MGIC Investment Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. MGIC principally provides mortgage insurance on low-down-payment residential mortgages. Its business is substantially dependent on loans acquired by Fannie Mae and Freddie Mac.
Financial results and key metrics
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Total revenue | $284.0 million | $294.6 million; down 4% |
| Net premiums earned | $242.0 million | $255.2 million; down 5% |
| Net investment income | $49.2 million | $38.3 million; up 28% |
| Net investment and financial-instrument losses | $(7.7) million | $(0.8) million |
| Net losses incurred | $6.4 million | $(19.3) million |
| Income before tax | $195.6 million | $219.4 million |
| Net income | $154.5 million | $175.0 million; down 12% |
| Diluted EPS | $0.53 | $0.54 |
| Adjusted net operating income (non-GAAP) | $157.8 million; $0.54 per diluted share | $192.9 million; $0.60 per diluted share |
| Loss ratio | 2.7% | (7.6)% |
| Underwriting expense ratio | 31.1% | 23.0% |
Cash flow and liquidity: Operating cash flow was $212.3 million, versus $228.0 million. Investing activities used $65.2 million and financing activities used $113.4 million. Cash and restricted cash increased $33.7 million to $366.6 million. At March 31, the holding company had approximately $582 million in cash and investments; management said it expects sufficient holding-company liquidity for obligations for the foreseeable future.
Balance sheet and debt: Total assets were $6.35 billion and shareholders’ equity was $4.78 billion at March 31. Long-term debt carrying value was $663.2 million, consisting primarily of $650 million par value of 5.25% notes due 2028 and $21.1 million of 9% convertible debentures due 2063. The filing reports compliance with debt covenants; MGIC had no subsidiary debt outstanding.
Capital and insurance position: MGIC reported $5.9 billion of PMIERs Available Assets, approximately $2.4 billion above Minimum Required Assets, and remained eligible to insure GSE-purchased loans. Its risk-to-capital ratio was 9.7:1, compared with 10.2:1 at year-end 2022. Policyholder position exceeded the required minimum by $3.7 billion. Primary insurance in force was $292.4 billion and risk in force was $76.0 billion. Primary delinquency inventory fell to 24,757 from 30,462 a year earlier.
Material changes and management commentary
- Net income declined $20.5 million. Lower premiums, higher losses and higher underwriting and operating expenses more than offset stronger investment income and the absence of the prior-year debt-extinguishment loss.
- Net premiums earned decreased mainly because ceded premiums rose. Net premium yield declined to 32.9 basis points from 36.9 basis points, reflecting higher reinsurance costs and portfolio mix and pricing factors.
- Net investment income increased as higher average yields more than offset a smaller investment portfolio. The portfolio’s fair value was $5.56 billion against $5.98 billion amortized cost; management attributed unrealized losses primarily to higher interest rates and said it did not consider them indicative of ultimate collectability.
- Current-year delinquency notices added $47.2 million of losses, partly offset by $40.8 million of favorable prior-year reserve development, mainly from lower expected claim rates. The prior-year quarter had $36.3 million of new-notice losses and $55.7 million of favorable development.
- Underwriting and operating expenses increased 28%, primarily due to pension settlement-accounting charges and higher performance-based compensation. The defined benefit pension and supplemental executive retirement plans were frozen effective January 1, 2023. Management expects additional settlement charges in 2023, but their timing and amount are uncertain.
- Q1 new insurance written was $8.2 billion, versus $19.6 billion. Management expects a smaller origination market to reduce 2023 new insurance written compared with 2022, and expects in-force portfolio premium yield to remain relatively flat.
Outlook, risks, contingencies and unusual items
- Management expects net losses and loss-adjustment expenses paid to increase, but the timing and magnitude are uncertain. Loss estimates are sensitive to claim rates, severity, unemployment, housing prices, delinquency trends and loss-mitigation outcomes. At March 31, a $1,000 change in average severity would change reserves by about $9 million; a one-percentage-point change in average claim rate would change reserves by about $15 million, all else equal.
- Mortgage insurer eligibility and returns depend on PMIERs and state capital rules and on credit received for reinsurance. Reinsurance availability, pricing and terms may worsen; the company reported no XOL transactions through the ILN market in Q1 2023. Reinsurance also exposes MGIC to counterparty risk. Trigger events had occurred for Home Re 2019-1 and Home Re 2022-1; the filing describes these triggers and the related coverage mechanics.
- Other material risks include mortgage-market and GSE policy changes, competition from FHA/VA and alternative credit enhancement, economic or housing-market deterioration, interest-rate and credit-spread exposure, and cyber and counterparty risks. The filing notes the FHA’s 30-basis-point mortgage-insurance premium reduction announced in February 2023 as a potential headwind to MGIC’s new business.
- Ordinary-course legal disputes are not expected by management to have a material adverse effect based on facts known at filing. For claim disputes, additional losses may be recorded if an adverse outcome becomes probable and reasonably estimable.
- After quarter-end, MGIC paid a $300 million dividend to the holding company in May. In April, the board authorized an additional $500 million share-repurchase program through July 1, 2025; the company also repurchased 1.7 million shares for $24.4 million under its prior authorization. These are subsequent events, not Q1-period activity.
- The company repurchased 5.8 million shares for approximately $77.8 million in Q1 and paid $29.6 million in shareholder dividends. It declared a further $0.10-per-share quarterly dividend payable May 25, 2023.
Most important facts for investors to verify
- Whether new insurance written and premium yields develop as management expects given the smaller origination market, competition and increased ceded premiums.
- Whether delinquency, claim severity and paid-claim trends require reserve increases; reported favorable prior-year development may not recur.
- Whether MGIC maintains PMIERs and state-capital headroom, including the continued availability and regulatory credit of reinsurance.
- How investment portfolio fair values, yields and interest-rate exposure evolve; the filing estimates a 4.1% fair-value change for a parallel 100-basis-point yield-curve shift, in the opposite direction to the shift.
- The effects of pension settlement charges, the new repurchase authorization, and the $300 million post-quarter dividend on expenses, capital and holding-company liquidity.