MGIC Investment Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. MGIC Investment Corporation principally provides U.S. private mortgage insurance through subsidiaries. Unless noted, amounts are U.S. dollars.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 or prior date |
|---|---|---|
| Total revenue | $265.8 million | $260.9 million; up 2% |
| Net premiums earned | $232.1 million | $229.1 million; up 1% |
| Investment income, net | $32.1 million | $29.5 million; up 9% |
| Losses incurred, net | $23.9 million | $27.6 million; down 13% |
| Income before tax | $180.0 million | $174.0 million; up 3% |
| Income tax provision / effective rate | $36.4 million / 20.2% | $84.2 million / 48.4% |
| Net income | $143.6 million | $89.8 million; up 60% |
| Diluted EPS | $0.38 | $0.24; up 58% |
| Adjusted net operating income (non-GAAP) | $144.6 million; $0.38 per diluted share | $117.1 million; $0.31 per diluted share |
| Operating cash flow | $134.0 million | $77.5 million |
Net income growth primarily reflected the prior-year additional tax provision for the expected IRS settlement and the lower 2018 statutory tax rate, rather than a comparable increase in pre-tax earnings. Q1 2017 also included that unusual tax provision. Other underwriting and operating expenses rose 13% to $46.1 million, mainly due to higher share-based and non-executive compensation. Interest expense declined to $13.2 million from $16.3 million, reflecting the 2017 maturity of 5% notes and conversion of 2% notes.
Net cash increased $77.6 million during the quarter to $177.5 million. Investing activities used $48.3 million and financing activities used $8.1 million. At March 31, total assets were $5.62 billion, total liabilities $2.38 billion, and shareholders’ equity $3.23 billion. Long-term debt carrying value was $830.7 million. The investment portfolio was $4.94 billion; its fair value declined from $4.99 billion at year-end, and Q1 other comprehensive loss was $64.0 million, primarily reflecting unrealized investment losses.
Mortgage insurance and material changes
- New insurance written was $10.6 billion, compared with $9.3 billion a year earlier. Primary insurance in force reached $197.5 billion, versus $183.5 billion; primary risk in force was $50.9 billion, versus $47.5 billion.
- Premium yield fell to 47.3 basis points from 50.1 basis points, reflecting lower rates and premium resets, partly offset by lower premium refunds. Net premiums written were essentially unchanged at $236.9 million.
- Primary delinquent inventory declined to 41,243 loans from 46,556 at year-end and 45,349 a year earlier. The primary delinquency rate was 4.02%, versus 4.55% at both comparison dates. Net loss reserves decreased to $878.7 million from $937.2 million at year-end, reflecting claims paid exceeding incurred losses and favorable prior-year development.
- Net losses and LAE paid were $82 million, down from $128 million. The company paid $7 million in connection with claims-paying-practice matters and commutations of non-performing loan pools; these commutations removed 224 delinquencies and had no material impact on losses incurred.
- Available Assets under PMIERs were approximately $4.8 billion, about $0.9 billion above Minimum Required Assets. MGIC’s risk-to-capital ratio was 9.4:1; its policyholder position exceeded the required minimum by $2.2 billion. The filing states MGIC remained compliant with PMIERs and state capital requirements and eligible to insure GSE loans.
Outlook, risks, and unusual items
- Management expected MGIC to continue paying the holding company quarterly dividends of at least $50 million for the remainder of 2018. The holding company had approximately $257 million in cash and investments at quarter-end and $814.5 million of debt principal. A $200 million share-repurchase authorization was approved April 26, 2018, for purchases through year-end 2019; the program may be suspended or discontinued.
- Management expected revised PMIERs, if adopted as proposed, to reduce materially—but not eliminate—MGIC’s excess Available Assets; the company expected continued eligibility and quarterly dividends at the then-current $50 million level. Timing and final requirements remained uncertain.
- Borrower-paid premium reductions announced in April were scheduled to take effect June 4, 2018. Based on Q1 business mix, management estimated the change would reduce the weighted average direct premium rate on affected business by about 11%, and the rate across all Q1 new insurance written by about 9%.
- DTI above 45% represented about 20% of Q1 new insurance written, up from about 6% a year earlier. MGIC changed underwriting guidelines in March to require a FICO score of at least 700 for such loans and said it was monitoring exposure.
- The company estimated that most hurricane-related delinquent notices would cure without materially increasing incurred or paid losses; this remains an estimate. It also expected paid losses to continue declining as the credit profile improved and delinquent inventory fell.
- For claims-paying-practice disputes where loss was reasonably possible, MGIC estimated maximum exposure of approximately $282 million, excluding interest and consequential or exemplary damages, but could not estimate a likely range and expected resolution for significantly less. Loss-reserve estimates are judgmental and sensitive to claim rates and severity.
- The IRS and MGIC had agreed to settle the REMIC tax dispute; in Q2 2018 the Joint Committee on Taxation raised no objection and the IRS was working to finalize it. The expected settlement impact was already reflected in the financial statements. If not completed, further adjustments could be material. The filing reports $143.7 million of unrecognized tax benefits; stated deficiency and related exposure amounts are not equivalent to the recorded liability.
- Other risks include competition and alternative credit enhancement, dependence on the GSEs, possible changes to PMIERs or state capital rules, investment-market and interest-rate risk, and the possibility that loss experience or reinsurance credit differs from assumptions. Management cautioned that interim results may not indicate full-year results.
Important facts for investors to verify
- Whether the IRS settlement was finalized and whether its cash, tax, and statutory-capital effects differed from the amounts already reflected.
- Final PMIERs revisions, implementation timing, resulting Available Asset cushion, and capacity for dividends or repurchases.
- Trends in delinquency cures, hurricane-related defaults, claim severity, reserve development, and paid losses.
- Effects of the June 2018 premium-rate reductions, underwriting changes for high-DTI loans, and competitive pricing on new business and premium yield.
- Progress and execution of the $200 million repurchase authorization, alongside holding-company liquidity, debt service, and regulated-subsidiary dividend capacity.