MGIC Investment Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. MGIC provides private mortgage insurance through subsidiaries, primarily on U.S. residential mortgages. Financial figures below are in U.S. dollars; “m” means million and “bn” means billion.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $243.1m | $231.2m | $513.3m | $466.3m |
| Net premiums earned | $213.5m | $207.5m | $430.8m | $421.7m |
| Losses incurred, net | $90.2m | $141.1m | $172.0m | $263.7m |
| Income before tax | $115.0m | $46.6m | $251.4m | $107.3m |
| Net income | $113.7m | $45.5m | $246.7m | $105.5m |
| Diluted EPS | $0.28 | $0.12 | $0.60 | $0.27 |
- Combined insurance operations loss ratio was 42.3% in Q2 2015 versus 68.0% a year earlier; the expense ratio was 15.0% versus 14.4%, and the combined ratio was 57.3% versus 82.4%. For the first half, the combined ratio was 55.6% versus 77.5%.
- Six-month cash flow from operations was negative $59.9m, improved from negative $279.1m. Investing activities provided $75.2m; cash and cash equivalents ended at $215.8m, up from $197.9m at year-end 2014.
- At June 30, total assets were $5.25bn, total liabilities $4.01bn, and shareholders’ equity $1.24bn. The available-for-sale investment portfolio was $4.55bn at fair value; all fixed-maturity holdings were investment grade.
- Debt was $1.30bn, including $61.9m of 5.375% senior notes due November 2015. Holding-company cash and investments were approximately $463m. Dividends from the principal insurance subsidiary require regulatory approval, and it had not paid dividends to the holding company since 2008.
Changes and drivers versus prior periods
- Q2 net income rose to $113.7m from $45.5m, primarily as lower incurred losses and higher premiums and investment income outweighed higher operating expenses. Six-month net income also benefited from $26.5m of realized investment gains, compared with $0.3m in the prior-year period; most of the 2015 gain came from fixed-maturity sales in Q1.
- New primary insurance written was $11.8bn in Q2, up from $8.3bn, and $20.8bn for the first half, up from $13.5bn. Primary insurance in force reached $168.8bn, compared with $159.3bn a year earlier.
- Primary default inventory fell to 66,357 loans from 85,416 a year earlier; the reported default rate declined to 6.78% from 8.98%. Six-month losses incurred decreased to $172m from $264m, reflecting fewer new default notices and favorable prior-year reserve development of $52m versus $43m.
- The premium deficiency reserve was eliminated by June 30, following a $17m Q2 reduction and a $24m first-half reduction. Lower estimated ultimate losses were a principal factor.
- Other comprehensive loss was $63.6m in Q2, largely from unrealized investment losses; accumulated other comprehensive loss widened to $128.1m from $81.3m at year-end. The fair-value portfolio’s gross unrealized losses were $60.1m, versus $30.5m at year-end; the filing attributed losses primarily to interest-rate changes and reported no other-than-temporary impairments.
Outlook, risks, contingencies and unusual items
- Management expected 2015 new insurance written to exceed 2014, citing application and origination trends, and expected insurance in force and net premiums earned to increase. It also expected premium yield to decline through the remainder of 2015 and at least into 2016, mainly because of planned reinsurance restructuring and the changing mix and aging of insured books.
- Management expected paid claims to continue declining during the remainder of 2015, while cautioning that losses historically can be higher in the second half. Results depend on housing and employment conditions, claim rates and severity, and reserve estimates.
- MGIC expected to meet revised GSE PMIERs financial requirements effective December 31, 2015, but that expectation depends on completing a restructured reinsurance agreement, transferring MIC subsidiary assets to MGIC, and receiving expected reinsurance credit. Fannie Mae and Wisconsin’s OCI had approved the restructuring; Freddie Mac approval remained outstanding. GSEs may revise requirements, potentially increasing capital needs or limiting eligibility.
- Under current state requirements, MGIC’s risk-to-capital ratio was 13.2:1, compared with 14.6:1 at year-end; its policyholder position was $914m above Wisconsin’s $1.1bn minimum. The combined insurance operations ratio was 14.8:1.
- Claims-paying-practice litigation and settlements remain uncertain. The filing estimated maximum exposure above the best-estimate provision of $122m for other probable settlements, and approximately $218m for other discussions and proceedings; the latter was expected to resolve for significantly less. These estimates exclude interest and consequential or exemplary damages. The amended Countrywide/CHL settlement received consent for about 89% of covered exposure; non-consenting holders retain claims rights.
- The IRS tax dispute is material and unresolved. Notices of deficiency included $197.5m of taxes and penalties on REMIC matters, plus estimated interest of $175.5m at June 30, and an additional $261.4m of proposed amounts, primarily related to a NOL carryback. MGIC had paid $65.2m toward the dispute and reported $106.7m of unrecognized tax benefits, including related interest. Potential state taxes and interest were estimated at $48.1m, excluding possible penalties. The company is contesting most proposed adjustments in Tax Court.
- The Minnesota regulator’s June 2015 consent order, like the CFPB settlement, bars MGIC for ten years from entering new captive reinsurance agreements or reinsuring new loans under existing captive agreements. The filing reported no findings of wrongdoing in either settlement.
- Pricing competition, including discounted lender-paid single-premium policies, may lower future premium yields. The FHA’s January 2015 premium reduction may also affect competitiveness. A June 2015 GSE change increases required assets for certain lender-paid policies on loans dated from January 1, 2016.
Important facts for investors to verify
- Whether Freddie Mac approves the restructured reinsurance agreement and whether the expected asset transfers and PMIERs compliance occur by the effective date.
- Whether lower defaults and favorable reserve development persist, and how much future earnings depend on reserve releases and investment gains.
- Progress and ultimate cost of claims-paying-practice matters, including claims by non-consenting Countrywide loan holders, and the IRS REMIC tax litigation.
- Holding-company liquidity and the plan to settle the $61.9m senior notes due November 2015, given operating cash outflows and restricted subsidiary dividends.
- How pricing competition, lender-paid policy mix, refinancing-driven cancellations, and GSE capital rules affect premium yield, new business, and required capital.