MGIC Investment Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports quarterly results. MGIC is a holding company whose subsidiaries principally provide U.S. private mortgage insurance. Figures below are consolidated unless otherwise stated.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $1.039 billion | $1.378 billion |
| Net premiums written | $923.5 million | $1.018 billion |
| Net premiums earned | $943.1 million | $1.033 billion |
| Net investment income | $80.7 million | $121.6 million |
| Net realized investment gains | $5.7 million | $195.4 million |
| Losses incurred, net | $838.7 million | $2.067 billion |
| Net loss | $49.8 million; $0.16 per share | $927.1 million; $4.59 per share |
| Operating cash flow | $(971.5) million | $(1.569) billion |
- Revenue fell about 25%, driven substantially by lower realized investment gains; premiums earned fell about 9% as average insurance in force declined and ceded premiums increased.
- Losses incurred decreased about 59%. The GAAP combined ratio improved to 107.5% from 215.3%, but remained above 100%, indicating underwriting losses before considering investment income and other items.
- 2013 quarterly net results were a loss of $72.9 million in Q1, income of $12.4 million in Q2, income of $12.1 million in Q3, and a loss of $1.4 million in Q4.
- At year-end, total assets were $5.601 billion, including investments of $4.867 billion and cash and cash equivalents of $332.7 million. Loss reserves were $3.061 billion; shareholders’ equity was $744.5 million.
- Holding-company debt totaled approximately $1.317 billion principal, with annual debt service of about $67 million. Holding-company cash and investments were approximately $560 million; insurance-subsidiary dividends are restricted, and MGIC had paid none to the parent since 2008.
- There was no cash dividend in 2013. The company reported that claims paid had exceeded premiums received since 2009 and expected that trend to continue, with investment assets expected to decline.
Insurance operations and changes versus prior periods
- Primary new insurance written rose to $29.8 billion from $24.1 billion in 2012; primary insurance in force declined to $158.7 billion from $162.1 billion. Primary risk in force was $41.1 billion, down from $41.7 billion.
- Primary defaults fell to 103,328, or 10.76% of loans in force, from 139,845, or 13.90%. Management cited fewer new delinquency notices and lower estimated claim rates on recent delinquencies. It reported about 20% fewer new delinquent notices in 2013 than in 2012.
- Net losses and loss-adjustment expenses paid decreased to $1.794 billion from $2.518 billion. Average primary claim paid declined to $46,375 from $48,722.
- The 2012 comparison included a $267.5 million charge for settlement of a Freddie Mac pool-policy dispute and approximately $100 million of additional reserves for probable rescission settlements.
- MGIC’s statutory risk-to-capital ratio improved to 15.8:1 from 44.7:1; combined insurance operations were at 18.4:1 versus 47.8:1. MGIC’s policyholder position exceeded Wisconsin’s $1.0 billion minimum by $454 million.
Outlook, risks and unusual items
- Management expected average insurance in force to continue declining in early 2014 and 2014 premium yields to decline significantly, principally because of quota-share reinsurance and premium-rate reductions. It expected paid claims to decline in 2014, excluding the anticipated remaining Countrywide settlement impact. No full-year earnings guidance was provided.
- External quota-share reinsurance covered 30% of certain new business written from April 2013 through 2015; a December addendum applied a 40% quota share to certain eligible pre-April 2013 business. About 55% of insurance in force was subject to risk-sharing arrangements at year-end. MGIC remains liable to policyholders if reinsurers fail to pay, and future capital credit for ceded risk was uncertain.
- Eligibility depends on state capital requirements and new GSE capital standards that had not yet been finalized. MGIC’s ratings were below the GSEs’ stated legacy rating threshold, and it operated under GSE remediation plans. Failure to meet applicable requirements could restrict new business; the GSEs and regulators had not confirmed the final standards or timing.
- Mortgage-finance regulation and market structure remain uncertain, including GSE reform, the final Qualified Residential Mortgage definition, FHA competition, and lender demand for private mortgage insurance. Management noted that none of its 2013 new insurance met the proposed 70% LTV “QM-plus” definition.
- Countrywide settlements were implemented for certain GSE loans; implementation of the separate CHL agreement for non-GSE loans depended on investor consent and was considered probable by management. Estimated maximum exposure above the recorded provision was $475 million. Other material claims-paying disputes had estimated maximum exposure of about $260 million; management could not reasonably estimate a likely range and expected resolution for less.
- An IRS dispute over REMIC tax treatment included proposed federal taxes and penalties of $197.5 million, approximately $154.5 million of interest, and approximately $46 million of potential state taxes and interest as of year-end, before possible state penalties. The company expected litigation in 2014 absent settlement. It reported $2.616 billion of federal regular-tax NOL carryforwards, subject to possible Section 382 limitations.
- Loss-reserve estimates are highly judgmental and apply principally to loans already in default. Management estimated that a $1,000 change in average reserve severity combined with a 1% change in the average claim-rate factor could change reserves by approximately $112 million.
- In 2013, the CFPB settlement ended its captive-reinsurance investigation without findings of wrongdoing, imposed a $2.65 million civil penalty, and barred new captive reinsurance business for ten years. Related RESPA litigation and a Minnesota regulator investigation remained outstanding.
Key facts for investors to verify
- Whether final GSE and state capital rules recognize the quota-share reinsurance and whether MGIC remains eligible to write business in all jurisdictions.
- Reserve adequacy, especially for legacy 2005–2008 books, and the effects of future claim severity, rescissions, cures, modifications and delayed foreclosures.
- Completion and final cost of the CHL settlement, exposure from other claims-paying disputes, and the status of RESPA litigation and regulatory matters.
- Cash burn, the pace of investment-portfolio depletion, holding-company debt service and the availability of regulated-subsidiary dividends.
- Resolution and cash consequences of the IRS REMIC dispute, and the company’s ability to use its tax-loss carryforwards.