MGIC Investment Corporation — FY2023 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2023. MGIC provides private mortgage insurance and related mortgage-credit risk services. Its direct primary insurance in force (IIF) was $293.5 billion and risk in force (RIF) was $77.2 billion at year-end.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $1.155 billion | $1.173 billion | Down 2% |
| Net premiums earned | $952.6 million | $1.007 billion | Down 5% |
| Net investment income | $214.7 million | $167.5 million | Up 28% |
| Net income | $712.9 million | $865.3 million | Down 18% |
| Diluted EPS | $2.49 | $2.79 | Down 11% |
| Operating cash flow | $713.0 million | $650.0 million | Up |
Adjusted net operating income, a non-GAAP measure, was $724.4 million ($2.53 per diluted share), versus $904.8 million ($2.91) in 2022. Management attributes the lower earnings primarily to lower net premiums and less favorable loss-reserve development, partly offset by stronger investment income.
Net losses incurred were a benefit of $20.9 million, compared with a $254.6 million benefit in 2022. In 2023, $187.7 million of loss expense from new delinquency notices was more than offset by $208.5 million of favorable development on prior-year reserves. The reported loss ratio was -2.2%, versus -25.3%; underwriting expense ratio was 25.5%, versus 25.2%. Net premium yield declined to 32.3 basis points from 35.3 basis points. These negative loss ratios reflect reserve releases, not an absence of claims.
Cash and cash equivalents were $363.7 million; investments were $5.74 billion. Total assets were $6.54 billion, shareholders’ equity $5.07 billion, and total liabilities $1.47 billion. Long-term debt had $650 million principal outstanding, with a $643.2 million carrying value; the 5.25% senior notes mature in 2028. Cash flows were $713.0 million from operations, negative $179.2 million from investing, and negative $496.0 million from financing. The holding company held about $918 million in cash and investments at year-end, against the holding company’s debt obligations.
Material changes and business developments
- Primary new insurance written (NIW) fell to $46.1 billion from $76.4 billion, reflecting a smaller purchase-origination market amid higher mortgage rates and home prices. MGIC’s estimated share of private mortgage insurance NIW declined to 16.3% from 18.9%.
- Primary IIF was nearly flat at $293.5 billion versus $295.3 billion; annual persistency increased to 86.1% from 82.2%. The year-end delinquency rate was 2.25%, versus 2.22%, with 25,650 delinquent loans compared with 26,387.
- Reinsurance remained important to capital management. At year-end, PMIERs-eligible reinsurance capital credit was $2.23 billion. MGIC reported $5.8 billion of PMIERs Available Assets, $2.4 billion above Minimum Required Assets, and remained eligible to insure GSE-purchased loans.
- MGIC paid $600 million in dividends to the holding company. The company returned approximately $465 million to shareholders through repurchases and dividends, and repurchased about 21.7 million shares in 2023. It ended the year with approximately 272.5 million shares outstanding.
- Investment portfolio fair value increased to $5.74 billion from $5.42 billion. Its pre-tax yield rose to 3.7% from 3.0%; accumulated other comprehensive loss improved to $316.3 million from $481.5 million.
Outlook, risks and unusual items
Management expected NIW to increase slightly in 2024, IIF to remain relatively flat, net investment income to rise with higher average yields, and underwriting and operating expenses to be modestly lower. It expected the effective tax rate to be about 21% and planned to continue shareholder dividends, with share repurchases expected to remain the primary method of capital return. These are management expectations, not guarantees.
Management expects net losses and loss-adjustment expenses paid to increase from suppressed levels, but says the timing and magnitude are uncertain. Favorable home-price appreciation has enabled some delinquent borrowers to cure through property sales. The third- and fourth-year after origination have historically been higher claim-frequency years; 67% of primary RIF was written after 2020.
Key risks include economic contraction, unemployment and falling home prices; changing GSE policies, PMIERs requirements and mortgage-insurance cancellation practices; competition from the FHA, VA and alternative credit-risk products; reinsurance availability, cost and counterparty performance; and investment-market, interest-rate, technology and cybersecurity risks. MGIC’s risk-to-capital ratio was 10.2:1, and its policyholder position exceeded the required minimum by $3.6 billion. Insurance regulation restricts dividends: MGIC could pay $64 million of ordinary dividends in 2024 without OCI approval, before considering dividends paid in the preceding 12 months.
Loss reserves require significant judgment. A $1,000 change in the average claim-severity reserve factor would change reserves by about $8 million; a one-percentage-point change in the average claim-rate factor would change them by about $16 million. The auditor identified valuation of primary case reserves as a critical audit matter. The company reported no known cybersecurity incident that materially affected, or was reasonably likely to materially affect, it. Ordinary-course legal matters were not considered likely to have a material adverse effect based on facts then known.
Unusual or notable items included $8.0 million of additional ceded premium associated with 2023 Home Re note tender offers, and a $5.1 million early-termination fee for the 2020 quota-share reinsurance transaction. No debt-extinguishment loss was recorded in 2023, compared with $40.2 million in 2022. The 9% convertible debentures were redeemed through a $28.6 million cash payment in lieu of issuing shares.
Investor verification priorities
- Review reserve adequacy, especially assumptions for claim rates, severity, cure activity and the potential emergence of claims from older delinquencies.
- Track delinquency inventory, claim payments and whether favorable reserve development continues or reverses.
- Confirm 2024 NIW, persistency and premium-yield trends against management’s outlook and mortgage-origination forecasts.
- Monitor PMIERs and state-capital headroom, including the continued availability and capital credit of reinsurance.
- Assess holding-company liquidity, regulated-subsidiary dividend capacity, the 2028 debt maturity and planned shareholder returns.
- Evaluate investment portfolio exposure to interest rates and credit spreads, and changes in competition or GSE and government-program policies.