MGIC Investment Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. MGIC Investment is a holding company whose principal business is U.S. mortgage insurance through its subsidiaries, including coverage for low-down-payment residential mortgages. Figures are consolidated unless otherwise noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $293.1 million | $297.9 million | $587.7 million | $595.8 million |
| Net premiums earned | $255.7 million | $251.5 million | $510.9 million | $506.6 million |
| Net income | $249.3 million | $153.1 million | $424.3 million | $303.1 million |
| Diluted EPS | $0.80 | $0.44 | $1.34 | $0.87 |
| Net losses incurred | $(99.1) million | $29.2 million | $(118.4) million | $68.8 million |
| Loss ratio | (38.7)% | 11.6% | (23.2)% | 13.6% |
Net income rose 63% in Q2 and 40% year to date. The principal driver was favorable prior-year loss reserve development, not a comparable increase in premium revenue: reserve releases were approximately $130.9 million in Q2 and $186.6 million for the first half, mainly reflecting lower estimated claim rates and better-than-expected cures. New notices added $31.9 million and $68.2 million to losses incurred in those respective periods.
Net premiums earned increased 2% in Q2 and 1% year to date; net investment income declined 2% and 1%, respectively. Net premium yield fell to 36.2 basis points in Q2 from 39.1, and to 36.4 basis points for the first half from 39.8, reflecting a lower-yielding in-force mix and reduced single-premium cancellation benefits. The underwriting expense ratio was 22.4% in Q2 and 22.7% year to date, versus 22.3% and 21.1% in the comparable periods.
For the first half, operating cash flow was $361.7 million, versus $349.4 million in 2021. Investing activities provided $289.6 million, while financing activities used $537.0 million; cash and restricted cash increased $114.3 million to $419.3 million. At June 30, total assets were $6.60 billion, total liabilities $2.03 billion, and shareholders’ equity $4.57 billion. Equity declined from year-end, primarily due to investment fair-value losses, share repurchases and dividends, partly offset by net income.
Fixed-income investments had a fair value of $5.71 billion versus amortized cost of $6.09 billion. The resulting unrealized loss position, primarily attributed to rising interest rates, contributed to a $445.4 million after-tax loss in other comprehensive income for the first half. Total comprehensive income was a loss of $21.2 million for the first half, despite positive net income.
Debt carrying value was $917.9 million at June 30, down from $1.15 billion at year-end. The company repaid its $155 million FHLB advance and repurchased $74.9 million principal amount of 9% debentures during the first half. In July, it redeemed the $242.3 million principal amount of 5.75% notes; the filing says a $6.8 million extinguishment loss will be recorded in Q3. Management reported $690 million of cash and investments at the holding company and stated it expects sufficient liquidity to meet obligations for the foreseeable future.
Material changes and business indicators
- New insurance written was $24.3 billion in Q2 and $43.9 billion for the first half, down from $33.6 billion and $64.4 billion, respectively, mainly because fewer refinances required mortgage insurance. Management expected a smaller origination market to reduce full-year NIW versus 2021; no numeric earnings or full-year guidance was provided.
- Primary insurance in force increased to $286.8 billion from $262.0 billion a year earlier. Persistency was 71.5%, versus 57.1% at June 2021. Primary delinquency inventory fell to 26,855 loans from 42,999 a year earlier; the delinquency rate was 2.28%, versus 3.71%.
- The mix of new business shifted toward purchases and higher-risk characteristics: 98.2% of Q2 NIW was purchase business versus 79.3% a year earlier; 21.0% had DTI above 45% versus 12.9%, and 14.3% had LTV above 95% versus 12.0%.
- Share repurchases totaled 15.7 million shares for approximately $221.9 million in the first half. The company paid $51 million in shareholder dividends and declared a subsequent quarterly dividend of $0.10 per share, up from $0.08.
Outlook, risks and unusual items
- Management warned that claims could increase as pandemic-era forbearance and foreclosure protections expire; timing and magnitude are uncertain. A significant portion of delinquency inventory remained in forbearance, and outcomes depend on borrowers’ finances and housing-market conditions.
- Loss reserves are highly judgmental. The filing estimates that a $1,000 change in average severity would change reserves by about $13 million, and a one-percentage-point change in average claim rate by about $16 million.
- MGIC reported $5.8 billion of PMIERs Available Assets, $2.6 billion above Minimum Required Assets, and remained eligible to insure GSE-purchased loans. Its risk-to-capital ratio was 9.7:1, below the commonly applicable 25:1 limit. The company cautioned that changes to GSE requirements, reinsurance credit, capital rules or GSE business practices could affect eligibility and results.
- The company repurchased debentures at more than carrying value, recognizing a $28.5 million first-half debt extinguishment loss, including the FHLB prepayment fee. Its Home Re 2019-1 and Home Re 2022-1 transactions had trigger events; the filing describes suspended note principal payments under such triggers.
- Mortgage-insurance premium refund litigation under the Homeowners Protection Act is being monitored; MGIC expects to be named as a third-party defendant in one case and could not assess the potential impact. Management said other ordinary-course legal matters were not expected to have a material adverse effect based on facts then known.
- The filing notes a third-party issue involving inaccurate FICO score reporting in late Q1 and early Q2 2022. The impact on reported metrics was unknown, although management did not expect a material business impact.
- Other identified risks include competition and premium-rate pressure, interest-rate and credit-spread exposure, potential economic and housing-market deterioration, cybersecurity threats, and uncertainty related to the Russia-Ukraine war. The company stated its disclosure controls were effective and reported no material Q2 change in internal control over financial reporting.
Important facts for investors to verify
- Whether the large favorable reserve releases are sustainable, and how subsequent claim frequency and severity compare with the assumptions used in reserves.
- Whether foreclosures and paid claims rise as forbearance and foreclosure protections end, especially among older or long-delinquent loans.
- How higher mortgage rates and housing-market changes affect originations, cancellations, persistency, premium yield and borrower credit quality.
- Whether the investment portfolio’s unrealized losses remain rate-driven and whether they affect capital, liquidity or future realized results.
- The post-July debt balance and impact of the 5.75% note redemption, including the expected Q3 extinguishment loss, alongside planned buybacks and dividends.
- Continued PMIERs and state-capital compliance, including the availability and regulatory credit of reinsurance; also monitor the Home Re trigger events and the FICO reporting issue.