MTG

MGIC Investment Corp. 10-Q Summary: Period Ended September 30, 2002

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for MGIC Investment Corporation, a provider of private mortgage insurance and related financial services. The report covers the three and nine-month periods ended September 30, 2002. The Company operates primarily through its insurance subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), and holds equity interests in joint ventures focused on mortgage asset servicing and consumer receivables.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 3% to $491.7 million for the nine months ended September 30, 2002, compared to $478.1 million in the prior year. Diluted earnings per share rose 5% to $4.66 from $4.43.
• Revenue Growth: Total revenues increased 15% to $1.15 billion, driven by a 14% increase in net premiums earned and a significant 85% jump in "other revenue" (primarily equity earnings from joint ventures C-BASS and Sherman).
• Losses: Net losses incurred surged 106% to $225.2 million, attributed to higher default activity in the "bulk" channel and early development of 2000-2001 flow books. The loss ratio increased from 14.3% to 25.8%.
• Insurance Volume: New primary insurance written increased 8% to $67.3 billion. However, the persistency rate (percentage of insurance remaining in force) declined to 58.9% due to strong refinancing activity in a low-interest-rate environment.
• Debt: Total debt increased to $634.9 million from $472.1 million at year-end 2001, following the issuance of $200 million in Senior Notes in March 2002.

Guidance, Outlook, and Risks

• Outlook: Management expects underwriting expenses to increase in the fourth quarter due to continued strong refinance activity. Incurred losses in the fourth quarter could be higher than the third quarter depending on the notice inventory level.
• Share Repurchases: The Company repurchased 5.8 million shares for $347.0 million during the first nine months. A new program covering up to 5 million shares was announced in October 2002.
• Liquidity: The Company maintains a $285 million credit facility and a $200 million commercial paper program. As of September 30, 2002, $151 million remained available under the credit facility after supporting commercial paper.
• Contingencies: A significant litigation settlement regarding the Real Estate Settlement Procedures Act (Downey et al. v. MGIC) was approved in June 2001. A $23.2 million charge was recorded in 2000. Payments are delayed pending appeals; if the settlement is not fully implemented, litigation could continue with uncertain financial impact.
• Risk Factors: Key risks include economic deterioration increasing defaults, competition from captive reinsurance, declining policy persistency due to low interest rates, and regulatory changes by HUD or GSEs (Fannie Mae/Freddie Mac) that could reduce revenue or increase capital requirements.

Investor Verification Checklist

• Loss Reserve Adequacy: Verify the assumptions used for the 106% increase in incurred losses, specifically regarding the "bulk" channel default rates and the composition of the notice inventory.
• Joint Venture Valuation: Review the valuation methods for C-BASS and Sherman, as their assets lack readily ascertainable market values and rely on management estimates of future cash flows.
• Reinsurance Dispute: Confirm the status of the terminated quota share reinsurance agreement for bulk business and the potential impact of the $5.6 million disputed ceded premiums.
• Regulatory Capital: Monitor the MGIC risk-to-capital ratio (8.8:1) against the 22:1 covenant limit and rating agency requirements, noting the potential impact of GSE capital stress tests on non-AAA rated insurers.
• Refinance Sensitivity: Assess the impact of the declining persistency rate (58.9%) on future premium revenue streams in a sustained low-interest-rate environment.