MGIC Investment Corporation — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
MGIC Investment Corporation is a holding company whose principal business is private mortgage insurance through MGIC. At year-end, MGIC had $172.9 billion of primary insurance in force and $44.5 billion of primary risk in force. The company continued to manage legacy claims from older, higher-risk loan vintages while writing new insurance under tighter underwriting standards.
Financial and operating performance
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Total revenue | $1.504 billion | $1.521 billion | Down about 1% |
| Net premiums earned | $1.124 billion | $1.169 billion | Down about 4% |
| Net loss | $485.9 million | $363.7 million | Loss widened about 34% |
| Diluted loss per share | $2.42 | $2.06 | Loss per share widened |
| Net losses incurred | $1.715 billion | $1.608 billion | Up about 7% |
| Net losses and LAE paid | $2.921 billion | $2.280 billion | Up about 28% |
| Combined insurance ratio | 168.6% | 153.8% | Above 100%, indicating underwriting losses |
| Primary new insurance written | $14.2 billion | $12.3 billion | Up about 16% |
| Primary insurance in force, year-end | $172.9 billion | $191.3 billion | Down about 10% |
| Primary default rate, year-end | 16.11% | 17.48% | Improved, but remained elevated |
Investment income declined to $201.3 million from $247.3 million, reflecting lower average invested assets and yields. MGIC recorded $142.7 million of net realized investment gains, including $143.4 million of gains on fixed-income sales and $0.7 million of impairment losses. The Wall Street bulk-business premium deficiency reserve declined to $134.8 million from $179.0 million.
Operating cash flow was negative $1.884 billion, compared with negative $875.4 million in 2010. Investing activities provided $1.754 billion and financing activities used $178.7 million; cash and cash equivalents decreased $308.4 million to $995.8 million. Total assets were $7.216 billion and shareholders’ equity was $1.197 billion, down from $9.334 billion and $1.669 billion, respectively, at year-end 2010. Loss reserves were $4.558 billion, versus $5.884 billion a year earlier.
At the holding company, cash and investments totaled $487 million, against $906 million of debt at par and annual interest cost of about $61 million. Consolidated debt carrying values totaled approximately $860 million: $170.5 million of senior notes, $345 million of convertible senior notes and $344.4 million of convertible junior debentures. The insurer’s investment portfolio and cash totaled approximately $6.8 billion at fair value, but claims payments and other cash uses exceeded cash generated from operations.
Material changes and management commentary
- New primary insurance written increased from $12.3 billion to $14.2 billion, while cancellations exceeded new business and primary insurance in force continued to contract. Management expected average insurance in force to decline further in 2012.
- Primary defaults fell to 175,639 from 214,724. New delinquency notices declined, but 56% of the year-end default inventory had been delinquent for at least 12 consecutive months, which the company said increases the likelihood of claims.
- Net claims paid rose materially. Management believed quarterly paid claims peaked in the second quarter of 2011 and expected total paid claims to decline if foreclosure patterns continued.
- Management expected 2012 new insurance written to increase modestly from 2011’s approximately $14 billion. It expected investment income to decline in 2012 as invested assets were used to fund claims.
- MGIC’s statutory risk-to-capital ratio was 20.3:1 at year-end; the combined insurance operations ratio was 22.2:1. Management expected MGIC’s ratio to exceed 25:1 in the second half of 2012. Wisconsin had extended its capital-requirement waiver through 2013, subject to conditions; a $1 billion liquid-assets keepwell commitment applied during the covered period. Management reported liquid assets of approximately $6.4 billion at year-end.
- To support continued business if MGIC cannot meet capital requirements, MGIC contributed $200 million to its subsidiary MIC in January 2012. Fannie Mae extended MIC’s eligibility through 2013; Freddie Mac’s approval was limited through 2012 and, at the time of the filing, covered specified jurisdictions.
Risks, contingencies and unusual items
- Capital and eligibility: Waivers may not be renewed, regulators may restrict new business, and the GSEs may change eligibility requirements. MGIC’s ratings were B1 from Moody’s and B from S&P, both with negative outlooks; it operated under GSE remediation plans.
- Rescissions and litigation: Rescissions reduced paid claims by an estimated $0.6 billion in 2011, and year-end reserves reflected an estimated $0.7 billion benefit from rescissions. The company warned that lower rescission activity or adverse legal outcomes could increase losses. It had not accrued an estimate for an adverse outcome in the Countrywide proceedings because it could not reasonably estimate the potential liability. Countrywide asserted additional damages of almost $700 million, plus exemplary damages.
- Freddie Mac pool-policy dispute: Freddie Mac’s interpretation of aggregate loss limits would increase the applicable limit by approximately $535 million. MGIC said 2011 incurred losses would have been $192 million higher under Freddie Mac’s interpretation, and expected that difference to grow.
- Other legal and regulatory matters: New RESPA class actions and a CFPB investigation concern captive mortgage reinsurance practices. The company also faced Fair Housing Act proceedings and an appeal in a securities case relating to C-BASS. MGIC denied wrongdoing in the matters described.
- Tax contingency: The IRS was reconsidering a tentative settlement concerning REMIC tax positions. The IRS assessment was $190.7 million in taxes and penalties, plus potentially substantial interest and state taxes. The company had paid $65.2 million in 2007 and said an approved settlement could result in approximately $23 million of net cash outflows after prior payments and available NOL carrybacks.
- Other uncertainties: Loss reserves depend on volatile claim-rate, severity, economic and rescission assumptions. Loan modifications may re-default; management used an approximate 50% re-default assumption for internal reporting. Failed auctions restricted access to $170 million of student-loan-backed auction-rate securities, though the company expected liquidity by December 31, 2014.
- The company reported no cash dividends in 2011; dividends had been suspended in 2008. MGIC had paid no dividends to the holding company in 2009–2011, and 2012 subsidiary dividends required Wisconsin regulatory approval.
Important facts for investors to verify
- Whether capital waivers and GSE eligibility remain in force, and whether MGIC’s risk-to-capital ratio crosses 25:1 as management expected.
- Actual 2012 claims, cash use and liquid-asset trends compared with management’s outlook and the $1 billion keepwell threshold.
- Loss-reserve adequacy, including the assumptions for rescissions, claim rates, severity and the aged delinquency inventory.
- Developments in the Countrywide arbitration and other rescission disputes, and their potential effects on reserves and statutory capital.
- Resolution of the Freddie Mac pool-policy interpretation dispute and any effect on incurred losses and capital.
- Final terms and cash consequences of the IRS matter, and the availability and realizability of deferred tax assets and NOL carryforwards.
- Cash-flow and funding capacity at the holding company, given debt exceeding holding-company cash and investments and restricted subsidiary dividends.