MGIC Investment Corporation — Q1 2020 Form 10-Q
Business context and reporting period. MGIC Investment Corporation is a holding company principally engaged in U.S. private mortgage insurance through its subsidiaries. This unaudited filing covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. Management said COVID-19 had not materially affected Q1 results, liquidity or financial condition, but expected potentially material adverse effects in future periods.
Financial performance and position
- Revenue: $306.9 million, up 5%; net premiums earned were $260.9 million, up 4%, and net investment income was $41.3 million, up 2%.
- Profit: Net income was $149.8 million, down 1%; diluted EPS was $0.42, unchanged. Adjusted net operating income was $147.5 million versus $152.4 million.
- Losses and margins: Net losses incurred rose 56% to $61.0 million. The loss ratio increased to 23.4% from 15.6%; the underwriting expense ratio improved to 17.3% from 18.9%. Net premium yield declined to 46.6 basis points from 47.4.
- Cash flow: Operating cash flow was $184.3 million versus $164.9 million. Investing activities provided $166.2 million, compared with $40.1 million used in Q1 2019. Financing activities used $150.0 million, largely for share repurchases and dividends. Cash and restricted cash totaled $369.5 million at quarter-end, versus $169.1 million at year-end 2019.
- Balance sheet and debt: Total assets were $6.16 billion and shareholders’ equity was $4.24 billion at March 31, 2020. Long-term debt carrying value was $833.0 million; the company reported compliance with debt covenants. Holding-company cash and investments were approximately $562.5 million, compared with $815 million aggregate principal of holding-company debt.
- Capital and liquidity: MGIC reported approximately $4.3 billion of PMIERs Available Assets, about $1.0 billion above Minimum Required Assets, including approximately $1.3 billion of capital credit from reinsurance. Its risk-to-capital ratio was 10.2:1, versus 9.7:1 at year-end 2019. Statutory policyholder position exceeded the required minimum by $2.8 billion.
- Portfolio activity: New insurance written was $17.9 billion versus $10.1 billion, primarily reflecting increased refinance business. Primary insurance in force was $225.5 billion and primary risk in force was $57.9 billion at quarter-end.
Material changes versus the prior comparable period
- Revenue grew, but net income edged lower as higher incurred losses more than offset revenue growth and lower operating expenses. Fewer new delinquency notices were received, but the company increased estimated claim rates in light of COVID-19 uncertainty and raised its IBNR reserve from $22 million to $30 million.
- Q1 2019 included $31 million of favorable prior-year reserve development; Q1 2020 had minimal adverse development on prior delinquencies.
- Portfolio fair value declined: fixed-income investments were $5.46 billion versus $5.74 billion at year-end 2019. Other comprehensive income included a $71.5 million after-tax loss, largely from unrealized investment losses amid COVID-19-related market volatility. No allowance for credit losses on available-for-sale securities was established at quarter-end.
- The company repurchased approximately 9.6 million shares for $120 million and paid $21 million in shareholder dividends. It temporarily suspended repurchases because of pandemic uncertainty. MGIC paid $390 million to the holding company in Q1; it did not plan to request a second-quarter dividend from its regulator.
Outlook, risks and unusual items
- COVID-19 and claims: Management expected unemployment, economic uncertainty and mortgage forbearance to increase delinquencies, incurred losses and capital needs. Delinquent inventory was 27,384 loans at March 31 and 30,243 at April 30; the company expected further increases but could not predict their scale. Foreclosure moratoriums may delay claims and reduce near-term claim payments, with later increases in payments expected but uncertain in timing and amount.
- PMIERs sensitivity: Delinquent loans generally require more capital. MGIC applied a 70% reduction to required assets for qualifying pandemic-related delinquencies, subject to eligibility and duration conditions, and was awaiting GSE guidance for the June 2020 calculation. The company warned that reporting gaps, changing rules or a rise in delinquencies could reduce its capital cushion and, in an extreme case, threaten GSE eligibility.
- Reserves and model uncertainty: Loss reserves depend on estimates of claim rates, severity, cures and claim timing. A $1,000 change in the average severity reserve factor would change reserves by approximately $10 million; a one-percentage-point change in the average claim-rate factor would change them by approximately $16 million. Reserves are generally established for delinquent loans, so future claims from loans not yet delinquent are not reflected.
- Reinsurance and regulation: Reinsurance reduces capital requirements but entails counterparty and GSE-credit risks; COVID-19 market volatility disrupted new insurance-linked-note transactions. Proposed changes to state mortgage-insurance capital rules and future GSE requirements could affect capital and business capacity.
- Other risks and contingencies: Litigation concerning claims-paying practices had an estimated maximum reasonably possible exposure of approximately $47 million; the company could not reasonably estimate a liability range. The filing also cites competition and pricing pressure, servicer liquidity and reporting risks, and uncertainty around mortgage originations and GSE policy.
- Accounting change: The company adopted CECL on January 1, 2020; it reported that no allowance was necessary at March 31 for premium receivables, reinsurance recoverables or available-for-sale securities. CARES Act tax changes did not materially affect results.
Important facts for investors to verify
- Subsequent delinquency counts, forbearance reporting and the resulting claim-rate, severity and IBNR assumptions.
- MGIC’s PMIERs Available Assets cushion, treatment of pandemic-related delinquencies, and GSE guidance or changes to capital requirements.
- Whether COVID-19-related investment losses result in credit impairment, and changes in portfolio fair value and liquidity.
- Holding-company liquidity and debt service if insurance-subsidiary dividends remain restricted or are reduced.
- Actual claim payments and outcomes of claims-practice disputes, including any changes to the estimated litigation exposure.