MGIC Investment Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; selected fourth-quarter results are noted below. MGIC is a holding company principally engaged in private mortgage insurance, with additional mortgage-credit-risk and mortgage-finance services.
Financial results and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $1.199 billion | $1.214 billion |
| Net premiums earned | $1.022 billion | $1.031 billion |
| Net investment income | $154.4 million | $167.0 million |
| Losses incurred, net | $364.8 million | $118.6 million |
| Income before tax | $559.3 million | $848.0 million |
| Net income | $446.1 million | $673.8 million |
| Diluted EPS | $1.29 | $1.85 |
| Operating cash flow | $732.3 million | $609.5 million |
Net income declined 34%; diluted EPS fell 30%. Adjusted net operating income, a non-GAAP measure, was $456.8 million, or $1.32 per diluted share, versus $669.7 million, or $1.84, in 2019. The GAAP loss ratio increased to 35.7% from 11.5%, while the underwriting expense ratio rose to 19.2% from 18.4%.
For fourth-quarter 2020, net income was $151.4 million and diluted EPS was $0.44, compared with $177.1 million and $0.49 in fourth-quarter 2019.
At year-end, total assets were $7.355 billion, including a $6.683 billion investment portfolio and $288.0 million of cash and cash equivalents. Shareholders’ equity was $4.699 billion, up from $4.309 billion. Loss reserves were $880.5 million, compared with $555.3 million. Operating, investing and financing cash flows were respectively $732.3 million, negative $772.5 million and positive $167.8 million.
Debt carrying value was $1.243 billion, up from $832.8 million. The company issued $650 million of 5.25% notes due 2028 and used part of the proceeds to repurchase $182.7 million of 5.75% notes due 2023 and $48.1 million of 9% debentures due 2063. Holding-company cash and investments were approximately $847 million; management said liquidity was sufficient for foreseeable obligations. Annual debt service was estimated at about $67 million, and no debt maturities were due within 12 months.
Business performance and changes
- Primary new insurance written increased to $112.1 billion from $63.4 billion. Direct primary insurance in force rose 10.9% to $246.6 billion, and risk in force increased to $61.8 billion.
- Primary delinquent loans rose to 57,710 from 30,028; the delinquency rate increased to 5.11% from 2.78%. The company received 106,099 new delinquency notices, versus 54,239 in 2019.
- COVID-19-related unemployment and economic uncertainty drove higher reserves and losses. Current-year/new-notice losses were $345.2 million; adverse development on prior-year reserves was $19.6 million, versus favorable development of $71.0 million in 2019.
- Net losses and LAE paid fell to $114 million from $226 million, primarily because forbearance programs and foreclosure moratoriums delayed claims. Net premiums earned declined slightly, while net investment income fell 8% as yields decreased.
- Persistency fell to 60.5% from 75.8%, amid strong refinancing activity. Refinances accounted for about 36% of 2020 NIW, versus 19% in 2019.
Outlook, risks and unusual items
Management expected 2021 NIW to decline from the 2020 level as mortgage originations and refinance activity were forecast to fall. It expected insurance in force to grow, 2021 direct written premiums to be comparable to 2020, earned premiums to decline, investment income to be comparable, and losses incurred to be lower than in 2020. Management also expected higher underwriting and operating expenses from technology investment and an effective tax rate of approximately 21%. The timing and scale of claims as forbearance and foreclosure protections expire remained uncertain.
- COVID-19 and reserves: About 62% of year-end delinquent loans were reported in forbearance. The adequacy of reserves depends on uncertain cure rates, claim frequency and severity, home prices, unemployment and the timing of claims. A $1,000 change in the average severity reserve factor would change reserves by about $16 million; a one-percentage-point change in the claim-rate factor by about $34 million.
- Capital and reinsurance: MGIC reported $5.3 billion of PMIERs Available Assets, $1.8 billion above Minimum Required Assets. A temporary 70% reduction in required assets applied to certain COVID-19 delinquent loans; expiration of relief or changes to PMIERs or reinsurance credit could reduce the cushion. Reinsurance covered 88% of risk in force, but the company disclosed trigger events on its outstanding insurance-linked-note transactions.
- Industry and regulatory exposure: The business depends heavily on Fannie Mae and Freddie Mac eligibility, practices and capital rules. GSE reform, government-insured loan competition, alternative credit-risk transfers and changing state capital rules could affect volumes, pricing or capital needs. MGIC’s statutory risk-to-capital ratio was 9.2:1.
- Claims disputes: The company was involved in discussions and proceedings over claims-paying practices. It estimated maximum exposure where loss was reasonably possible at approximately $40 million, but could not reasonably estimate a liability range; this figure excludes interest and consequential or exemplary damages.
- Capital returns and debt: MGIC paid $390 million in cash and/or investment-security dividends to the holding company during 2020, but suspended further cash or investment-security dividends after the first quarter amid pandemic uncertainty. Share repurchases were also temporarily suspended after $120 million of 2020 repurchases. The company continued its quarterly $0.06-per-share shareholder dividend.
- Unusual item: A $26.7 million loss on debt extinguishment was recorded in connection with the 2020 debt repurchases. The auditor identified loss-reserve valuation as a critical audit matter; the auditor issued an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Subsequent delinquency, cure, forbearance-exit and claim trends, and whether reserves prove adequate as claims develop.
- PMIERs Available Assets relative to Minimum Required Assets as temporary relief changes, including continued recognition of reinsurance credit.
- Actual 2021 premium, NIW, investment-income and claims outcomes versus management’s outlook.
- Reinsurance recoverability, the effects of reported ILN trigger events, and renewal terms and costs.
- Holding-company liquidity and debt service, including the timing and approvals for any future subsidiary dividends or capital returns.
- Developments in claims-paying-practices proceedings and the disclosed potential exposure.