MGIC Investment Corp. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. MGIC Investment Corporation is the leading provider of private mortgage insurance in the United States. The company operates primarily through its subsidiary, Mortgage Guaranty Insurance Corporation (MGIC). The filing highlights significant challenges regarding regulatory capital requirements, which threaten the company's ability to write new business in certain jurisdictions without waivers or the use of a newly capitalized subsidiary, Mortgage Insurance Corporation (MIC).
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Premiums Earned | $271.95 million | $355.83 million |
| Total Revenues | $370.77 million | $435.18 million |
| Losses Incurred (Net) | $454.51 million | $757.89 million |
| Net Loss | $(150.09) million | $(184.56) million |
| Loss Per Share (Basic/Diluted) | $(1.20) | $(1.49) |
| Combined Ratio | 185.5% | 227.7% |
| Cash and Cash Equivalents | $818.12 million | $1,185.74 million (Dec 31, 2009) |
| Total Assets | $9.25 billion | $9.40 billion (Dec 31, 2009) |
| Shareholders' Equity | $1.16 billion | $1.30 billion (Dec 31, 2009) |
Material Changes vs. Prior Period
- Improved Loss Experience: Net losses incurred decreased significantly from $757.9 million in Q1 2009 to $454.5 million in Q1 2010. This improvement was driven by a decrease in the default inventory (down 9,196 loans) and stable claim severity, offset by a decrease in premiums earned.
- Revenue Decline: Net premiums written and earned declined due to higher levels of rescissions (policy cancellations), lower average insurance in force, and reduced new insurance written ($1.8 billion in Q1 2010 vs. $6.4 billion in Q1 2009).
- Investment Performance: Net realized investment gains were $33.0 million in Q1 2010, compared to $8.4 million in Q1 2009. Other-than-temporary impairment (OTTI) losses decreased to $6.1 million from $25.7 million.
- Premium Deficiency Reserve: The reserve for Wall Street bulk transactions decreased by $13 million to $180 million, primarily due to lower estimated ultimate claim rates.
- Rescission Impact: Rescissions mitigated paid losses by approximately $373 million in Q1 2010, compared to $163 million in Q1 2009.
Guidance, Outlook, and Risks
- Capital and Regulatory Risk: MGIC's risk-to-capital ratio was 20.2:1 at March 31, 2010. Management estimates this could reach 40:1 or higher in coming years. The company relies on regulatory waivers to write new business; if waivers are not renewed, operations could be forced into "run-off" (no new business). A subsidiary, MIC, has been capitalized with $200 million to write business in jurisdictions where MGIC cannot.
- Profitability Outlook: The company expects to continue reporting net losses for 2010 and cannot assure when it will return to profitability. New insurance written for 2010 is expected to be between $10 billion and $15 billion.
- Subsequent Events: In April 2010, the company completed a public offering of 74.9 million shares of common stock (net proceeds ~$772 million) and issued $345 million of 5% Convertible Senior Notes (net proceeds ~$334.5 million) to improve liquidity and repay maturing debt.
- Litigation: Significant ongoing litigation includes a lawsuit and arbitration with Countrywide Home Loans regarding rescissions, where Countrywide seeks damages of at least $150 million. There is also an ongoing SEC investigation regarding the C-BASS joint venture and a consolidated class action lawsuit regarding financial reporting.
- Tax Position: The company established a valuation allowance against deferred tax assets, reducing the tax benefit for the quarter to $1.0 million. An IRS examination regarding REMIC residual interests remains unresolved with an assessment of $197.1 million in taxes and penalties.
Investor Verification Checklist
- Regulatory Waivers: Verify the status of risk-to-capital waivers in key jurisdictions and the expiration dates of these waivers.
- Rescission Sustainability: Assess the sustainability of the high rescission rates used to mitigate losses and the potential impact of legal challenges (e.g., Countrywide) on future loss reserves.
- Capital Adequacy: Monitor the utilization of the $200 million capital contribution to MIC and the sufficiency of the April 2010 capital raise to meet future debt service and regulatory requirements.
- Loss Reserve Assumptions: Review the assumptions regarding future claim rates, severity, and housing values, particularly for the 2006 and 2007 books of business.
- IRS Dispute: Track the progress of the IRS appeal regarding the $197.1 million tax assessment on REMIC residual interests.