MTG

MGIC Investment Corp. 10-Q Summary: Period Ended June 30, 2006

Business Context and Reporting Period

This filing covers the quarterly period ended June 30, 2006. MGIC Investment Corporation, through its subsidiary Mortgage Guaranty Insurance Corporation (MGIC), is the leading provider of private mortgage insurance in the United States. The company operates primarily through flow (loan-by-loan) and bulk (portfolio) channels. Results are significantly influenced by mortgage origination volumes, interest rate environments, and the performance of joint ventures (C-BASS and Sherman).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net premiums earned decreased by approximately 5.3% year-over-year due to a decline in average insurance in force. New Insurance Written (NIW) dropped to $26.1 billion for the six-month period from $28.0 billion in 2005, driven largely by lower refinance volumes.
• Profitability Pressure: Net income declined 12.1% to $313.3 million. The combined ratio worsened to 61.1% from 53.1%, driven by a higher loss ratio (44.0% vs. 37.6%) and a higher expense ratio (17.1% vs. 15.5%).
• Loss Trends: Losses incurred increased by 10.8% to $261.4 million. This was caused by higher estimated claim severity (average claim paid rose to $27,016 from $25,894) and an increase in the estimated number of delinquencies resulting in claims.
• Joint Venture Growth: Income from joint ventures increased 10.1% to $86.7 million, primarily due to higher earnings from the C-BASS joint venture, which offset a slight decline in contribution from Sherman.
• Balance Sheet: Total debt decreased by $54.1 million due to the repayment of short-term debt and the maturity of senior notes, partially offset by commercial paper issuances. Cash and cash equivalents declined by $88.8 million, largely due to share repurchases and dividend payments.

Guidance, Outlook, and Risks

• Outlook: Management anticipates net premiums written and earned in the second half of 2006 will be lower than the comparable 2005 period due to lower premium rates, despite slight growth in insurance in force. Losses incurred are expected to be higher in the second half of 2006 than in the first half.
• Joint Venture Outlook: Income from both C-BASS and Sherman is projected to be lower in the second half of 2006 compared to the first half.
• Capital and Liquidity: The company maintains a $300 million commercial paper program and a $300 million revolving credit facility. The risk-to-capital ratio remains at 7.4:1. Dividends paid to shareholders totaled $43.7 million in the first six months.
• Risks and Contingencies:
  • Regulatory Investigations: The company is responding to inquiries from the New York Insurance Department and Minnesota Department of Commerce regarding captive mortgage reinsurance arrangements.
  • Tax Examination: The IRS is examining tax returns for 2000-2004, specifically challenging the tax basis of REMIC residual interest investments. Management intends to contest any proposed adjustments.
  • Reserve Uncertainty: Small changes in estimated claim rates or severity could materially impact reserves. A $1,000 change in severity combined with a 1% change in claim rate could alter reserves by approximately $50 million.
  • Market Risk: The investment portfolio has an effective duration of 4.9 years; a 100 basis point parallel shift in the yield curve would result in an approximate 4.9% change in market value.

Investor Verification Checklist

• Loss Reserve Adequacy: Verify the sensitivity of loss reserves to changes in claim severity and frequency, particularly given the rising average claim payments.
• IRS Tax Dispute: Monitor the status of the IRS examination regarding REMIC residual interests and potential adjustments to taxable income.
• Regulatory Impact: Assess the potential financial impact of ongoing state insurance department investigations into captive reinsurance arrangements.
• Joint Venture Performance: Review the specific drivers of the projected decline in C-BASS and Sherman income for the second half of 2006.
• Share Repurchase Program: Confirm the remaining authority for share repurchases ($7.6 million shares remaining) and the impact on liquidity.