MTG

Business Context and Reporting Period

Company: MGIC Investment Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: MGIC is the leading provider of private mortgage insurance (PMI) in the United States. Its principal products include primary mortgage insurance (written on a flow or bulk basis) and pool mortgage insurance. The company's results are driven by premiums written, investment income, losses incurred, and income from joint ventures (C-BASS and Sherman Financial Group).

Key Financial Metrics

Key Ratios (Three Months Ended June 30, 2004):
- Loss Ratio: 46.5%
- Expense Ratio: 15.1%
- Combined Ratio: 61.6%
- Risk-to-Capital Ratio: 8.3:1 (as of June 30, 2004)

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased to $403.1 million for the quarter (from $432.1 million in Q2 2003) and $818.6 million for the six months (from $840.6 million in 2003). This was primarily due to a decline in new insurance written and lower average insurance in force.
• New Insurance Written: New primary insurance written dropped significantly to $16.1 billion in Q2 2004 from $25.4 billion in Q2 2003. This reflects a decrease in refinance volume (down from 50% to 33% of new flow business) and a sharp decline in bulk channel volume ($2.9 billion vs. $6.6 billion).
• Losses Incurred: Net losses incurred decreased to $154.1 million in Q2 2004 from $173.1 million in Q2 2003, driven by a lower growth rate in the delinquency inventory, despite higher estimates for claim severity.
• Joint Venture Income: Income from joint ventures increased substantially to $34.8 million in Q2 2004 from $19.0 million in Q2 2003, due to higher earnings from C-BASS and Sherman Financial Group.
• Investment Income: Investment income increased slightly to $52.3 million in Q2 2004 from $50.3 million in Q2 2003, as a larger portfolio size offset a decline in pre-tax yield (4.2% vs. 4.4%).

Guidance, Outlook, and Risks

• Outlook: Management expects new insurance written for the last two quarters of 2004 to be materially lower than the comparable period in 2003, consistent with Mortgage Bankers Association forecasts. Consequently, net premiums written and earned in the second half of 2004 are not expected to increase compared to the second half of 2003.
• Joint Venture Outlook: The company does not anticipate that C-BASS's income before tax in the second half of 2004 will exceed its first-half income of $118 million.
• Liquidity: The company maintains a $285 million commercial paper program and a $285 million credit facility (with $185 million remaining available). It met all covenants as of June 30, 2004.
• Key Risks:
  • Economic Deterioration: A worsening economy could increase borrower defaults and housing value declines, leading to higher losses.
  • Competition: Increased competition from other insurers and alternatives to PMI (e.g., 80-10-10 loans) could reduce revenue.
  • Interest Rates: Declining rates could increase refinancing activity, reducing policy persistency and revenue.
  • Litigation: A pending class action regarding the Fair Credit Reporting Act (FCRA) remains unresolved, though the court denied class certification in June 2004.

Investor Verification Checklist

• Volume Trends: Verify the projected decline in mortgage originations and its impact on future premium revenue.
• Loss Reserves: Review the adequacy of loss reserves given the increase in claim severity estimates despite lower delinquency growth.
• Joint Venture Performance: Assess the sustainability of the significant increase in income from C-BASS and Sherman, particularly regarding unrealized gains.
• Capital Adequacy: Confirm the company's ability to maintain its risk-to-capital ratio (currently 8.3:1) well below the 22:1 covenant limit.
• Legal Exposure: Monitor the status of the FCRA class action lawsuit and potential financial impact if class certification is granted on appeal.