MGIC Investment Corporation — Q3 2023 Form 10-Q
Business and period. MGIC Investment Corporation, through its insurance subsidiaries, provides private mortgage insurance, primarily on low-down-payment U.S. residential mortgages. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net premiums earned | $241.3 million | $252.1 million | $726.1 million | $763.0 million |
| Investment income, net | $55.4 million | $42.5 million | $156.9 million | $121.1 million |
| Net losses incurred | $(0.1) million | $(105.1) million | $(11.3) million | $(223.4) million |
| Net income | $182.8 million | $249.6 million | $528.4 million | $673.9 million |
| Diluted EPS | $0.64 | $0.81 | $1.83 | $2.15 |
| Underwriting expense ratio | 22.2% | 24.6% | 25.8% | 23.3% |
| Loss ratio | 0.0% | (41.7)% | (1.6)% | (29.3)% |
Negative incurred losses and loss ratios reflect favorable reserve development. Q3 income before tax was $234.4 million, down 25%; adjusted net operating income was $183.0 million, or $0.64 per diluted share, versus $264.2 million, or $0.86, a year earlier. The company presents adjusted operating measures as non-GAAP measures.
Cash flow and liquidity. For the first nine months, operating cash flow was $526.7 million, investing cash outflow was $240.8 million, and financing cash outflow was $343.8 million. Cash and restricted cash ended at $275.1 million combined. At September 30, the holding company had approximately $723 million in cash and investments and reported sufficient liquidity for foreseeable obligations. Consolidated total assets were $6.33 billion and shareholders’ equity was $4.85 billion.
Debt and capital. Long-term debt carrying value was $642.8 million, consisting of $650 million principal of 5.25% senior notes due 2028; MGIC had no subsidiary debt. The $21.1 million principal of 9% convertible debentures was redeemed in Q3, with substantially all holders converting and the company paying $28.6 million in cash in lieu of shares. MGIC reported PMIERs Available Assets of $6.0 billion, $2.4 billion above Minimum Required Assets, and a 9.6-to-1 risk-to-capital ratio. Its policyholder position exceeded the required minimum by $3.8 billion.
Insurance portfolio. Q3 new insurance written was $14.6 billion versus $19.6 billion; nine-month NIW was $35.2 billion versus $63.5 billion. Primary insurance in force was $294.3 billion and risk in force was $77.1 billion at quarter-end. Delinquency inventory was 24,720, down from 25,878 a year earlier; the delinquency rate was 2.14%. Loss reserves were $525.5 million, down from $558.0 million at year-end 2022.
Material changes and drivers
- Net income declined 27% in Q3 and 22% year to date. Lower earned premiums and less favorable reserve development than in 2022 were major factors; higher investment income and lower expenses partially offset the declines.
- Premiums earned fell 4% in Q3 and 5% year to date, primarily because ceded premiums increased as profit commissions on quota-share reinsurance declined. Average investment yields rose about 80 basis points, contributing to 30% growth in investment income.
- Favorable reserve development was $48.2 million in Q3 and $148.9 million year to date, versus $140.9 million and $327.5 million in the respective 2022 periods. New delinquency notices added $48.1 million in Q3 and $137.6 million year to date.
- Shareholders’ equity increased 5% from year-end 2022. During the first nine months, the company repurchased 14.7 million shares for approximately $217.8 million and paid $91.1 million in shareholder dividends. The board declared a further $0.115-per-share quarterly dividend in October.
- Available-for-sale fixed-income securities had $550.3 million of gross unrealized losses at September 30, primarily attributed by management to higher interest rates. The company said the securities remained current on interest and it did not consider the unrealized losses indicative of ultimate collectability.
Outlook, risks and unusual items
- Management expected a smaller mortgage-origination market to reduce NIW for the remainder of 2023 compared with 2022, and expected in-force portfolio premium yield to remain relatively flat for 2023.
- Management expects net claims paid to increase, but stated the timing and magnitude are uncertain. Loss estimates are sensitive to claim frequency and severity, unemployment, housing prices, loan exposure and loss-mitigation outcomes. A $1,000 change in the average severity reserve factor would change reserves by about $9 million; a one-percentage-point change in the average claim-rate factor would change them by about $15 million.
- MGIC elected to terminate its 2020 quota-share reinsurance transaction effective December 31, 2023, with an estimated approximately $5 million termination fee in Q4. The company also agreed to a 30% quota-share transaction covering most 2024 NIW.
- October 2023 Home Re tender offers reduced related insurance-linked notes and terminated corresponding coverage; MGIC expects about $8 million of additional Q4 ceded premium for tender-related costs. MGIC also entered into a new $330.2 million excess-of-loss reinsurance agreement covering specified 2022–2023 policy in-force dates.
- Reinsurance supports regulatory capital relief but exposes MGIC to counterparty and market-access risks. A trigger event had occurred on the Home Re 2019-1 transaction. The company also cites possible changes to GSE eligibility requirements, state capital rules, competition, economic conditions, interest rates, cybersecurity threats and geopolitical events as risks.
- Management said ordinary-course litigation was not expected to have a material adverse effect based on facts known at filing. The filing states that loss outcomes may nonetheless differ materially from estimates. Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether mortgage originations, NIW and premium trends develop as management expected, and how persistency and competition affect premiums.
- Whether favorable reserve development continues or reverses, including trends in new delinquencies, cures, claim severity and paid claims.
- The final costs and coverage effects of the 2020 QSR termination and October Home Re transactions, and the execution and economics of the 2024 QSR agreement.
- Whether MGIC maintains PMIERs and state-capital buffers, including the amount of credit regulators and the GSEs allow for reinsurance.
- Investment portfolio valuation and realized losses, reinsurance recoverability, and holding-company liquidity after dividends and share repurchases.