MGIC Investment Corp. — Q3 2019 Form 10-Q
Business and period. MGIC Investment Corporation is a holding company principally engaged in U.S. private mortgage insurance through its subsidiaries. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless noted.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $318.4 million | $290.4 million | $902.4 million | $838.2 million |
| Net premiums earned | $267.9 million | $250.4 million | $764.7 million | $729.5 million |
| Investment income, net | $42.7 million | $36.4 million | $125.7 million | $103.0 million |
| Losses incurred, net | $34.0 million | $(1.5) million | $94.9 million | $8.9 million |
| Income before tax | $223.1 million | $231.9 million | $625.3 million | $649.4 million |
| Net income | $176.9 million | $181.9 million | $496.7 million | $512.4 million |
| Diluted EPS | $0.49 | $0.49 | $1.36 | $1.36 |
- The loss ratio was 12.7% for Q3 and 12.4% for the first nine months, versus negative 0.6% and 1.2%, respectively, in 2018. The underwriting expense ratio was 17.7% and 18.1%, compared with 17.6% and 17.8%.
- Net premiums written were $259.4 million in Q3 and $747.3 million year to date. Net premium yield was 49.6 basis points in Q3 and 47.8 basis points year to date.
- Operating cash flow was $458.2 million for the first nine months, up from $383.5 million. Investing activities used $309.0 million and financing activities used $132.5 million; cash and restricted cash increased $16.7 million.
- At September 30, total assets were $6.15 billion, investments $5.68 billion, and shareholders’ equity $4.16 billion. Cash and cash equivalents plus restricted cash totaled $171.8 million. MGIC Investment reported $308 million of cash and investments at the holding company.
- Debt carrying value was $832.5 million: $155 million FHLB advance, $420.6 million senior notes, and $256.9 million convertible debentures. The company terminated its undrawn $175 million revolving credit facility in May 2019.
- MGIC had $4.5 billion of PMIERs Available Assets, approximately $1.2 billion above Minimum Required Assets. Its risk-to-capital ratio was 9.9:1; its policyholder position exceeded the required minimum by $2.9 billion.
Material changes and management commentary
- Revenue increased 10% in Q3 and 8% year to date, supported by higher average insurance in force and investment income. Investment income rose with a larger portfolio and higher yields.
- Net income declined 3% in both reported periods. Management attributed the decline mainly to higher losses incurred, partly offset by revenue growth and lower income tax expense. Lower weighted-average shares kept diluted EPS unchanged.
- Losses incurred rose sharply against 2018, when favorable prior-year reserve development was greater. Year-to-date 2019 results also included a $23.5 million probable loss recognized in Q1 related to claims-paying-practices litigation. New-notice estimated claim rates were 8% in 2019 versus 9% in 2018.
- Primary delinquent inventory was 29,940 loans, down 9% from year-end 2018; the delinquency rate was 2.78%, versus 3.11%. Management noted a slight quarterly inventory increase as newer books entered expected peak loss years.
- New insurance written was $19.1 billion in Q3 and $44.1 billion year to date, above 2018 levels. Persistency was 78.6%, down from 81.7% at December 31, 2018. Management expects net premium yield to decline as higher-rate older policies run off or reset and newer, lower-rate policies are written.
- Share repurchases totaled approximately 7.3 million shares in the first nine months. Up to a further $131 million could be repurchased through 2020 under the authorized program. The company paid a $0.06-per-share quarterly dividend and declared another $0.06 dividend payable in November.
Outlook, risks and contingencies
- Management expected MGIC to pay at least $280 million in dividends to the holding company in 2020, subject to board approval and no objection from Wisconsin regulators. This is an expectation, not a guarantee.
- The company said it may pursue further excess-of-loss reinsurance if capital-market conditions remain favorable. Reinsurance provides capital credit but exposes MGIC to reinsurer, collateral, and future eligibility-credit risks.
- The Treasury’s September 2019 housing reform plan and potential changes to GSE rules, PMIERs, state capital requirements, and the GSE Patch create uncertainty for the mortgage insurance market. The GSE Patch was scheduled to expire no later than January 2021; about 22% of Q3 NIW had DTI ratios above 43%.
- Loss reserves depend on estimates of claim rates and severity and can change materially with economic conditions, unemployment, home values, foreclosure timing, and claim outcomes. Management estimated that a $1,000 change in average severity would change reserves by about $10 million; a one-percentage-point claim-rate change would change them by about $17 million.
- For claims-paying-practices disputes, the company recorded a probable loss of $23.5 million. It estimated reasonably possible exposure of approximately $264 million above the probable loss recorded, while stating it could not reasonably estimate a liability range. A Q3 settlement agreement did not require an additional loss but remained subject to GSE approval.
- Investment portfolio market risk includes interest rates and credit spreads. The fixed-income portfolio’s modified duration was 4.0 years; management estimated a parallel 100-basis-point yield-curve shift would change its fair value by approximately 4.0% in the opposite direction of the rate move.
Most important facts for investors to verify
- Whether the $23.5 million litigation reserve and the estimated additional reasonably possible exposure change as disputes and required GSE approvals progress.
- Future loss development, claim-rate and severity assumptions, delinquency trends, and performance of newer books entering peak loss years.
- Continued PMIERs and state-capital compliance, including the level of capital credit recognized for quota-share and Home Re reinsurance.
- Actual holding-company liquidity and subsidiary dividend capacity, including approval of the anticipated 2020 dividends and the pace of share repurchases.
- The effects of GSE reform, PMIERs revisions, the GSE Patch’s scheduled expiration, and mortgage insurance competition on new business, pricing, and yields.