Business Context and Reporting Period
Company: MGIC Investment Corp.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: MGIC is the leading provider of private mortgage insurance (PMI) in the United States. The company insures residential first mortgage loans, primarily for low down payment borrowers, protecting lenders against losses from borrower defaults. The company operates primarily through its subsidiary, Mortgage Guaranty Insurance Corporation (MGIC).
Key Financial Metrics
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Net Premiums Written | $1.24 billion | $1.47 billion | $1.35 billion |
| Net Premiums Earned | $1.30 billion | $1.39 billion | $1.26 billion |
| Total Revenues | $1.71 billion | $1.72 billion | $1.69 billion |
| Losses Incurred, Net | $3.38 billion | $3.07 billion | $2.37 billion |
| Net Loss | $(1.32) billion | $(0.53) billion | $(1.67) billion |
| Loss Per Share (Diluted) | $(10.65) | $(4.61) | $(20.54) |
| Total Assets | $9.40 billion | $9.15 billion | $7.72 billion |
| Shareholders' Equity | $1.30 billion | $2.43 billion | $2.59 billion |
| Combined Ratio | 274.6% | 234.6% | 203.1% |
Material Changes vs. Prior Period
- Increased Losses: Net losses incurred increased by approximately 10% to $3.38 billion in 2009 compared to 2008. This was driven by higher estimated claim rates and a smaller benefit from captive reinsurance arrangements, partially offset by a decrease in estimated claim severity.
- Decline in New Business: New primary insurance written dropped significantly to $19.9 billion in 2009 from $48.2 billion in 2008. This decline is attributed to stricter underwriting guidelines implemented by MGIC and competitors, as well as increased competition from Federal Housing Administration (FHA) programs.
- Premium Deficiency Reserve Reduction: The premium deficiency reserve related to Wall Street bulk transactions decreased by $261 million to $193 million. This reduction was primarily due to higher expected rescission rates and lower estimated ultimate premiums.
- Rescissions: Rescissions (denials of coverage due to misrepresentation or fraud) materially mitigated paid losses by approximately $1.2 billion in 2009, compared to $0.2 billion in 2008.
Guidance, Outlook, and Risks
- Capital Constraints: MGIC faces significant challenges regarding access to capital to write new business beyond 2011. The company is implementing a plan to write new insurance through a new subsidiary, MGIC Indemnity Corporation (MIC), in jurisdictions where MGIC cannot meet regulatory capital requirements. MIC has received conditional approval from Fannie Mae (through 2011) and Freddie Mac (through 2012).
- Underwriting Profitability: Management believes that business written beginning in the second quarter of 2008 will generate underwriting profits due to improved risk profiles from stricter guidelines.
- Key Risks:
- Rescission Litigation: Countrywide (now Bank of America) has filed a lawsuit challenging MGIC's rescission practices. MGIC has filed a counter-arbitration. The outcome could impact future loss mitigation.
- GSE Dependence: Changes in the business practices of Fannie Mae and Freddie Mac (GSEs), including the expansion of "charter coverage" (lower coverage levels), could reduce MGIC's revenues.
- Loss Reserve Uncertainty: Estimates for future losses are highly volatile due to economic conditions, housing prices, and unemployment rates. A small change in claim rate or severity assumptions could materially impact reserves.
- Holding Company Liquidity: The holding company has limited liquid assets ($84 million) to service debt obligations ($78.4 million due in 2011 and $300 million due in 2015). Dividends from the subsidiary are restricted and require regulatory and GSE approval.
Important Facts for Investor Verification
- Rescission Rates: Verify the sustainability of the high rescission rates (approx. 28% for Q1 2009 claims) that are currently mitigating losses, as legal challenges could reverse these benefits.
- Capital Plan Execution: Monitor the successful licensing and capitalization of MGIC Indemnity Corporation (MIC) to ensure uninterrupted ability to write new business in 2010 and beyond.
- Loss Reserve Adequacy: Scrutinize the assumptions used for loss reserves, particularly regarding claim severity and cure rates, given the volatility of the housing market.
- Holding Company Debt Service: Assess the ability of the holding company to service its 2011 and 2015 debt maturities given the restrictions on dividends from the insurance subsidiary.
- IRS Tax Dispute: Note the ongoing dispute with the IRS regarding REMIC residual interest losses, with an assessment of $197.1 million in taxes and penalties pending resolution.