MGIC Investment Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. MGIC Investment Corporation is a holding company whose main business is U.S. private mortgage insurance, conducted principally through MGIC and MGIC Indemnity Corporation (MIC). It remained the largest private mortgage insurer by primary insurance in force.
Key financial and operating metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $1.378 billion | $1.504 billion |
| Net premiums earned | $1.033 billion | $1.124 billion |
| Net loss | $927 million; $4.59 per share | $486 million; $2.42 per share |
| Losses incurred, net | $2.067 billion | $1.715 billion |
| Net losses and loss-adjustment expenses paid | $2.518 billion | $2.921 billion |
| Net cash used in operating activities | $1.569 billion | $1.884 billion |
| Investment income, net | $122 million | $201 million |
| Net realized investment gains | $195 million | $143 million |
| Shareholders’ equity | $197 million | $1.197 billion |
| Loss reserves | $4.057 billion | $4.558 billion |
The combined insurance operations’ GAAP loss ratio was 200.1% (152.6% in 2011), expense ratio 15.2% (16.0%), and combined ratio 215.3% (168.6%). Ratios above 100% indicate underwriting losses. Total assets were $5.574 billion, including $4.230 billion of investments and $1.028 billion of cash and cash equivalents. The investment portfolio’s pretax yield fell to 1.7% from 2.8%.
Material changes and business trends
- Primary new insurance written increased to $24.1 billion from $14.2 billion; private mortgage insurers also gained market share as FHA/VA’s share of insured low-down-payment mortgages declined.
- Despite higher new business, primary insurance in force fell to $162.1 billion from $172.9 billion, as $34.9 billion of cancellations exceeded new writings. Primary risk in force declined to $41.7 billion from $44.5 billion.
- Primary loans in default declined to 139,845, or 13.90% of loans in force, from 175,639, or 16.11%. New delinquent notices fell about 21%; however, the share of defaults delinquent for at least 12 months rose to 58% from 56%.
- Losses incurred increased, including $573 million of unfavorable prior-year development, versus favorable development of $99 million in 2011. The increase included the Freddie Mac settlement, probable rescission settlements, and higher estimated primary claim rates, partly offset by lower estimated claim severity.
- Primary average claim paid decreased to $48,722 from $49,887. The primary loss reserve was $3.744 billion, down from $4.249 billion; the Wall Street bulk premium-deficiency reserve declined to $74 million from $135 million.
Liquidity, capital, and debt
- Operating cash outflow remained substantial as claim payments exceeded premiums received. Investing activities provided $1.654 billion, largely reflecting investment portfolio sales and maturities; financing activities used $53 million. Cash and cash equivalents increased by $32 million.
- MGIC’s statutory risk-to-capital ratio was 44.7:1, versus 20.3:1 a year earlier; combined insurance operations were at 47.8:1. MGIC was $640 million below Wisconsin’s $1.2 billion minimum policyholder position. The Wisconsin regulator’s capital waiver ran through December 31, 2013, subject to conditions.
- MIC had $448 million of statutory capital and began writing business in selected jurisdictions in 2012. Its GSE approvals were conditional and generally extended only through December 31, 2013. The company’s forecast that MIC could write all new business for at least five years if MGIC could not was an assumption-dependent projection, not a guarantee.
- At the holding company, cash and investments were approximately $315 million against $835 million of debt at par: $100 million of senior notes, $345 million of convertible senior notes, and $390 million of junior debentures. Insurance-subsidiary dividends were restricted, and MGIC had paid none to the parent since 2008.
- The company deferred a $17.5 million interest payment on its 9% convertible junior debentures; deferred interest compounds, and the company expected further deferrals. No common dividend was paid in 2012.
Outlook, commentary, risks, and unusual items
- Management expected continued annual net losses, with timing of any return to annual profitability uncertain. It expected insurance in force, investment income, and premium yield to decline in 2013; new loan modifications were expected to provide only modest loss mitigation.
- The $267.5 million Freddie Mac/FHFA pool-policy settlement was recognized in 2012; $100 million was paid in December and the remaining $167.5 million was payable in 48 installments beginning January 2013. A payment default could trigger additional remedies under the agreement.
- Two probable rescission settlements increased loss reserves by approximately $100 million in the fourth quarter. The Countrywide dispute included claims for nearly $700 million of additional damages; settlement was considered probable but not finalized as of the filing. Further disputes could increase losses, and settlement terms could encourage other customers to seek remedies.
- The IRS disputed the company’s tax treatment of REMIC investments, assessing $190.7 million in taxes and penalties, plus substantial interest; the company had previously paid $65.2 million. A statutory notice of deficiency was expected after the first quarter of 2013, with possible litigation and material effects on cash flow, earnings, and statutory capital.
- Other material risks include uncertain loss-reserve estimates and rescission outcomes; state capital actions or loss of GSE eligibility that could restrict new business; housing, employment, and foreclosure developments; competition and changes in GSE/FHA policy; proposed QRM and Basel III rules; and CFPB investigations and litigation concerning captive mortgage reinsurance.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Verify the status and conditions of MGIC’s Wisconsin waiver, other state waivers, and MGIC/MIC GSE approvals after December 31, 2013.
- Assess statutory capital, liquidity, claim-paying resources, and the parent’s ability to meet debt service given restricted subsidiary dividends and ongoing claim outflows.
- Review the Freddie Mac settlement payment schedule and the final terms and recorded effects of the probable rescission settlements, including any subsequent Countrywide developments.
- Test loss-reserve assumptions—especially claim rates, severity, cures, rescissions, and the aging of defaults—against subsequent paid claims and housing and employment trends.
- Track the IRS REMIC dispute, CFPB captive-reinsurance investigation, remaining RESPA and MERS litigation, and related potential financial exposure.
- Compare 2013 new insurance, cancellations, premium yield, investment income, and cash use with management’s expectations; the filing provides no assured date for a return to profitability.