Business Context and Reporting Period
Company: MGIC Investment Corp.
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: MGIC is the leading provider of private mortgage insurance (PMI) in the United States, operating primarily through its subsidiary, Mortgage Guaranty Insurance Corporation (MGIC). The company insures residential first mortgage loans, protecting lenders against losses from borrower defaults. In 2008, the company faced severe headwinds from the housing market collapse, resulting in a significant increase in defaults and claims.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Net Premiums Written | $1,466 million | $1,346 million | $1,217 million |
| Net Premiums Earned | $1,393 million | $1,262 million | $1,187 million |
| Total Revenues | $1,722 million | $1,693 million | $1,469 million |
| Losses Incurred, Net | $3,072 million | $2,365 million | $614 million |
| Net Loss | $(519) million | $(1,670) million | $565 million |
| Loss Per Share (Diluted) | $(4.55) | $(20.54) | $6.65 |
| Total Assets | $9,183 million | $7,716 million | $6,622 million |
| Shareholders' Equity | $2,367 million | $2,594 million | $4,296 million |
| Loss Reserves | $4,776 million | $2,642 million | $1,126 million |
| Premium Deficiency Reserves | $454 million | $1,211 million | $0 |
| Combined Ratio | 234.6% | 203.1% | 68.7% |
Material Changes vs. Prior Period
- Losses Incurred: Net losses incurred increased by approximately 30% to $3.07 billion in 2008 compared to $2.37 billion in 2007. This was driven by a 70% increase in the default inventory (from 107,120 to 182,188 loans) and higher claim severity (average claim paid rose to $52,239 from $37,165).
- Premium Deficiency Reserve: The reserve related to "Wall Street bulk transactions" decreased by $757 million to $454 million. This reduction was primarily due to the recognition of actual premiums, losses, and expenses, partially offset by a $134 million increase in the reserve due to worsening assumptions regarding ultimate losses.
- Joint Ventures: In 2008, the company sold its entire interest in Sherman Financial Group LLC, resulting in a $62.8 million gain. Consequently, income from joint ventures turned positive ($24.5 million) compared to a significant loss ($269.3 million) in 2007, which was driven by the impairment of the C-BASS investment.
- Underwriting Volume: New primary insurance written declined to $48.2 billion in 2008 from $76.8 billion in 2007. The company ceased writing "Wall Street bulk transactions" in late 2007 and significantly tightened underwriting guidelines in 2008, reducing exposure to high-risk loans.
Guidance, Outlook, and Risks
- Capital Adequacy: The company faces a critical challenge regarding access to capital to continue writing new business. While MGIC exceeded the Minimum Policyholders Position (MPP) by over $1.5 billion and maintained a risk-to-capital ratio of 12.9:1 (below the 25:1 regulatory limit) as of December 31, 2008, management warned that continued loss trends could breach these requirements before the end of 2009.
- Outlook: Management expects the 2006 and 2007 books of business to continue generating material incurred and paid losses for several years. The company anticipates paid claims in 2009 will exceed the $1.4 billion paid in 2008.
- Rating Downgrades: MGIC's financial strength ratings were downgraded below the Aa3/AA- threshold historically required by Fannie Mae and Freddie Mac. Moody's rated MGIC Ba2 (developing outlook), while S&P and Fitch rated it A- (negative outlook). This downgrade poses a risk to the volume of new business writings.
- Government Assistance: The company initiated discussions with the U.S. Treasury in late 2008 regarding potential capital investment or reinsurance under the Troubled Assets Relief Program (TARP).
- Legal and Regulatory: The company is subject to ongoing investigations by the SEC, the IRS (regarding REMIC residual interests), and various state insurance departments regarding captive reinsurance arrangements. Additionally, five stockholder class action lawsuits were filed in 2008 alleging misrepresentations regarding C-BASS and loss reserves.
Key Facts for Investor Verification
- Loss Reserve Adequacy: Verify the assumptions used for claim rates and severity, particularly for the 2006 and 2007 vintages, as the company noted significant uncertainty and upward trends in loss estimates.
- Capital Runway: Monitor the company's ability to maintain the Minimum Policyholders Position (MPP) and risk-to-capital ratios required by Wisconsin and other state regulators to continue writing new business in 2009.
- Premium Deficiency Reserve: Track the $454 million reserve for Wall Street bulk transactions; any further deterioration in assumptions could lead to additional charges.
- Debt Covenants: Review the company's compliance with debt covenants, specifically the requirement to maintain Consolidated Net Worth of at least $2.00 billion (rising to $2.25 billion if conditions are met by June 2009).
- Investment Portfolio: Assess the impact of the $256.6 million in gross unrealized losses in the investment portfolio, primarily in municipal bonds, and the liquidity of the $524 million in auction rate securities (ARS).