Business Context and Reporting Period
Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2004
Business Overview: MGIC is the leading provider of private mortgage insurance in the United States. Its principal products are primary mortgage insurance (written on a flow or bulk basis) and pool mortgage insurance. 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 (in thousands, except per share) | Three Months Ended Sep 30, 2004 |
Three Months Ended Sep 30, 2003 |
Nine Months Ended Sep 30, 2004 |
Nine Months Ended Sep 30, 2003 |
|---|---|---|---|---|
| Net Premiums Earned | $324,224 | $346,605 | $996,868 | $1,015,896 |
| Total Revenues | $391,034 | $427,381 | $1,209,622 | $1,267,964 |
| Net Income | $134,069 | $105,129 | $418,666 | $390,016 |
| Earnings Per Share (Diluted) | $1.36 | $1.06 | $4.25 | $3.94 |
| Investment Income | $54,187 | $50,049 | $159,642 | $151,446 |
| Losses Incurred, Net | $169,802 | $220,726 | $514,552 | $536,057 |
| Combined Ratio | 67.1% | 77.7% | 66.1% | 67.1% |
| Total Assets | $6,299,344 | — | — | — |
| Total Liabilities | $2,173,457 | — | — | — |
| Shareholders' Equity | $4,125,887 | — | — | — |
| Debt (Short & Long-term) | $599,726 | — | — | — |
| Cash & Short-term Investments | $275,957 | — | — | — |
Material Changes vs. Prior Period
- Profitability: Net income increased 27.5% for the quarter and 7.3% for the nine-month period compared to 2003. This was driven by a significant decrease in losses incurred and higher income from joint ventures, despite lower premiums.
- Premiums: Net premiums written and earned declined due to a decrease in average insurance in force and lower New Insurance Written (NIW). Total NIW dropped to $18.0 billion for the quarter (from $28.0 billion in 2003) and $47.1 billion for the nine months (from $77.5 billion in 2003).
- Losses: Net losses incurred decreased significantly (23% for the quarter, 4% for nine months) due to a lower growth rate in the delinquency inventory, partially offset by higher estimates for claim frequency and severity.
- Investment Income: Increased due to a larger portfolio size ($5.3 billion average invested assets for the quarter vs. $4.8 billion in 2003), offset by a slight decline in yield.
- Joint Ventures: Income from joint ventures (C-BASS and Sherman) increased substantially, contributing $29.6 million for the quarter (vs. $13.0 million in 2003) and $87.4 million for the nine months (vs. $42.3 million in 2003).
Guidance, Outlook, and Risks
- Outlook: Management expects total NIW for the fourth quarter of 2004 to be lower than the comparable period in 2003. Net premiums written and earned are also expected to decline in Q4 2004 due to lower average insurance in force.
- Persistency: The persistency rate improved to 59.4% at September 30, 2004, up from 44.9% in September 2003. Management expects modest improvement in Q4, assuming no significant decline in mortgage interest rates.
- Joint Venture Guidance: C-BASS income in Q4 2004 is not expected to exceed Q3 2004 levels ($39 million). Sherman income in Q4 2004 is expected to exceed Q4 2003 levels ($25 million) but not match the Q3 2004 growth rate.
- Risks:
- Economic Conditions: Deterioration in the economy could increase defaults and losses.
- Interest Rates: Rising rates could increase claims on Adjustable Rate Mortgages (ARMs), which comprise a significant portion of the portfolio.
- Competition: Increased competition from other insurers and alternatives like 80-10-10 loans could reduce revenue.
- Litigation: Pending class action regarding the Fair Credit Reporting Act (FCRA) and potential future RESPA litigation.
- Liquidity: The company maintains a $285 million commercial paper program and a $285 million credit facility. $185 million of the credit facility remains available after supporting commercial paper.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions regarding claim frequency and severity, as these estimates significantly impact net income.
- Joint Venture Performance: Review the specific drivers of the increased income from C-BASS and Sherman to ensure sustainability.
- Delinquency Trends: Monitor the default rates for A-minus and subprime loans, which are higher than flow loans (15.75% vs 3.80% at Sep 30, 2004).
- Regulatory Capital: Confirm continued compliance with the risk-to-capital ratio (8.2:1 at Sep 30, 2004) and credit facility covenants.
- Stock Repurchases: Note the company repurchased 1.4 million shares in the first nine months of 2004 for $95.7 million, with authority to purchase an additional 6.2 million shares.