MGIC Investment Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are against December 31, 2021. MGIC, through its subsidiaries, principally provides mortgage insurance on low-down-payment residential mortgages. Amounts are in U.S. dollars.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / prior period |
|---|---|---|
| Total revenue | $294.6 million | $298.0 million, down 1% |
| Net premiums earned | $255.2 million | $255.0 million |
| Investment income, net | $38.3 million | $37.9 million |
| Net income | $175.0 million; diluted EPS $0.54 | $150.0 million; diluted EPS $0.43 |
| Adjusted net operating income (non-GAAP) | $192.9 million; $0.60 per diluted share | $148.0 million; $0.42 per diluted share |
| Loss ratio | (7.6%) | 15.5% |
| Underwriting expense ratio | 23.0% | 19.8% |
| Operating cash flow | $228.0 million | $198.0 million |
Net income improved mainly because of lower incurred losses; the comparison also reflects a $22.1 million debt-extinguishment loss in Q1 2022. The negative loss ratio reflects favorable prior-year reserve development, not an absence of new loss costs: new notices added about $36.3 million to incurred losses, while reserve re-estimation produced $55.7 million of favorable development, primarily on peak-COVID delinquencies.
At March 31, total assets were $6.84 billion, total liabilities $2.23 billion, and shareholders’ equity $4.61 billion. Cash and cash equivalents were $477.1 million, plus $12.8 million restricted cash. The investment portfolio was $5.95 billion, down from $6.61 billion at year-end; the company attributed the reduction principally to lower fair values as interest rates rose and to use of investments for debt reduction and shareholder returns. The resulting $270.5 million after-tax other comprehensive loss drove accumulated other comprehensive income from positive $119.7 million to a loss of $150.8 million.
Consolidated operating, investing, and financing cash flows were respectively positive $228.0 million, positive $349.4 million, and negative $392.5 million. Cash and restricted cash increased by $184.9 million during the quarter. Holding-company cash and investments were approximately $409 million at quarter-end; management said liquidity was sufficient for foreseeable obligations.
Long-term debt carrying value was $935.3 million, down from $1.15 billion at year-end. The company repaid its $155 million FHLB advance and repurchased $57.0 million principal amount of 9% debentures for $77.7 million plus accrued interest. Senior notes include $242.3 million due in 2023 and $650 million due in 2028. Q1 share repurchases totaled 8.5 million shares for $127.6 million; the quarterly dividend was $0.08 per share.
Material changes and business trends
- New insurance written fell to $19.6 billion from $30.8 billion, primarily due to fewer refinance transactions. Purchase loans represented 94.2% of Q1 2022 primary NIW versus 59.7% a year earlier.
- Primary insurance in force rose to $277.3 billion from $251.7 billion; risk in force rose to $70.6 billion from $62.6 billion. Persistency was 66.9%, versus 56.2% a year earlier.
- Primary delinquency inventory declined to 30,462 loans from 52,775 a year earlier; the delinquency rate was 2.61%, compared with 4.65%. Nearly half of current inventory had been delinquent for at least 12 months.
- Net premiums were broadly flat, but net premium yield declined to 36.9 basis points from 40.9 basis points. Management expects continued yield pressure as higher-rate older policies run off and are replaced by newer business generally written at lower rates.
- Other underwriting and operating expenses increased 14% to $54.7 million, primarily reflecting investments in technology and data and analytics infrastructure.
Outlook, risks, and unusual items
- Management expects lower NIW for the remainder of 2022 versus 2021 as refinancing activity declines. The filing does not provide numerical earnings or revenue guidance.
- Management expects foreclosures, claims received, and losses paid to increase as COVID-era forbearance and foreclosure protections end; the magnitude and timing are uncertain. Actual claim experience could differ materially from reserve estimates. A $1,000 change in average severity reserve factor would change reserves by approximately $15 million; a one-percentage-point change in average claim-rate factor would change them by approximately $18 million.
- Inflation, higher interest rates, possible home-price declines, recession or unemployment, and the Russia-Ukraine war could affect borrowers, housing markets, investment values, and reinsurance availability or cost. Rising rates contributed to substantial unrealized investment losses; management said these were primarily rate-driven and did not indicate impaired collectability.
- MGIC reported $6.0 billion of PMIERs Available Assets, approximately $2.4 billion above Minimum Required Assets, and remained eligible to insure GSE loans. Its risk-to-capital ratio was 9.2:1, versus a commonly applicable state maximum of 25:1. These measures rely in part on reinsurance credit, which could change.
- In April 2022, MGIC entered into $473.6 million of excess-of-loss reinsurance and received approval for a $400 million dividend from MGIC to the holding company. It also repurchased 3.0 million additional shares for $39.7 million. These are post-quarter events.
- Trigger events were in effect for Home Re 2018-1, 2019-1, and 2021-2 transactions. The filing says these events suspend related note principal payments and do not reduce available coverage through those payments. MGIC reported no material exposure to the Home Re entities but noted it could not quantify maximum potential loss related to a trustee failure.
- Legal disputes may affect claims through rescissions or curtailments. Management stated ordinary-course proceedings were not expected to materially adversely affect results based on facts known, while acknowledging outcomes and reserve estimates remain uncertain. The company also highlighted cybersecurity risks and dependence on third-party systems.
Most important facts for investors to verify
- Whether favorable reserve development continues, and how COVID-era delinquencies translate into actual claims, severity, and paid losses as protections expire.
- Whether the investment portfolio’s unrealized losses remain rate-related and how interest rates, credit spreads, and portfolio income evolve.
- Whether lower refinancing and NIW, changing loan risk mix, and ongoing premium-yield pressure affect future premiums and returns.
- Whether MGIC maintains PMIERs and state-capital headroom, including the regulatory credit available for its reinsurance arrangements and the cost and availability of future reinsurance.
- Whether holding-company liquidity remains adequate for the 2023 note maturity, interest, dividends, and planned repurchases; confirm the effects of the April dividend approval and subsequent share buyback.
- How technology spending, claims trends, and other operating costs affect the expense ratio and core profitability; compare non-GAAP adjusted operating results with GAAP results.