MGIC INVESTMENT CORP annual report, FY2022

Full document

MGIC Investment Corporation — FY 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This filing reports annual results; the supplied text does not provide a clear standalone fourth-quarter income statement. MGIC provides private mortgage insurance and related mortgage-credit services, principally for loans purchased by Fannie Mae and Freddie Mac.

Financial and operating results

  • Revenue: Total revenue was $1.173 billion, down 1% from $1.186 billion in 2021. Net premiums earned were $1.007 billion, down 1%; investment income was $167.5 million, up 7%.
  • Profit: Net income was $865.3 million, or $2.79 per diluted share, up 36% and 51%, respectively. Income before tax was $1.090 billion; the effective tax rate was 20.6%. Adjusted net operating income, a non-GAAP measure, was $904.8 million, or $2.91 per diluted share.
  • Losses and margins: Net losses incurred were a benefit of $254.6 million, versus $64.6 million of losses in 2021. The reported loss ratio was (25.3)% versus 6.4%. The underwriting expense ratio increased to 25.2% from 20.6%, reflecting higher expenses and slightly lower net premiums written. Net premium yield declined to 35.3 basis points from 38.9 basis points.
  • Cash flow: Operating cash flow was $650.0 million, compared with $696.3 million in 2021. Investing activities provided $410.5 million; financing activities used $1.033 billion, mainly for debt repayment, share repurchases and dividends. Cash and cash equivalents were $327.4 million at year-end.
  • Assets and liquidity: Total assets were $6.214 billion. The investment portfolio was $5.425 billion, down from $6.607 billion, primarily reflecting lower fair values as interest rates rose. MGIC had $5.7 billion of PMIERs Available Assets, $2.3 billion above Minimum Required Assets. Holding-company cash and investments were approximately $647 million.
  • Debt and capital: Long-term debt carrying value fell to $662.8 million from $1.147 billion; principal outstanding was $671.1 million. Remaining principal was $650 million of 5.25% notes due 2028 and $21.1 million of 9% debentures due 2063; no debt was due in the next 12 months. MGIC’s risk-to-capital ratio was 10.2:1, below the commonly applicable 25:1 maximum.
  • Insurance portfolio: Primary new insurance written (NIW) was $76.4 billion, versus $120.2 billion in 2021. Primary insurance in force (IIF) rose 7.6% to $295.3 billion, and risk in force was $76.5 billion. The primary delinquency rate fell to 2.2% from 2.8%; delinquency inventory declined to 26,387 loans from 33,290.

Material changes and notable items

  • Net income increased chiefly because of favorable reserve development. Re-estimation of reserves on previously reported delinquencies reduced losses by approximately $404.1 million, primarily due to better-than-estimated cures, borrower reinstatements, servicing actions and property sales. New delinquency notices added approximately $149.6 million of losses.
  • New business fell as higher mortgage rates and home prices reduced purchase activity and refinancing. Purchase loans represented 97.4% of 2022 NIW, versus 79.7% in 2021. NIW with borrower DTI above 45% increased to 21.3% from 13.6%.
  • Unrealized investment losses contributed to a $601.2 million after-tax decline in other comprehensive income and reduced shareholders’ equity to $4.643 billion from $4.861 billion. The filing attributes most unrealized losses to rising interest rates and says securities were current on interest payments.
  • MGIC Investment repurchased approximately 27.8 million shares for about $386 million and paid $111 million of shareholder dividends. MGIC, the insurance subsidiary, paid $800 million in dividends to the parent, subject to regulatory limits on future distributions.
  • Debt actions included redeeming the 5.75% notes, repaying the $155 million FHLB advance and repurchasing $89.1 million principal of 9% debentures. A $40.2 million debt-extinguishment loss was recorded; interest expense declined to $48.1 million from $71.4 million.
  • Reinsurance covered varying portions of 85% of risk in force at year-end. MGIC terminated its 2015 and 2019 quota-share agreements effective December 31, 2022, and added excess-of-loss coverage. Trigger events were in effect for Home Re 2019-1 and Home Re 2022-1.

Outlook, management commentary and risks

  • Management expected 2023 NIW to be lower than 2022, based on mortgage origination forecasts of $1.8 trillion versus an estimated $2.3 trillion in 2022. IIF was expected to be relatively flat. Management expected net investment income to increase, underwriting and operating expenses to be modestly lower, and the effective tax rate to be approximately 21%.
  • Management expected net losses and loss-adjustment expenses paid to increase as claims activity normalizes after pandemic-related forbearance and foreclosure delays; timing and magnitude were uncertain. Premium yield was expected to remain relatively flat.
  • Key exposures include recession, unemployment, declining home prices, inflation and elevated interest rates; changes in GSE policies, PMIERs or mortgage-insurance cancellation rules; competition from government programs and alternative credit enhancement; and the availability, cost and regulatory capital credit of reinsurance.
  • The FHA announced a 30-basis-point reduction in mortgage-insurance premium rates on February 22, 2023. MGIC said this could negatively affect NIW, but the extent was uncertain.
  • Loss reserves require significant estimates of claim frequency and severity. A $1,000 change in the average severity factor would change reserves by approximately $10 million; a one-percentage-point change in the claim-rate factor would change reserves by approximately $15 million.
  • The company disclosed a lawsuit in which it is a third-party defendant involving mortgage-premium refunds under HOPA; it could not assess the potential impact. The auditor identified valuation of primary case loss reserves as a critical audit matter. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.

Most important facts for investors to verify

  • Whether favorable reserve development and high cure rates persist, and how claims paid develop as pandemic-related delays unwind.
  • Whether falling home prices, weaker affordability or unemployment increase delinquencies, claims severity or required PMIERs assets.
  • Whether MGIC can maintain reinsurance availability and the expected PMIERs and statutory capital credit, including following reinsurance terminations and Home Re trigger events.
  • How the FHA premium reduction, GSE policy changes and competitive pricing affect NIW, market share and premium yield.
  • Whether investment portfolio valuations recover or further losses affect equity and liquidity, and whether regulated subsidiary dividends remain sufficient for parent-company capital returns and debt service.