MGIC Investment Corporation — FY2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015. MGIC is a holding company whose principal business is private mortgage insurance, primarily for low-down-payment residential loans. The company reported $43.0 billion of primary new insurance written and $174.5 billion of primary insurance in force at year-end.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $1.041 billion | $941.8 million |
| Net premiums earned | $896.2 million | $844.4 million |
| Investment income, net | $103.7 million | $87.6 million |
| Losses incurred, net | $343.5 million | $496.1 million |
| Income before tax | $487.7 million | $254.7 million |
| Net income | $1.172 billion | $251.9 million |
| Net cash from operating activities | $152.0 million | $(405.3) million |
- FY2015 net income included a $686.7 million tax benefit from reversing the deferred-tax-asset valuation allowance. Excluding that nonrecurring, noncash item, management reported adjusted net income of $485.3 million, versus $251.9 million in 2014.
- Primary insurance in force increased 6% to $174.5 billion; primary risk in force was $45.5 billion. New primary insurance written rose to $43.0 billion from $33.4 billion. Net premiums written were $1.020 billion, up from $882.0 million.
- The GAAP loss ratio improved to 38.3% from 58.8%; the expense ratio was 14.9% versus 14.7%. Net losses and loss-adjustment expenses paid were $834 million, down from $1.154 billion.
- Year-end loss reserves were $1.893 billion, down from $2.397 billion. The Wall Street bulk premium deficiency reserve was eliminated in Q2 2015.
- Cash and cash equivalents were $181.1 million and investments were $4.663 billion. Total assets were $5.880 billion; shareholders’ equity was $2.236 billion.
- Holding-company debt totaled $1.223 billion at year-end, comprising $333.5 million of 5% convertible notes due 2017, $500 million of 2% notes due 2020, and $389.5 million of 9% junior debentures due 2063. Debt-to-equity was 54.7%, versus 125.0% in 2014. Holding-company cash and investments were approximately $402 million; insurance-subsidiary dividends are regulated.
- MGIC’s year-end statutory risk-to-capital ratio was 12.1:1. It reported PMIERs Available Assets of $5.0 billion against Minimum Required Assets of $4.5 billion and said it met the requirements.
Material changes and unusual items
- Operating performance improved as default notices and claim costs declined. Primary loans in default fell to 62,633 (6.3%) from 79,901 (8.3%) at year-end 2014. Management attributed lower incurred losses to fewer new notices, better cures, and favorable prior-year reserve development.
- The 2013 quota-share reinsurance agreement was commuted effective July 1, 2015, and replaced with a 30% quota-share agreement. The new agreement covers specified in-force policies and qualifying new business through 2016; GSE approval and PMIERs credit are subject to review. Reinsurance reduces capital requirements but cedes premiums and may lower future premium yield.
- Investment portfolio yield increased to 2.5% from 2.2%; the portfolio’s fair value was $4.663 billion. Net realized investment gains were $28.4 million, compared with $1.4 million.
- For Q4 2015, net premiums earned were $226.2 million, losses incurred were $95.1 million, and net income was $102.4 million. The large Q3 net income of $822.9 million primarily reflected the tax valuation-allowance reversal.
Outlook, commentary, and risks
- For 2016, management expected a modest increase in insurance in force but modestly lower new insurance written than in 2015. It expected premium yield to decline, partly due to reinsurance effects and lower-rate book runoff. Revised premium rates were expected to reduce new business modestly while keeping new-business premium yield broadly comparable.
- Management expected default inventory and paid claims to continue declining, while cautioning that the favorable loss development of the prior two years might not continue.
- Key exposures include competition from private insurers, FHA and VA; mortgage-market and GSE policy changes; more demanding PMIERs or state capital rules; economic or housing downturns; and uncertainty in claim-reserve estimates. Reserves are generally established for loans already in default, not all future claims on the insured portfolio.
- Potential claims-paying-practice disputes had estimated maximum reasonably possible exposure of approximately $317 million; management believed ultimate resolution would be significantly lower. The estimate excludes interest and consequential or exemplary damages.
- The IRS dispute over 2000–2007 REMIC tax treatment remained in Tax Court. Notices cited $197.5 million of taxes and penalties plus approximately $182.9 million of interest at year-end, as well as $261.4 million of other proposed amounts; a prior $65.2 million payment would reduce amounts ultimately owed. Potential state taxes and interest were estimated at $48.8 million. The company stated the outcome was uncertain.
- After year-end, the holding company repurchased $127.7 million principal amount of 5% notes, and MGIC purchased $132.7 million principal amount of 9% debentures using a $155 million FHLB Chicago advance at 1.91%. These transactions reduce potential dilution but affect liquidity, collateral availability, and financing costs.
Important facts for investors to verify
- Reconcile reported net income with adjusted net income and assess the sustainability and realizability of the deferred tax assets and remaining $1.9 billion of tax NOLs.
- Track PMIERs capital headroom, treatment of pledged assets and reinsurance credit, and any changes to GSE or state capital requirements.
- Review loss-reserve development, default cures, claim severity, and the aging of the remaining legacy 2005–2008 book.
- Assess the 2016 premium-rate changes, lender-paid single-premium mix, reinsurance costs, and resulting premium yield and returns on required capital.
- Monitor the IRS case and claims-paying disputes, including the stated $317 million maximum reasonably possible exposure.
- Evaluate holding-company liquidity, debt maturities and interest obligations, regulatory limits on subsidiary dividends, and the effects of the 2016 debt transactions.