MGIC Investment Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. MGIC Investment Corporation is a holding company principally engaged in U.S. mortgage insurance through its subsidiaries.
Financial results and key metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenues | $291.7 million | $265.8 million; up 10% |
| Net premiums earned | $249.8 million | $232.1 million; up 8% |
| Net investment income | $40.6 million | $32.1 million; up 26% |
| Losses incurred, net | $39.1 million | $23.9 million; up 64% |
| Net income | $151.9 million | $143.6 million; up 6% |
| Diluted EPS | $0.42 | $0.38; up 11% |
| Loss ratio | 15.6% | 10.3% |
| Underwriting expense ratio | 18.9% | 19.5% |
| Operating cash flow | $164.9 million | $134.0 million |
Cash and cash equivalents, including restricted cash, were $262.5 million at quarter-end, compared with $155.0 million at December 31, 2018. Investing activities used $40.1 million and financing activities used $17.3 million; cash increased $107.5 million. Total assets were $5.87 billion, liabilities $2.05 billion, and shareholders’ equity $3.82 billion.
Debt carrying value was $831.9 million: a $155 million FHLB advance, $420.0 million of 5.75% senior notes, and $256.9 million of 9% convertible debentures. Holding-company debt principal was approximately $814.5 million, excluding debt held by MGIC and eliminated in consolidation. Holding-company cash and investments were approximately $299 million.
Business trends and changes versus prior year
- Net income increased by $8.3 million, mainly on higher earned premiums and investment income, partly offset by higher incurred losses. Diluted weighted-average shares fell to 376.7 million from 391.6 million, helping lift diluted EPS.
- New insurance written was $10.1 billion, down from $10.6 billion. Primary insurance in force rose to $211.4 billion from $197.5 billion a year earlier; primary risk in force was $54.5 billion versus $50.9 billion.
- Primary delinquent inventory fell 25% year over year to 30,921 loans; the delinquency rate declined to 2.92% from 4.02%. Net losses and LAE paid declined 30% to $57 million.
- Losses incurred included a $23.5 million probable litigation loss. Excluding that item, favorable prior-year reserve development was $8.4 million; prior-year development was favorable by $35.2 million in Q1 2018.
- Premium yield was 47.4 basis points, essentially unchanged from 47.3 basis points. Management expects premium yield to decline in 2019, primarily because of lower average premium rates.
- Investment portfolio fair value was $5.29 billion, up from $5.16 billion at year-end. The increase in unrealized gains contributed to $82.7 million of after-tax other comprehensive income, versus a $64.0 million loss in Q1 2018.
Outlook, capital, risks and unusual items
- Management said it expects net losses and LAE paid to continue declining as the insured portfolio’s credit profile improves and delinquent inventory declines. It also expects MGIC to continue paying quarterly dividends of at least $70 million to the holding company, subject to board approval and regulatory non-disapproval.
- MGIC reported $4.5 billion of PMIERs Available Assets, approximately $1.1 billion above Minimum Required Assets, and remained eligible to insure GSE loans. Revised PMIERs took effect March 31, 2019; reinsurance credit is subject to counterparty haircuts for certain non-fully-collateralized arrangements.
- MGIC’s statutory risk-to-capital ratio was 8.9:1, below the commonly applicable 25:1 maximum; its policyholder position exceeded the required minimum by $2.7 billion. Reinsurance credit and future changes to capital rules could affect these measures.
- The 2019 quota-share reinsurance agreement covers eligible 2019 new business at a 30% cede rate, with an option to reduce the rate. A portion of the 2015 agreement is scheduled to terminate June 30, 2019; an amended agreement would reduce the cede rate on remaining eligible insurance from 30% to 15%, subject to GSE approval. Management expected an approximately $7 million termination fee in Q2 2019.
- For claims-paying-practices disputes, MGIC recorded a $23.5 million probable loss. It estimated reasonably possible exposure at approximately $266.2 million above the recorded probable loss; the estimate is judgmental and excludes interest and consequential or exemplary damages.
- Key risks include changes to GSE business practices or housing-finance policy, stricter PMIERs or state capital requirements, reinsurance counterparty and eligibility risk, economic or housing-market deterioration, and uncertainty in claims, reserve estimates and litigation outcomes. A one-percentage-point change in the average claim-rate reserve factor would change reserves by approximately $17 million; a $1,000 change in the average severity factor would change them by approximately $11 million.
- The board authorized up to $200 million of additional share repurchases through 2020; approximately $25 million remained under a prior authorization. No shares were repurchased during Q1, although about $12 million of repurchases executed in late 2018 settled in the quarter.
- The company adopted lease accounting guidance in Q1; the impact was immaterial. On May 6, 2019, Executive Vice President and Chief Risk Officer Stephen C. Mackey separated from service; the filing stated the separation did not involve company strategy, prospects or financial reporting.
Important facts for investors to verify
- How the $23.5 million claims-practices litigation accrual and the stated additional reasonably possible exposure develop, including any settlements or further reserve charges.
- Whether the amended 2015 quota-share agreement receives GSE approval, the resulting PMIERs capital credit, and the expected Q2 termination fee.
- Whether MGIC maintains its PMIERs excess, state capital compliance and reinsurance credit under revised or future requirements.
- Whether declining premium yield, new-business mix, persistency and delinquency trends affect future premiums and loss experience as management expects.
- Holding-company liquidity and debt service relative to regulated subsidiary dividends, planned dividends and the authorized repurchase program.