MGIC Investment Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. MGIC provides mortgage insurance, principally on low-down-payment residential loans sold to Fannie Mae and Freddie Mac.
Financial performance and position
- Revenue: $270.2 million, up from $235.1 million a year earlier. Net premiums earned were $217.3 million versus $214.3 million; investment income was $24.1 million versus $20.2 million. Realized investment gains were $26.3 million, compared with a $0.2 million loss in Q1 2014.
- Profit: Net income was $133.1 million, compared with $60.0 million; diluted EPS was $0.32 versus $0.15. The improvement reflected lower incurred losses and investment gains. The income-tax provision was $3.4 million, reduced by a $44.5 million decrease in the deferred-tax-asset valuation allowance.
- Losses and margins: Net losses incurred were $81.8 million versus $122.6 million. The loss ratio fell to 37.6% from 57.2%; the underwriting expense ratio rose to 16.4% from 15.7%; the combined ratio improved to 54.0% from 72.9%.
- Cash flow: Operating activities used $29.7 million, versus $157.9 million used in Q1 2014. Investing activities provided $64.9 million and financing activities provided $2.6 million. Cash and cash equivalents ended the quarter at $232.6 million, up from $197.9 million.
- Assets and equity: Total assets were $5.28 billion and shareholders’ equity was $1.19 billion at March 31, 2015, versus $5.27 billion and $1.04 billion at year-end 2014. The investment portfolio was $4.60 billion at fair value.
- Debt and liquidity: Debt principal was approximately $1.30 billion, including $61.9 million of 5.375% senior notes due November 2015. The company expected to settle those notes at or before maturity using cash on hand. The holding company reported $494 million in cash and investments; insurance-subsidiary dividends to it are restricted and MGIC had paid no dividends to the holding company since 2008.
- Insurance and capital: Primary insurance in force was $166.1 billion, up from $157.9 billion a year earlier; primary risk in force was $43.2 billion. MGIC’s statutory risk-to-capital ratio was 13.7:1, below the commonly applicable 25:1 maximum, and its policyholder position exceeded Wisconsin’s minimum requirement by $805 million.
Changes versus Q1 2014
- Primary new insurance written increased to $9.0 billion from $5.2 billion; refinancing was 28.8% of Q1 2015 volume versus 15.0%. Insurance in force grew 5% year over year.
- Primary default inventory declined to 72,236 loans from 91,842, and the default rate decreased to 7.44% from 9.67%. New default notices fell to 18,896 from 23,346.
- Prior-year reserve development was favorable by $27.6 million, compared with $33.4 million favorable a year earlier. The company attributed Q1 2015 results partly to fewer new defaults and a lower estimated claim rate.
- Net losses and loss-adjustment expenses paid fell to $232 million from $343 million. Operating cash outflow also narrowed substantially.
Outlook, risks and unusual items
- Management outlook: MGIC expected 2015 new insurance written to modestly exceed 2014 and average insurance in force to increase modestly during the rest of 2015. Management expected paid claims to continue declining for the remainder of 2015, excluding the expected impact of the remaining Countrywide settlement. The company cautioned that claims historically tend to be higher in the second half of the year.
- Pricing and business mix: Competition remained intense. Lender-paid single-premium policies rose to 20% of Q1 new business, from 11% in 2014; their average discount from MGIC’s rate card was 13%. Management expected this mix to increase in 2015 and noted that these policies were expected to generate less lifetime premium than borrower-paid monthly policies.
- PMIERs capital requirements: Revised GSE requirements take effect December 31, 2015. MGIC estimated a $230 million Available Assets shortfall as of March 31 before reinsurance, but expected a restructuring of its quota-share reinsurance, asset transfers and possible holding-company support to address it. The reinsurance restructuring requires GSE and Wisconsin regulatory approval; failure to meet requirements could limit new business. The GSEs may revise the requirements over time.
- Litigation: Countrywide’s amended settlement covering non-GSE loans requires consent from or on behalf of other investors; implementation was considered probable but was not assured. The estimated maximum exposure above the recorded provision was $441 million. Other claims-paying-practices discussions had estimated maximum exposure of $29 million; neither estimate includes interest or consequential or exemplary damages. Five RESPA class-action cases were dismissed with prejudice in Q1.
- Tax dispute: The IRS notices for 2000–2007 included $197.5 million of taxes and penalties, plus approximately $171.9 million of interest at quarter-end, and an additional $261.4 million primarily related to a disputed NOL carryback. MGIC contested most adjustments in Tax Court; a prior $65.2 million payment would reduce any amount ultimately owed. Potential related state taxes and interest were estimated at $47.7 million. The company said an adverse resolution could materially affect results, cash flow and capital.
- Other uncertainties: Loss reserves depend on estimates of claim frequency and severity and may change materially with economic, housing-market or servicing conditions. The company also cited GSE and FHA policy changes, refinancing and persistency, regulatory capital changes, and its below-investment-grade insurer financial-strength ratings as risks. A valuation-allowance reversal was considered likely in 2015 if sustainable pre-tax income continued, which could create a material tax benefit in that period.
Important facts for investors to verify
- Whether the restructured reinsurance receives the required GSE and regulatory approvals, and whether MGIC meets PMIERs by the effective date.
- How much of the $441 million Countrywide exposure is ultimately realized and whether the CHL agreement obtains required investor consent.
- The outcome and cash or capital effects of the IRS dispute and related state-tax exposure.
- Whether improving default and claim trends continue, particularly given the large share of older defaults and the expected seasonal pattern.
- How pricing discounts and the growing single-premium mix affect premium yield, persistency, and future earnings and cash generation.
- The holding company’s capacity to fund the November 2015 note maturity and any capital contributions while insurance-subsidiary dividends remain restricted.