Business Context and Reporting Period
Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Business Overview: MGIC is the leading provider of private mortgage insurance in the United States. Its results are driven by premiums written, investment income, losses incurred, and income from joint ventures (C-BASS and Sherman Financial Group).
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2005) | Value (in thousands) |
|---|---|
| Net Premiums Written | $935,637 |
| Net Premiums Earned | $933,553 |
| Total Revenues | $1,155,604 |
| Net Income | $498,752 |
| Earnings Per Share (Diluted) | $5.33 |
| Investment Income | $171,519 |
| Losses Incurred, Net | $381,978 |
| Combined Ratio | 56.5% |
| Total Assets | $6,349,968 |
| Total Liabilities | $2,103,074 |
| Shareholders' Equity | $4,246,894 |
| Short- and Long-term Debt | $599,806 |
| Cash and Short-term Investments | $341,516 |
Material Changes vs. Prior Period
- Profitability: Net income increased 19.1% to $498.8 million for the nine months ended September 30, 2005, compared to $418.7 million in the same period of 2004. Diluted EPS rose to $5.33 from $4.25.
- Premiums: Net premiums written and earned decreased due to a decline in average insurance in force. New Insurance Written (NIW) on a flow basis decreased primarily due to lower refinance volume.
- Losses: Net losses incurred decreased significantly ($382.0 million vs. $514.6 million in 2004) due to a decrease in the delinquency inventory and improved estimates regarding claim rates.
- Investment Income: Increased to $171.5 million from $159.6 million, driven by a larger average investment portfolio and slightly higher yields.
- Joint Ventures: Income from joint ventures (C-BASS and Sherman) increased to $110.5 million from $87.4 million, driven by higher earnings from both entities.
- Debt: Total debt decreased to $599.8 million from $639.3 million. The company repaid $300 million in Senior Notes due in October 2005 using proceeds from a new $300 million issuance.
Guidance, Outlook, and Risks
- Outlook: Management anticipates that net premiums written and earned in the fourth quarter of 2005 will be lower than the comparable period in 2004 due to lower average insurance in force. Losses incurred are expected to be higher in the fourth quarter than in the third quarter.
- Persistency: The persistency rate was 60.2% at September 30, 2005. Management expects modest improvement for the remainder of 2005, assuming no significant decline in mortgage interest rates.
- Regulatory & Litigation Risks:
- RESPA/FCRA: Ongoing litigation risks regarding anti-referral fee provisions and notice requirements. A recent Ninth Circuit decision may increase the likelihood of future FCRA litigation.
- State Investigations: Insurance commissioners in Colorado and North Carolina are reportedly considering investigating captive mortgage reinsurance arrangements.
- Tax Examination: The IRS is examining tax returns for 2000-2004, specifically challenging the tax basis of REMIC residual interests. Management intends to contest any adjustments.
- Market Risks: Exposure to economic deterioration, changes in the mix of business (e.g., higher risk loans), and interest rate fluctuations affecting persistency and investment portfolio value.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions used for claim rates and severity, particularly given the decrease in incurred losses and the expectation of higher losses in Q4.
- IRS Tax Dispute: Monitor the status of the IRS examination regarding REMIC residual interests and potential tax adjustments.
- Regulatory Scrutiny: Track developments in state insurance department reviews of captive reinsurance arrangements and potential RESPA/FCRA litigation outcomes.
- Joint Venture Performance: Assess the sustainability of increased earnings from C-BASS and Sherman, particularly regarding credit risk and liquidity in C-BASS and the integration of the Bank of Marin acquisition in Sherman.
- Debt Refinancing: Confirm the successful repayment of the $300 million Senior Notes due in October 2005 and the terms of the new 2015 issuance.