Business Context and Reporting Period
Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: MGIC is the leading provider of private mortgage insurance in the United States. The company operates primarily through its subsidiary, MGIC Indemnity Corporation (MIC). The reporting period reflects significant challenges in the mortgage insurance industry, including rising default rates, increased loss severity, and regulatory capital constraints.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Premiums Earned | $702,962 | $695,780 |
| Total Revenues | $889,666 | $848,408 |
| Losses Incurred, Net | $1,527,524 | $1,379,791 |
| Net Loss | $(524,395) | $(134,382) |
| Loss Per Share (Basic & Diluted) | $(4.22) | $(1.29) |
| Cash and Cash Equivalents | $1,008,190 | $1,060,663 |
| Total Assets | $9,222,029 | $9,146,734 |
| Total Liabilities | $7,205,020 | $6,712,501 |
| Shareholders' Equity | $2,017,009 | $2,434,233 |
| Short- and Long-Term Debt | $426,948 | $698,446 |
| Convertible Debentures | $281,486 | $272,465 |
Note: 2008 figures have been retrospectively adjusted for the adoption of FSP APB 14-1 regarding convertible debt accounting.
Material Changes vs. Prior Period
- Net Loss Deterioration: The net loss for the six months ended June 30, 2009, increased significantly to $524.4 million compared to $134.4 million in the prior year period. This was driven primarily by a $147.7 million increase in losses incurred.
- Losses Incurred: Losses incurred rose due to a larger increase in the default inventory (30,049 new delinquencies in H1 2009 vs. 21,111 in H1 2008) and higher estimated claim severity, particularly in California and Florida.
- Premium Deficiency Reserve: The premium deficiency reserve decreased by $227 million to $227 million as of June 30, 2009. This reduction was primarily due to a $239 million favorable change in assumptions related to higher expected rescission rates, offset by lower estimated ultimate premiums.
- Debt Reduction: The company repaid its $200 million revolving credit facility in June 2009 and repurchased approximately $71.6 million of its 5.625% Senior Notes, recognizing a gain of $19.9 million.
- Investment Portfolio: The investment portfolio grew to $7.48 billion. The company recognized $35.1 million in other-than-temporary impairment (OTTI) losses for the six-month period.
- Tax Provision: The company established a valuation allowance of $164.1 million against deferred tax assets, eliminating the tax benefit previously recognized on operating losses.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Constraints: Management faces significant challenges regarding access to capital to write new business. The risk-to-capital ratio increased to 15.8:1 on a combined statutory basis. Management expects this ratio to increase further, potentially breaching regulatory limits in 2010.
- New Business Strategy: In July 2009, the Wisconsin Office of the Commissioner of Insurance (OCI) approved a plan for MGIC to contribute up to $1 billion to a new subsidiary, MGIC Indemnity Corporation (MIC), to write new business. However, as of August 2009, the company delayed the first capital contribution pending discussions with GSEs (Fannie Mae and Freddie Mac) regarding MIC's eligibility.
- Loss Trends: Management expects default inventory to continue increasing in the second half of 2009. Paid claims in 2009 are expected to exceed the $1.4 billion paid in 2008, with the second half expected to exceed the first half due to the expiration of foreclosure moratoriums.
- Rescissions: While rescissions have materially mitigated paid losses in 2008 and 2009, management cautions that there is no assurance these benefits will continue at current levels.
Risks and Contingencies
- Regulatory Capital: If the risk-to-capital ratio exceeds state limits (typically 25:1), MGIC may be prohibited from writing new business in those states.
- Legal Proceedings: A consolidated class action lawsuit was filed in June 2009 alleging violations of federal securities laws regarding loss development and the C-BASS merger. The company intends to file a motion to dismiss.
- Tax Disputes: The IRS is examining tax returns for 2005-2007 and has issued an assessment for 2000-2004 totaling $189.5 million regarding REMIC residual interest losses. The company has appealed the adjustments.
- Convertible Debentures: The company deferred the April 1, 2009, interest payment on its $390 million convertible debentures for 10 years. Interest will accrue and compound at 9%.
Investor Verification Checklist
- Capital Adequacy: Verify the status of discussions with GSEs regarding the eligibility of the new subsidiary (MIC) to write new business and the timing of the planned capital contribution.
- Loss Reserve Accuracy: Monitor the actual vs. estimated rescission rates, as the reduction in the premium deficiency reserve was heavily dependent on assumptions of higher rescissions.
- Liquidity Position: Assess the holding company's ability to service its $128.4 million Senior Notes due in September 2011, given the current cash position of approximately $100 million in short-term investments.
- Legal Exposure: Track the progress of the consolidated class action lawsuit and the ongoing IRS examination regarding REMIC losses.
- Default Inventory: Watch for updates on delinquency rates in high-risk states (California, Florida) and the impact of foreclosure moratorium expirations on paid claims in the second half of 2009.