MTG

Business Context and Reporting Period

Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2007
Business Overview: MGIC is the leading provider of private mortgage insurance in the United States. The company operates primarily through its subsidiary, Mortgage Guaranty Insurance Corporation (MGIC). A significant corporate development during the period was the announcement of a merger with Radian Group Inc., expected to close in late 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Decline: Net income decreased by approximately 43% to $92.4 million, driven primarily by a significant increase in losses incurred and a sharp decline in income from joint ventures.
• Losses Incurred: Losses incurred rose to $181.8 million from $114.9 million. This increase was attributed to a smaller decrease in the default inventory and higher estimated claim severity, particularly in California, Arizona, Florida, and Massachusetts.
• Joint Venture Performance: Income from joint ventures dropped to $14.1 million from $39.1 million. The C-BASS joint venture reported an operating loss of $14.7 million (MGIC's share: $6.6 million) due to spread widening, securitization losses, and mark-to-market adjustments on whole loans.
• Debt Reduction: Total debt decreased by $173.4 million, primarily due to the repayment of $200 million in Senior Notes that matured in March 2007.
• Premiums: Net premiums earned remained relatively flat year-over-year, despite an increase in the insurance in force, due to lower average premium yields from a higher proportion of flow channel business.

Guidance, Outlook, and Risks

• Merger with Radian: MGIC agreed to merge with Radian Group Inc. The transaction involves an exchange of 0.9658 shares of MGIC stock for each share of Radian stock. Completion is expected in late Q3 or early Q4 2007, subject to regulatory and shareholder approval.
• Loss Outlook: Management anticipates that losses incurred for the remainder of 2007 will exceed net paid claims and exceed the 2006 level of losses incurred. Average claim payments are expected to increase due to higher insured loan sizes and reduced ability to mitigate losses via property sales in certain markets.
• Tax Contingency: On April 30, 2007, the IRS issued Notices of Proposed Adjustment for tax years 2000–2004 regarding REMIC residual interests. If upheld, this would require a payment of $188 million in taxes and penalties plus interest. MGIC intends to appeal.
• Market Risk: The effective duration of the fixed income portfolio is 4.7 years. A 100 basis point parallel shift in the yield curve would result in an approximate 4.7% change in the market value of the portfolio.
• Stock Repurchases: No shares were repurchased in Q1 2007 due to the pending merger. The company has board approval to purchase an additional 4.7 million shares.

Investor Verification Checklist

• IRS Dispute Status: Verify the progress of the appeal regarding the $188 million proposed tax adjustment and the likelihood of a material impact on future cash flows.
• Merger Timeline: Monitor regulatory approvals and shareholder votes for the Radian merger, scheduled for May 2007.
• Loss Reserve Adequacy: Assess the sustainability of the increased loss severity estimates, particularly in high-risk regions like California and Florida.
• Joint Venture Exposure: Review the financial stability of C-BASS given its Q1 operating loss and exposure to the subprime mortgage market dislocation.
• Liquidity Position: Confirm the availability of the $300 million commercial paper program and the $300 million revolving credit facility to meet future claim obligations.