MGIC Investment (MTG) - 2022 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements Unaudited statements show higher net income from negative loss provisions, offset by lower assets from investment losses and active capital management Consolidated Balance Sheets Total assets declined to $6.60 billion due to investment losses, while liabilities and equity also decreased Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $6,599,607 | $7,325,008 | | Total investment portfolio | $5,728,151 | $6,606,749 | | Cash and cash equivalents | $410,188 | $284,690 | | Total Liabilities | $2,026,588 | $2,463,626 | | Loss reserves | $727,178 | $883,522 | | Long-term debt (Senior notes & Debentures) | $917,911 | $1,146,712 | | Total Shareholders' Equity | $4,573,019 | $4,861,382 | Consolidated Statements of Operations Net income rose to $249.3 million in Q2 2022, driven by a significant reduction in net losses incurred Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $255,697 | $251,539 | $510,937 | $506,584 | | Total revenues | $293,116 | $297,852 | $587,732 | $595,809 | | Losses incurred, net | $(99,058) | $29,164 | $(118,372) | $68,800 | | Loss on debt extinguishment | $6,391 | $— | $28,498 | $— | | Net income | $249,268 | $153,051 | $424,281 | $303,072 | | Diluted EPS | $0.80 | $0.44 | $1.34 | $0.87 | Notes to Consolidated Financial Statements Notes detail debt management, reinsurance programs, favorable loss reserve development, and share repurchase activities - During the first half of 2022, the company repurchased $74.9 million in principal of its 9% Debentures, resulting in a $27.2 million loss on debt extinguishment, and also repaid a $155.0 million FHLB Advance[54][55] - The company utilizes extensive Quota Share Reinsurance (QSR) and Excess of Loss (XOL) reinsurance transactions to manage risk and capital, with QSR deals covering a weighted average of 30% of RIF[60][76][272] - For the six months ended June 30, 2022, the company experienced favorable loss development of $186.6 million on prior-year delinquencies, primarily from better-than-expected cures[147][151] - In the first six months of 2022, the company repurchased 15.7 million shares of common stock for approximately $222 million, with $278 million remaining under the authorization[163][192] - At June 30, 2022, MGIC's risk-to-capital ratio was 9.7 to 1, and its policyholder position was $3.5 billion above the required Minimum Policyholder Position (MPP)[170] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Strong Q2 2022 net income was driven by favorable loss development, despite lower NIW, while maintaining a robust capital position Overview Q2 2022 net income rose to $249.3 million due to favorable loss development, with a PMIERs surplus of $2.6 billion Q2 2022 vs Q2 2021 Financial Summary (in millions) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Income | $249.3 | $153.1 | 63% | | Diluted EPS | $0.80 | $0.44 | 82% | | Losses incurred, net | $(99.1) | $29.2 | (439)% | - The decrease in losses incurred was due to favorable development of approximately $130.9 million from greater-than-expected cures on prior delinquencies[182] - As of June 30, 2022, MGIC's Available Assets under PMIERs totaled $5.8 billion, which was $2.6 billion in excess of its Minimum Required Assets[194] Mortgage Insurance Portfolio New Insurance Written (NIW) decreased to $24.3 billion in Q2 2022, while persistency and credit quality remained strong New Insurance Written (NIW) (in billions) | Period | NIW | | :--- | :--- | | Q2 2022 | $24.3 | | Q2 2021 | $33.6 | | YTD 2022 | $43.9 | | YTD 2021 | $64.4 | - The percentage of NIW from purchase transactions increased to 98.2% in Q2 2022 from 79.3% in Q2 2021, while refinances dropped to 1.8% from 20.7%[245] - Persistency, the percentage of insurance remaining in force from one year prior, increased to 71.5% at June 30, 2022, compared to 57.1% at June 30, 2021[247] Consolidated Results of Operations Slightly lower Q2 revenues were offset by negative net incurred losses, resulting in a (38.7)% loss ratio Premium Yield Drivers (in basis points) | Component | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | In force portfolio yield | 39.4 | 42.6 | | Accelerated earnings on single premium policies | 1.1 | 3.1 | | Ceded premiums earned, net | (4.5) | (6.4) | | Net premium yield | 36.2 | 39.1 | - Losses incurred were negative $(99.0) million in Q2 2022, composed of $31.9 million from new notices and $(130.9) million in favorable prior year reserve development[288] - The primary delinquency inventory decreased by 37.5% year-over-year to 26,855 loans at June 30, 2022[292][305] Balance Sheet Review Total assets fell to $6.6 billion due to investment markdowns, while liabilities decreased from lower loss reserves and debt - Investments decreased by 13% to $5.7 billion from $6.6 billion at year-end 2021, primarily due to a decrease in fair value from rising interest rates[323] - Loss reserves decreased by 18% to $727 million from $884 million at year-end 2021, driven by favorable development on prior delinquencies[329] - Long-term debt decreased 20% to $917.9 million from $1,146.7 million at year-end 2021, following debt repurchases and repayments[330] Liquidity and Capital Resources The company maintained strong liquidity and capital, executing significant share repurchases and debt redemptions H1 2022 Holding Company Cash Flows (in millions) | Inflows | Amount | Outflows | Amount | | :--- | :--- | :--- | :--- | | Dividends received from MGIC | $400.0 | Share repurchases | $221.9 | | Intercompany tax receipts | $32.7 | 9% Debenture repurchases | $102.0 | | Investment income | $3.9 | Dividends paid to shareholders | $50.8 | | | | Interest payments | $28.5 | - In July 2022, the company redeemed the $242.3 million of outstanding 5.75% Senior Notes due in 2023[337][344] - As of June 30, 2022, MGIC's Available Assets under PMIERs were approximately $5.8 billion, an excess of $2.6 billion over its Minimum Required Assets[349] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate and credit spread risk within its fixed income portfolio - The fixed income investment portfolio's modified duration was 4.6 years as of June 30, 2022[367] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022 - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of the end of Q2 2022[368] PART II — OTHER INFORMATION Legal Proceedings The company is monitoring litigation related to premium refunds but does not expect a material adverse effect - The company is monitoring litigation involving refunds of mortgage insurance premiums under the Homeowners Protection Act and expects to be named as a third-party defendant in one case[379] Risk Factors Key risks include potential changes in GSE policies, legal proceedings, and the mix of business written - The GSEs' Equitable Housing Finance Plans may negatively impact the mortgage insurance industry through potential changes to MI requirements and cancellation policies[372] - The company's NIW on mortgages with LTV ratios >95% increased to 13% in H1 2022 from 10% in H1 2021, and NIW on mortgages with DTI ratios >45% increased to 19% from 13%[389] Issuer Purchases of Equity Securities The company repurchased 7.1 million shares in Q2 2022, with $278 million remaining under its authorization Share Repurchases for Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | 2,980,136 | $13.32 | | May 2022 | 1,889,445 | $13.40 | | June 2022 | 2,275,902 | $12.85 | | Total Q2 | 7,145,483 | $13.19 |