MGIC Investment Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. MGIC Investment is principally a mortgage-insurance holding company; its insurance operations protect lenders against defaults on low-down-payment residential mortgages.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net premiums earned | $252.1 million | $254.8 million | $763.0 million | $761.4 million |
| Total revenue | $292.8 million | $295.7 million | $880.5 million | $891.6 million |
| Net income | $249.6 million | $158.0 million | $673.9 million | $461.0 million |
| Diluted EPS | $0.81 | $0.46 | $2.15 | $1.33 |
| Adjusted net operating income (non-GAAP) | $264.2 million | $157.1 million | $711.5 million | $456.6 million |
| Adjusted net operating income per diluted share (non-GAAP) | $0.86 | $0.46 | $2.26 | $1.32 |
| Net loss ratio | (41.7%) | 8.1% | (29.3%) | 11.8% |
| Underwriting expense ratio | 24.6% | 21.9% | 23.3% | 21.3% |
Drivers and changes: Earnings rose mainly because of favorable prior-period loss reserve development and fewer diluted shares, partly offset by higher taxes and debt-extinguishment losses. Net losses incurred were a benefit of $105.1 million in Q3 and $223.4 million for the nine months, compared with expenses of $20.8 million and $89.6 million, respectively, in 2021. Favorable development on prior notices was $140.9 million in Q3 and $327.5 million year to date, primarily reflecting better-than-estimated cures and lower claim-rate estimates. New notices added $35.8 million in Q3 and $104.1 million year to date.
Net investment income increased to $42.5 million in Q3 and $121.1 million year to date, reflecting higher yields partly offset by a smaller portfolio. Net premium yield declined to 34.7 basis points from 38.4 basis points in Q3 2021. Management attributed pressure to lower-yielding newer books and premium-rate resets. Underwriting and operating expenses increased 9% in Q3 and 7% year to date, with technology and data investments cited as a key factor.
Balance sheet, cash flow and capital
- Cash and liquidity: Cash and cash equivalents were $242.0 million, plus $7.8 million restricted, at September 30. Operating cash flow was $483.8 million for the first nine months, versus $512.4 million in 2021. The holding company reported $352 million of cash and investments.
- Investments and equity: The investment portfolio was $5.42 billion, down from $6.61 billion at year-end 2021. Shareholders’ equity was $4.54 billion, down from $4.86 billion. A $615.2 million after-tax nine-month OCI loss, largely from unrealized investment losses as interest rates rose, drove accumulated other comprehensive loss to $495.5 million.
- Debt: Long-term debt declined to $662.7 million from $1.15 billion. The company repaid a $155 million FHLB advance, redeemed $242.3 million of 5.75% notes, and repurchased $88.9 million principal of 9% debentures. These actions generated $40.1 million of debt-extinguishment losses for the nine months. The company reported compliance with debt covenants.
- Insurance capital: MGIC reported $5.9 billion of PMIERs Available Assets, $2.6 billion above Minimum Required Assets, and continued GSE eligibility. Its risk-to-capital ratio was 9.4:1 versus a commonly applicable 25:1 maximum; policyholder position exceeded the required minimum by $3.7 billion.
- Capital returns: The company repurchased 21.7 million shares for approximately $306.2 million in the first nine months and paid $81.5 million in shareholder dividends. It had approximately $194 million of repurchase authorization remaining at quarter-end. MGIC paid a $400 million dividend to the holding company during the period and another $400 million in November.
Business trends, outlook and risks
New insurance written was $19.6 billion in Q3, down from $28.7 billion, and $63.5 billion for the nine months, down from $93.1 billion. Management attributed the decline primarily to a smaller mortgage-origination market and expected the smaller market to reduce NIW for the remainder of 2022. Primary insurance in force was $293.6 billion; primary risk in force was $75.7 billion. Persistency increased to 75.7% from 59.5% a year earlier, as higher mortgage rates reduced refinancing and cancellations.
Primary delinquency inventory was 25,878 loans, down 30.8% year over year; the delinquency rate was 2.17%. Management expected inventory to rise over the next several quarters as the portfolio seasons. It also said foreclosure and claim activity could increase as pandemic-related protections expire, but the timing and magnitude were uncertain. Loss estimates are sensitive to claim frequency and severity: the filing estimates that a one-percentage-point change in the claim-rate factor would change reserves by about $15 million, and a $1,000 change in average severity by about $11 million.
Reinsurance covered approximately 94% of risk in force and provided about $2.5 billion of PMIERs capital credit. Management cautioned that 2022 mortgage-insurance-linked-note transactions were more challenging, with higher pricing and smaller or fewer transactions, and that reinsurance availability, cost, counterparty risk and GSE recognition of ceded-risk credit could affect capital and returns. Trigger Events were in effect for Home Re 2019-1 and Home Re 2022-1; management reported no material exposure to the related VIEs at quarter-end.
Other notable items and contingencies: MGIC was named as a third-party defendant in litigation involving mortgage-insurance premium refunds under the Homeowners Protection Act; the potential impact could not be assessed. The company also disclosed risks from economic weakness, inflation, rising interest rates, possible home-price declines, GSE or regulatory changes, and cybersecurity incidents. It gave no specific full-year earnings guidance. The filing states the company expects the 2023 accounting standard for long-duration contracts to have no material impact; the Inflation Reduction Act’s relevant tax provisions were also not expected to have a material impact.
Investor verification points
- Assess how much reported earnings depends on reserve releases, and whether cure trends and claim-rate assumptions remain supportable as delinquencies season.
- Track new delinquencies, cure rates, claim severity, paid claims and the timing of any post-forbearance foreclosure increase.
- Evaluate the investment portfolio’s unrealized losses, credit quality and exposure to further interest-rate or spread changes; the filing reports a 4.4-year portfolio duration.
- Confirm continued PMIERs and state-capital compliance, including the amount of capital credit accepted for reinsurance and the availability and cost of future coverage.
- Monitor holding-company liquidity and capital returns after debt repurchases, share repurchases, shareholder dividends and the November subsidiary dividend.
- Follow the HOPA premium-refund litigation and any change in the company’s ability to estimate or accrue potential losses.