MGIC Investment Corporation — Q2 2021 Form 10-Q
Business and period: MGIC provides mortgage insurance on low-down-payment residential mortgages, primarily loans purchased by Fannie Mae and Freddie Mac. This unaudited filing covers the three and six months ended June 30, 2021; comparisons are with the same 2020 periods unless noted.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net premiums earned | $251.5 million | $243.6 million | $506.6 million | $504.5 million |
| Total revenues | $297.9 million | $294.0 million | $595.8 million | $600.9 million |
| Losses incurred, net | $29.2 million | $217.4 million | $68.8 million | $278.3 million |
| Net income | $153.1 million | $14.0 million | $303.1 million | $163.9 million |
| Diluted EPS | $0.44 | $0.04 | $0.87 | $0.48 |
| Loss ratio | 11.6% | 89.2% | 13.6% | 55.2% |
- Drivers and margins: Lower reported losses drove the earnings improvement, reflecting fewer new delinquency notices and smaller reserve increases than in 2020. New notices fell 84% in Q2 and 72% in the first half. The underwriting expense ratio rose to 22.3% for Q2 and 21.1% for the first half, from 20.1% and 18.6%, respectively, as technology and consulting costs increased. Net premium yield declined to 39.1 basis points in Q2 from 42.7; management expects further pressure as higher-rate older policies run off and newer policies generally carry lower rates.
- Cash flow: First-half operating cash flow was $349.4 million, down from $420.1 million. Investing activities used $407.3 million, while financing activities used $47.8 million. Cash and restricted cash totaled $191.0 million at June 30, versus $296.7 million at year-end 2020.
- Balance sheet and debt: Total assets were $7.576 billion and shareholders’ equity $4.915 billion at June 30. Loss reserves were $936.2 million, including $111.2 million recoverable from reinsurers. Debt carrying value was $1.244 billion: $155 million FHLB advance, $880.4 million senior notes, and $208.8 million convertible debentures. The company reported compliance with debt covenants. The holding company had approximately $772 million in cash and investments.
- Capital and liquidity: MGIC reported $5.7 billion of PMIERs Available Assets, $2.3 billion above Minimum Required Assets, and remained eligible to insure GSE loans. Its risk-to-capital ratio was 8.9:1, versus a commonly applicable 25:1 maximum; policyholder position exceeded the required minimum by $3.5 billion.
Material changes and notable items
- Direct primary insurance in force increased to $262.0 billion from $230.5 billion a year earlier; risk in force rose to $65.3 billion from $58.7 billion. First-half new insurance written was $64.4 billion, compared with $46.1 billion.
- Delinquency inventory fell to 42,999 loans from 69,326 a year earlier, but 55% of the June inventory remained in forbearance and 55% had been delinquent for at least 12 consecutive months. The primary delinquency rate was 3.71%, down from 6.35% at June 2020.
- First-half operating cash flow decreased, while the investment portfolio grew to $6.983 billion from $6.683 billion at year-end. The portfolio’s embedded pre-tax yield declined to 2.5% from 2.6% at year-end.
- Adoption of convertible-instrument accounting guidance on January 1, 2021 reclassified the 9% debentures as debt in their entirety, with offsetting $68.3 million adjustments to beginning retained earnings and paid-in capital; reported total equity was not changed by the net adjustment.
Outlook, risks, contingencies and capital returns
- Management expects delinquency inventory to remain elevated in 2021. It expects claims and claim payments to increase as foreclosure moratoria and forbearance programs end, but says the timing and magnitude are uncertain. COVID-19’s future effects on losses, liquidity and financial condition may be material.
- Loss estimates are sensitive to assumptions: a $1,000 change in average severity reserve factor would change reserves by approximately $17 million; a one-percentage-point change in average claim-rate factor would change reserves by approximately $25 million.
- The company recorded a $6.3 million probable loss in Q2 related to litigation over claims-paying practices. It estimated reasonably possible exposure of approximately $28 million above the recorded probable loss; the ultimate liability could not be reasonably estimated.
- Home Re 2018-1, 2019-1 and 2021-1 had trigger events at June 30, affecting principal payments and coverage reduction mechanics. MGIC said it considered its exposure to loss from the reinsurance entities remote, but could not quantify maximum exposure in the event of a trust-payment failure. A further $398.4 million Home Re transaction was entered into in August 2021.
- MGIC paid no cash or investment-security dividend to the holding company in the first half; it paid $150 million in August, for which GSE approval was not required. The board declared a $0.08-per-share quarterly dividend payable in August. The company said it intended to resume share repurchases in Q3; $291 million of authorization remained at June 30.
- Key ongoing risks include home-price or economic deterioration, post-forbearance borrower outcomes, reserve uncertainty, reinsurance availability and counterparty risk, changes to GSE eligibility or capital rules, and limits on insurance-subsidiary dividends. Management reported disclosure controls effective and no material change in internal control over financial reporting during Q2.
Investor verification priorities
- Track delinquency cures, aging, forbearance exits, foreclosure activity and claims as pandemic protections expire.
- Assess reserve development and the sensitivity of claim-rate and severity assumptions, including the claims-practices litigation exposure.
- Monitor PMIERs headroom, reinsurance credit and Home Re trigger status, as well as regulatory limits on subsidiary dividends.
- Verify holding-company liquidity, debt service and the timing and scale of planned repurchases and dividends.
- Evaluate premium-yield trends against new business growth, policy cancellations, competition and the rising underwriting expense ratio.