MGIC Investment Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. MGIC provides mortgage insurance on low-down-payment residential loans, with most new insurance written associated with Fannie Mae and Freddie Mac.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $298.0 million | $306.9 million |
| Net premiums written / earned | $241.5 million / $255.0 million | $246.0 million / $260.9 million |
| Investment income, net | $37.9 million | $41.3 million |
| Losses incurred, net | $39.6 million | $61.0 million |
| Income before tax | $189.6 million | $188.2 million |
| Net income | $150.0 million | $149.8 million |
| Diluted EPS | $0.43 | $0.42 |
| Operating cash flow | $198.0 million | $184.3 million |
- The loss ratio improved to 15.5% from 23.4%; the underwriting expense ratio rose to 19.8% from 17.3%.
- Net premiums earned declined 2%, and total revenue declined 3%. Net income was essentially flat; lower incurred losses were largely offset by lower premiums and investment income, higher operating expenses and higher interest expense.
- Net cash used in investing was $274.5 million, primarily as investment purchases exceeded sales and maturities; financing cash outflow was $27.4 million. Cash and restricted cash totaled $192.8 million at quarter-end, down from $296.7 million at year-end 2020.
- At March 31, total assets were $7.41 billion, liabilities $2.67 billion, and shareholders’ equity $4.73 billion. Loss reserves were $913.1 million, including $102.9 million recoverable from reinsurers; debt carrying value was $1.24 billion.
- The holding company reported approximately $802 million of cash and investments against approximately $1.1 billion of debt principal. MGIC did not pay a dividend to the holding company in Q1; insurance-subsidiary dividends are subject to regulatory and, through June 30, 2021, GSE approval.
- Comprehensive income was $56.8 million, reflecting a $93.3 million after-tax other comprehensive loss, primarily from unrealized investment losses. Management attributed these investment-market losses mainly to interest-rate changes.
Material changes and business trends
- New insurance written increased to $30.8 billion from $17.9 billion, mainly reflecting higher mortgage origination volume. Primary insurance in force reached $251.7 billion, versus $225.5 billion a year earlier; risk in force was $62.6 billion versus $57.9 billion.
- Persistency fell to 56.2% from 73.0% a year earlier. Management cited refinancing-related cancellations and expects net premium yield to continue declining as older, higher-rate policies run off and newer policies generally carry lower rates.
- Primary delinquency inventory was 52,775 loans, up 93% year over year but down 9% from December 2020. The delinquency rate was 4.65%, versus 2.53% a year earlier. About 61% of delinquent loans were reported in forbearance.
- Net losses and loss-adjustment expenses paid fell to about $15 million from $46 million, mainly because foreclosure moratoriums and forbearance delayed claims. Loss reserves increased 4% from year-end, primarily from reserves on new delinquency notices.
- Statutory risk-to-capital was 8.8:1, below the commonly applicable 25:1 maximum. PMIERs Available Assets were approximately $5.5 billion, about $2.3 billion above Minimum Required Assets; reinsurance provided about $1.8 billion of PMIERs capital credit.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects delinquencies to remain elevated in 2021 and expects claims and paid losses to rise as forbearance programs and foreclosure moratoriums end; the timing and magnitude are uncertain.
- COVID-19 outcomes remain a central uncertainty. Whether borrowers cure after forbearance, future employment and home-price conditions, and the timing of claim filings could materially affect losses, liquidity and capital needs. A 1 percentage-point change in the estimated claim rate would change reserves by approximately $31 million; a $1,000 change in average severity would change reserves by approximately $16 million, all else equal.
- PMIERs capital requirements may increase when forbearance-related reductions expire or if GSE rules change. Loss of GSE eligibility would materially reduce access to the company’s principal market. Reinsurance credit, availability and counterparty performance are additional risks.
- All outstanding Home Re insurance-linked-note transactions had a trigger event at March 31, 2021. Principal payments on affected notes are suspended while the trigger applies, and the related reinsurance coverage is not reduced by those principal payments.
- For disputes concerning claims-paying practices, the company reported approximately $43 million of maximum reasonably possible exposure based on available information, but said it could not reasonably estimate a potential liability range. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Adoption of convertible-instrument accounting guidance produced a $68.3 million beginning-of-year reclassification between paid-in capital and retained earnings; it did not represent current-quarter operating income. The company made no share repurchases in Q1 and had about $291 million of authorization remaining through year-end 2021.
Important facts for investors to verify
- Whether forbearance exits lead to cures or claims, and how quickly moratoriums ending affect claims received and paid.
- Reserve adequacy and subsequent changes in claim-rate, severity and delinquency assumptions.
- PMIERs headroom as temporary capital relief expires, and continued GSE recognition of reinsurance credit.
- Holding-company liquidity, debt-service needs and the timing or approval of any subsidiary dividends or resumed repurchases.
- Developments in claims-practices disputes, including any change to the disclosed $43 million maximum reasonably possible exposure.