-term paid losses. Management expects claims and paid losses may rise as these programs end; outcomes depend on borrowers’ ability to cure, unemployment, and housing prices.
- The Q3 included a $26.7M loss on debt extinguishment. The first nine months included $17.3M of adverse development on prior-year delinquencies, versus $47.8M of favorable development in 2019. Q3 reserve re-estimation showed no significant development, and IBNR and other reserves decreased $27M.
- Management estimated that, with other assumptions unchanged, a $1,000 change in the average severity reserve factor would change reserves by about $37M; a one-percentage-point change in the average claim-rate factor would change reserves by about $15M.
- Claims-paying-practices disputes and proceedings remain unresolved. The company could not reasonably estimate potential liability; it described approximately $40M as the maximum exposure where loss is reasonably possible. Other ordinary-course proceedings were not expected to have a material adverse effect.
- MGIC’s cash dividends to the parent are constrained by insurance regulation and require GSE approval through March 31, 2021. Share repurchases were suspended because of pandemic uncertainty. The company declared a $0.06-per-share quarterly dividend payable in November.
- In October, after quarter-end, MGIC entered into an additional $412.9M excess-of-loss reinsurance transaction. The 2018 and 2019 Home Re transactions had delinquency trigger events; principal payments on related notes were suspended while the triggers remained in effect.
Important facts for investors to verify
- Whether elevated delinquencies convert to claims after forbearance ends, and how claim frequency and severity compare with reserve assumptions.
- Whether PMIERs capital headroom remains adequate as delinquency-related requirements change, including the effect of expired or lost COVID-19 capital relief.
- Whether reinsurance recoveries and PMIERs credit remain available on current terms, and the performance of the new October transaction.
- How holding-company liquidity, debt service, and dividend capacity evolve while subsidiary cash dividends are restricted.
- Developments in claims-paying-practices litigation and whether the estimated potential exposure changes.
- Effects of lower premium yields, investment yields, and possible GSE or regulatory changes on future profitability and capital needs.