MGIC Investment Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. MGIC is a holding company whose principal business is private mortgage insurance, alongside mortgage-credit-risk and related services.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1.214 billion | $1.124 billion | +8% |
| Net premiums written | $1.001 billion | $992.3 million | +1% |
| Net premiums earned | $1.031 billion | $975.2 million | +6% |
| Net investment income | $167.0 million | $141.3 million | +18% |
| Losses incurred, net | $118.6 million | $36.6 million | +224% |
| Income before tax | $848.0 million | $844.2 million | Approximately flat |
| Net income | $673.8 million | $670.1 million | +1% |
| Diluted earnings per share | $1.85 | $1.78 | +4% |
| Operating cash flow | $609.5 million | $544.5 million | +12% |
The 2019 loss ratio was 11.5%, versus 3.7% in 2018; the underwriting expense ratio was 18.4%, versus 18.2%. Favorable reserve development on prior-year delinquencies was $71 million in 2019, compared with $167 million in 2018, driving much of the increase in incurred losses. Net losses and loss-adjustment expenses paid were $226 million, down from $333 million.
At year-end, total assets were $6.23 billion, shareholders’ equity was $4.31 billion, and loss reserves were $555 million. Investments totaled $5.76 billion and cash and cash equivalents were $162 million. Consolidated cash flow from investing activities was negative $422 million and from financing activities negative $173 million. The company reported no debt maturities due within the next 12 months; debt carrying value was approximately $833 million, including the subsidiary’s $155 million FHLB advance.
At the holding-company level, cash and investments were approximately $325 million against $815 million of debt principal: $425 million of 5.75% notes due 2023 and $389.5 million of 9% convertible debentures due 2063. Annual debt service was approximately $60 million. The 9% debentures are convertible, and MGIC holds $132.7 million of them, eliminated in consolidation.
Material changes and business developments
- Primary new insurance written rose to $63.4 billion from $50.5 billion; direct primary insurance in force increased 6% to $222.3 billion and risk in force rose to $57.2 billion.
- MGIC’s primary delinquency rate improved to 2.78% from 3.11%; delinquent loans declined to 30,028 from 32,898. Loss reserves fell 18% year over year.
- Persistency declined to 75.8% from 81.7%, reflecting increased refinancing and policy cancellations. Refinances were 19.1% of 2019 new insurance written, versus 6.8% in 2018.
- MGIC’s estimated share of private mortgage insurer new business declined to 16.5% from 17.4%, despite private mortgage insurance’s estimated share of the broader primary mortgage insurance market increasing to 44.7% from 44.1%.
- The company launched MiQ, a risk-based pricing system, completed a $316 million insurance-linked-note transaction, and continued quota-share reinsurance. About 79% of insurance in force was subject to quota-share reinsurance at year-end.
- MGIC paid $280 million in dividends to its parent, compared with $220 million in 2018. The parent repurchased 8.7 million shares for approximately $114 million and resumed quarterly shareholder dividends.
Outlook, risks and contingencies
Management’s outlook, stated in the filing as of February 2020, anticipated lower 2020 new insurance written, driven by expected lower refinancing activity and a modest decline in private mortgage insurance penetration. It expected insurance in force to grow, direct and net premiums written and earned to decline, investment income to be comparable with 2019, and losses on 2020 delinquency notices to be lower than the comparable 2019 amount. Management projected an effective tax rate of approximately 21%. These are management expectations, not guarantees.
- Capital and liquidity: MGIC reported $4.6 billion of PMIERs Available Assets, $1.2 billion above Minimum Required Assets, and remained eligible to insure loans purchased by the GSEs. Its statutory risk-to-capital ratio was 9.7:1, below the commonly applicable 25:1 maximum. A planned $320 million special dividend to the parent in first-quarter 2020 would reduce MGIC’s statutory policyholder position and increase that ratio.
- Reinsurance: Reinsurance supports capital requirements and returns, but availability, cost, counterparty performance, and the level of capital credit recognized by the GSEs or regulators could change. The company remains liable to policyholders for ceded insurance.
- Market and policy risks: The business depends heavily on the GSEs and could be affected by housing-finance reform, changes to GSE eligibility or coverage practices, alternative credit-risk-transfer programs, government-insurer competition, mortgage originations, interest rates, employment, and home prices. The effects of the 2019 Treasury Housing Reform Plan were described as unclear.
- Reserves and claims: Loss reserves depend on management estimates of claim rates and severity and are established for delinquent loans, not all future claims on performing insured loans. A one-percentage-point change in the claim-rate assumption would change reserves by approximately $17 million; a $1,000 change in the average severity factor would change them by approximately $10 million.
- Legal matters: MGIC estimated maximum exposure of approximately $46 million for claims-paying-practices matters where a loss was reasonably possible; it could not reasonably estimate the potential liability range. A $23.5 million settlement received necessary GSE approvals in the fourth quarter of 2019 with no additional loss beyond the amount previously recorded.
- Other risks and events: The filing identifies technology and cybersecurity risks, natural-disaster exposure, investment and interest-rate risk, and uncertainty from the planned transition away from LIBOR after 2021. The external auditor issued an unqualified opinion and identified loss-reserve valuation as a critical audit matter. Management and the auditor concluded internal control over financial reporting was effective at year-end; a new financial management system was implemented beginning October 1, 2019.
Most important facts for investors to verify
- Whether actual 2020 insurance volumes, premium yields, investment income, and losses matched management’s February 2020 outlook.
- How subsequent delinquency experience and changes in claim-rate or severity assumptions affected the $555 million loss-reserve balance.
- Whether MGIC maintained PMIERs and state-capital compliance after the planned special dividend, and what credit regulators and the GSEs allowed for ceded reinsurance.
- The final outcome and any additional accruals or payments relating to the claims-paying-practices matters, including exposure beyond the disclosed estimate.
- How GSE reform, competing credit-risk-transfer products, pricing competition, and persistency affect market share and long-term premium yields.
- Holding-company liquidity and capital allocation, including debt service, convertible-debenture dilution, dividends, and share repurchases.