Business Context and Reporting Period
Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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, regulatory capital constraints, and a shift in GSE (Fannie Mae/Freddie Mac) business practices.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Dec 31, 2008 (Balance Sheet) |
|---|---|---|---|
| Net Premiums Earned | $293.5 million | $996.5 million | N/A |
| Total Revenues | $413.3 million | $1,303.0 million | N/A |
| Losses Incurred (Net) | $971.0 million | $2,498.6 million | N/A |
| Net Loss | $(517.8) million | $(1,042.2) million | N/A |
| Loss Per Share (Basic/Diluted) | $(4.17) | $(8.39) | N/A |
| Total Assets | $9,481.0 million | N/A | $9,146.7 million |
| Cash and Cash Equivalents | $869.7 million | N/A | $1,097.3 million |
| Total Liabilities | $7,831.9 million | N/A | $6,712.5 million |
| Shareholders' Equity | $1,649.1 million | N/A | $2,434.2 million |
| Loss Reserves | $6,314.4 million | N/A | $4,775.6 million |
| Premium Deficiency Reserve | $207.8 million | N/A | $454.3 million |
| Debt (Short & Long Term) | $384.7 million | N/A | $698.4 million |
| Convertible Debentures | $286.5 million | N/A | $272.5 million |
Material Changes vs. Prior Period
- Net Loss Expansion: The net loss for the nine months ended September 30, 2009, was $1.04 billion, a significant increase from the $250 million loss in the same period in 2008. This was driven primarily by a $330 million increase in losses incurred.
- Loss Reserves: Loss reserves increased by approximately $1.54 billion (from $4.78 billion to $6.31 billion) due to a larger increase in the default inventory (53,422 delinquencies in 9M 2009 vs. 44,788 in 9M 2008) and higher estimated claim severity.
- Premium Deficiency Reserve: The reserve decreased by $246 million to $208 million. This reduction was primarily due to changes in assumptions regarding lower estimated ultimate losses and premiums, driven by higher expected rescission rates.
- Debt Reduction: Total short- and long-term debt decreased by approximately $314 million. The company repaid its $200 million revolving credit facility in June 2009 and repurchased approximately $113.9 million of its 5.625% Senior Notes, recognizing a gain of $26.3 million.
- Investment Portfolio: The investment portfolio grew to $7.85 billion (fair value) from $7.05 billion. Gross unrealized losses decreased significantly to $50.1 million from $256.6 million at year-end 2008, largely due to interest rate changes.
- Rescissions: Rescissions (denials of coverage) materially mitigated paid losses, reducing them by $839 million in the first nine months of 2009, compared to only $97 million in the same period in 2008.
Guidance, Outlook, and Risks
Capital and Regulatory Outlook
MGIC faces significant regulatory capital constraints. As of September 30, 2009, the company's risk-to-capital ratio was 19.7:1 on a combined statutory basis. Management anticipates that MGIC may fail to meet regulatory capital requirements in Wisconsin and 16 other jurisdictions as early as the first quarter of 2010, which would prevent the writing of new business.
Strategic Plan: To mitigate this, the company is implementing a plan to write new business through a wholly-owned subsidiary, MGIC Indemnity Corporation (MIC). On October 14, 2009, MGIC entered an agreement with Fannie Mae to contribute $200 million to MIC, approving MIC as an eligible insurer through December 31, 2011, subject to regulatory waivers. Approval from Freddie Mac and the Wisconsin Office of the Commissioner of Insurance (OCI) is still pending.
Market and Operational Risks
- GSE Policy Changes: Fannie Mae announced changes to its coverage programs (expanding "charter coverage" and eliminating "reduced coverage") effective January 1, 2010, which could reduce MGIC's premium revenues.
- Loan Modifications: The impact of government loan modification programs (e.g., HAMP) on loss mitigation remains uncertain. Changes to the Net Present Value (NPV) test by GSEs may reduce the number of loans eligible for modification.
- Litigation: The company is facing a consolidated class action lawsuit alleging securities law violations regarding loss development and liquidity disclosures. Additionally, there is an ongoing IRS examination regarding tax basis in REMIC residual interests, with a potential liability of $189.5 million (partially paid).
- Debt Servicing: The holding company has limited liquid assets (~$92 million as of Oct 31, 2009) against $78.4 million of Senior Notes maturing in September 2011. Dividends from the insurance subsidiary to service this debt require regulatory and Fannie Mae approval.
Investor Verification Checklist
- Regulatory Approvals: Verify the status of the OCI waiver for Wisconsin and Freddie Mac's approval of MIC as an eligible insurer, as these are critical for future revenue generation.
- Rescission Sustainability: Assess whether the high rescission rates (mitigating $839M in losses) are sustainable or if they face legal challenges that could reverse loss mitigation benefits.
- Liquidity Position: Monitor the holding company's cash position relative to the $78.4 million Senior Notes maturing in September 2011 and the ability to secure dividend approvals.
- Loss Reserve Adequacy: Review the assumptions regarding claim severity and default rates, particularly in high-risk states like Florida and California, where delinquencies are rising.
- Tax Liability Resolution: Track the outcome of the IRS appeal regarding REMIC residual interests, which could impact future tax provisions and cash flows.