MGIC Investment Corporation — Q3 2021 Form 10-Q
Business context and reporting period
Mortgage-insurance holding company reporting for the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Its subsidiaries insure lenders against losses on low-down-payment residential mortgages; most new insurance written (NIW) covers loans purchased by Fannie Mae or Freddie Mac.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $295.7 | $296.0 | $891.6 | $896.9 |
| Net premiums earned | $254.8 | $256.1 | $761.4 | $760.6 |
| Losses incurred, net | $20.8 | $40.7 | $89.6 | $319.0 |
| Income before tax | $199.7 | $164.3 | $583.2 | $369.1 |
| Net income | $158.0 | $130.8 | $461.0 | $294.7 |
| Diluted EPS | $0.46 | $0.38 | $1.33 | $0.85 |
- Q3 loss ratio was 8.1%, versus 15.9%; nine-month loss ratio was 11.8%, versus 41.9%. The underwriting expense ratio rose to 21.9% from 20.2% in Q3 and to 21.3% from 19.1% year to date.
- Net premium yield declined to 38.4 basis points in Q3 from 43.6; nine-month yield was 39.4 versus 44.0. Management expects continued pressure as higher-rate older policies run off and are replaced by lower-rate business.
- Operating cash flow was $512.4 for the first nine months, near $508.9 a year earlier. Investing activities used $398.2 and financing activities used $225.0; combined cash and restricted cash fell $110.8 to $185.9.
- At September 30, assets were $7.51 billion, liabilities $2.63 billion and shareholders’ equity $4.88 billion. Loss reserves were $932.9 million, up from $880.5 million at year-end 2020.
- Carrying value of debt was $1.245 billion, including the $155 million FHLB advance. Holding-company debt principal was approximately $1.1 billion; holding-company cash and investments were $715.9 million. Debt covenants were reported in compliance.
- MGIC had $5.8 billion of PMIERs Available Assets, $2.6 billion above Minimum Required Assets. Its risk-to-capital ratio was 9.0:1, below the commonly applicable 25:1 maximum; its policyholder position exceeded the required minimum by $3.6 billion.
Material changes versus comparable periods
- Net income increased 21% in Q3 and 56% year to date. The principal driver was substantially lower incurred losses as new delinquency notices fell; year-to-date notices were down 65% from 2020. The comparisons also reflect the $26.7 million debt-extinguishment loss recorded in 2020.
- Q3 2021 included $18 million of favorable development on prior delinquencies. Year-to-date prior-year development was favorable by $6.0 million, compared with $17.3 million adverse development in 2020; the 2021 period also included a $6.3 million probable litigation loss.
- Primary delinquency inventory declined to 37,379 loans from 64,418 a year earlier; the delinquency rate fell to 3.20% from 5.79%. However, 56% of inventory had been delinquent for at least 12 consecutive months, versus 17% a year earlier.
- NIW was $28.7 billion in Q3, down from $32.8 billion, but $93.1 billion for nine months, up from $78.9 billion. Q3 volume reflected lower refinance activity; purchase loans made up 89.7% of Q3 NIW.
- Q3 share repurchases resumed: approximately 10.0 million shares for $150 million. The company declared an $0.08 quarterly dividend; in October it authorized an additional $500 million repurchase program through 2023.
Outlook, risks and unusual items
- Management expected refinance activity to remain low over the next several quarters and purchase activity to remain strong, though below recent levels. No numerical earnings or revenue guidance was provided.
- COVID-19 effects remain uncertain. At September 30, 48% of delinquency inventory was reported in forbearance. Expiration of forbearance and foreclosure protections could increase claims and claim payments; timing and magnitude were uncertain. Loss-reserve estimates are sensitive: a one-point change in the estimated claim rate would change reserves by about $22 million, and a $1,000 change in average severity by about $17 million.
- Claims-paying-practice disputes remain unresolved. The company recorded a $6.3 million probable loss and estimated reasonably possible exposure at approximately $27 million more than the recorded probable loss; it could not reasonably estimate a potential liability range.
- MGIC elected to terminate its 2017 and 2018 quota-share reinsurance transactions effective December 31, 2021, with a $5 million early-termination fee. Trigger events were in effect on Home Re 2018-1, 2019-1, 2021-1 and 2021-2 transactions, affecting note principal payments or coverage reduction under contract terms.
- Key business risks include GSE policy and PMIERs changes, reinsurance-credit and counterparty risk, housing and employment conditions, interest rates, and delayed claims from moratoria and forbearance. Management also cited technology, cybersecurity and implementation risks. The filing says forward-looking statements are not guaranteed to be updated.
- Adoption of convertible-debt accounting guidance shifted $68.3 million between beginning retained earnings and paid-in capital. The filing also reports that 2021 unrealized investment losses reduced other comprehensive income; these were attributed primarily to interest-rate movements, not a conclusion that securities were uncollectible.
Important facts for investors to verify
- Whether delinquency inventory, especially the long-duration and forbearance cohorts, converts to claims as protections expire, and whether reserve assumptions remain adequate.
- Progress and potential cost of claims-practice litigation, including the $6.3 million recorded loss and stated additional possible exposure.
- Whether MGIC maintains PMIERs and state-capital headroom, and whether GSE or regulatory changes alter reinsurance capital credit.
- Effects of terminating the 2017 and 2018 quota-share agreements on premiums, earnings, risk transfer and capital requirements.
- Holding-company liquidity and capacity to service debt and fund dividends and repurchases, given debt principal, regulated subsidiary dividends and the new repurchase authorization.
- Purchase-versus-refinance mix, persistency, premium yield and claim trends against management’s stated outlook.