MGIC Investment Corporation — Q2 2023 Form 10-Q
Business and period: MGIC Investment Corporation is a holding company principally engaged, through its subsidiaries, in U.S. private mortgage insurance, including insurance and reinsurance connected with Fannie Mae and Freddie Mac credit-risk-transfer programs. This unaudited filing covers the three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $290.7 million | $293.1 million | $574.6 million | $587.7 million |
| Net premiums earned | $242.8 million | $255.7 million | $484.8 million | $510.9 million |
| Net investment income | $52.3 million | $40.3 million | $101.6 million | $78.6 million |
| Net income | $191.1 million | $249.3 million | $345.6 million | $424.3 million |
| Diluted EPS | $0.66 | $0.80 | $1.19 | $1.34 |
| Adjusted net operating income per diluted share (non-GAAP) | $0.68 | $0.81 | $1.21 | $1.41 |
Net premiums written were $231.2 million in Q2 and $461.4 million for the first half, down 5% in each comparison. Net investment income rose 30% in Q2 and 29% year to date, primarily as average investment yields increased 80 basis points. Net realized investment losses were $5.0 million in Q2 and $12.7 million for the first half.
- Losses: Net losses incurred were a benefit of $17.7 million in Q2 and $11.2 million for the first half, mainly reflecting favorable reserve development on prior-period delinquencies. Prior-year favorable development was $59.9 million in Q2 and $100.7 million year to date; current-year notices added $42.2 million and $89.5 million, respectively.
- Margins and expenses: The net loss ratio was negative 7.3% in Q2 and negative 2.3% year to date, versus negative 38.7% and negative 23.2% in 2022. Net premium yield was 33.2 basis points in Q2 and 33.0 basis points year to date, down from 36.2 and 36.4. The underwriting expense ratio rose to 24.1% in Q2 and 27.6% year to date, from 22.4% and 22.7%.
- Cash flow: First-half operating cash flow was $356.9 million, compared with $361.7 million. Investing activities used $157.0 million, while financing activities used $216.1 million, principally for repurchases and dividends. Cash and cash equivalents were $310.7 million at June 30, 2023.
- Balance sheet and debt: Total assets were $6.35 billion and shareholders’ equity was $4.84 billion. Loss reserves were $530.7 million, down from $558.0 million at year-end 2022. Debt carrying value was $663.5 million, including $642.5 million of 5.25% senior notes due 2028 and $21.1 million of 9% convertible debentures due 2063. The company reported compliance with debt covenants and no debt at MGIC, the insurance subsidiary.
- Capital and liquidity: MGIC reported $5.8 billion of PMIERs Available Assets, approximately $2.3 billion above Minimum Required Assets, and remained eligible to insure GSE-purchased loans. Its risk-to-capital ratio was 9.9:1. The holding company reported $816.5 million in cash and investments.
Material changes and capital returns
Net income fell 23% in Q2 and 19% for the first half. Lower premiums and less favorable loss development than in 2022, together with higher first-half operating expenses, weighed on results; higher investment income partly offset the declines. The prior-year comparisons also included debt-extinguishment losses of $6.4 million in Q2 and $28.5 million for the first half, while none were recorded in 2023. The share count declined following repurchases: 10.8 million shares were repurchased in the first half for approximately $150.9 million. The company paid $58.8 million in first-half dividends and declared a subsequent quarterly dividend of $0.115 per share.
First-half new insurance written was $20.6 billion, versus $43.9 billion a year earlier; Q2 was $12.4 billion versus $24.3 billion. Primary insurance in force was $292.5 billion, while primary risk in force was $76.4 billion. Persistency was 83.5%, compared with 71.5% at June 30, 2022.
Outlook, commentary, and risks
- Management expects a smaller mortgage origination market to drive lower new insurance written for the remainder of 2023 compared with 2022. It expects in-force portfolio premium yield to remain relatively flat in 2023. The filing provides no numerical earnings guidance.
- Management expects paid losses and loss-adjustment expenses to increase from suppressed levels, but says the timing and magnitude are uncertain. Loss estimates depend on claim frequency and severity, housing prices, unemployment, delinquency cures, and the timing of claims. At June 30, a $1,000 change in average severity reserve factor would change reserves by approximately $9 million; a one-percentage-point change in the average claim-rate factor would change them by approximately $15 million.
- Management expects additional pension settlement accounting charges during the rest of 2023; timing and magnitude are uncertain. First-half underwriting and operating expenses included higher pension costs, including settlement charges, and higher performance-based compensation.
- Reinsurance reduces retained exposure and supports regulatory capital, but creates counterparty and recoverability risks. The filing notes trigger events in the Home Re 2019-1 and 2022-1 ILN transactions. Management describes its exposure to the related variable-interest entities as remote, while noting it cannot quantify maximum exposure if a trust trustee failed to distribute claim payments.
- Other key risks include economic deterioration, falling home prices, elevated unemployment, changes to GSE eligibility or capital requirements, competition and alternative credit enhancement, reinsurance availability and cost, and dependence on regulatory credit for ceded risk. The FHA’s February 2023 premium-rate reduction and a proposed bank capital rule could pressure new business, though the impact is uncertain.
- The fixed-income portfolio had a fair value of $5.60 billion and gross unrealized losses of $458.4 million at June 30, primarily attributed to higher interest rates. Management said the securities were current on interest and it did not consider the unrealized losses indicative of ultimate collectability. Litigation and disputes arise in the ordinary course; management said known matters were not expected to materially adversely affect financial position or results.
Important facts for investors to verify
- Whether delinquency counts, cures, claim severity, paid claims, and reserve releases continue to support the favorable loss experience; delinquency inventory was 23,823 at June 30, 2023.
- Whether PMIERs capital headroom and state-capital compliance remain adequate, including the continued availability and regulatory recognition of reinsurance.
- Whether new insurance written, persistency, premium yield, and competitive conditions develop in line with management’s outlook.
- How Home Re trigger events and remaining XOL coverage evolve, and whether reinsurance counterparties and trusts perform as expected.
- Whether portfolio fair-value losses, rising yields, pension settlement charges, and capital returns affect earnings, liquidity, or capital flexibility.