MGIC Investment (MTG) - 2022 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements show a decrease in total assets and a significant increase in net income, primarily due to reduced net losses incurred Consolidated Balance Sheets Total assets decreased to $6.15 billion, driven by a decline in the investment portfolio's fair value, while liabilities and shareholders' equity also saw reductions Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $6,154,116 | $7,325,008 | | Total investment portfolio | $5,415,717 | $6,606,749 | | Total Liabilities | $1,614,055 | $2,463,626 | | Loss reserves | $603,370 | $883,522 | | Senior notes | $641,357 | $881,508 | | Total Shareholders' Equity | $4,540,061 | $4,861,382 | | Retained earnings | $3,843,060 | $3,250,691 | | Accumulated other comprehensive income (loss) | ($495,525) | $119,697 | Consolidated Statements of Operations Net income significantly increased in Q3 and YTD 2022, primarily due to a substantial net benefit from losses incurred, leading to higher diluted EPS Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $252,111 | $254,844 | $763,048 | $761,428 | | Total revenues | $292,799 | $295,746 | $880,531 | $891,555 | | Losses incurred, net | ($105,054) | $20,766 | ($223,426) | $89,566 | | Loss on debt extinguishment | $11,632 | $— | $40,130 | $— | | Net income | $249,625 | $157,977 | $673,906 | $461,049 | | Diluted EPS | $0.81 | $0.46 | $2.15 | $1.33 | Notes to Consolidated Financial Statements Detailed notes reveal significant debt reduction, reinsurance strategies, decreased loss reserves due to favorable development, and robust statutory capital Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights strong performance driven by reduced net losses from favorable reserve development, despite lower new insurance written, while maintaining robust capital and returning value to shareholders Summary Financial Results (in millions, except per share data) | Metric | Q3 2022 | Q3 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $249.6 | $158.0 | $673.9 | $461.0 | | Diluted income per share | $0.81 | $0.46 | $2.15 | $1.33 | | Adjusted net operating income | $264.2 | $157.1 | $711.5 | $456.6 | | Adjusted net operating income per diluted share | $0.86 | $0.46 | $2.26 | $1.32 | - Net income for Q3 2022 increased by $91.6 million year-over-year, primarily due to a $125.9 million decrease in net losses incurred, which was driven by favorable loss reserve development of approximately $140.9 million[179][181] - The company recorded a $40.1 million loss on debt extinguishment in the first nine months of 2022 from repurchasing 9% Debentures, redeeming 2023 Senior Notes, and prepaying an FHLB advance[188] Mortgage Insurance Portfolio New Insurance Written decreased due to a smaller market, yet credit quality remained high, and portfolio persistency significantly increased amid reduced refinancing New Insurance Written (NIW) | Period | NIW (billions) | | :--- | :--- | | Q3 2022 | $19.6 | | Q3 2021 | $28.7 | | YTD 2022 | $63.5 | | YTD 2021 | $93.1 | - The share of NIW from purchase transactions increased to 98.8% in Q3 2022 from 89.7% in Q3 2021, while refinances dropped from 10.3% to 1.2%[242] - Portfolio persistency rose to 75.7% as of September 30, 2022, a substantial increase from 59.5% at September 30, 2021, indicating fewer policy cancellations[244] Consolidated Results of Operations Total revenues slightly decreased, but net losses incurred significantly improved to a benefit, resulting in a negative loss ratio due to favorable prior-year reserve development Losses Incurred, Net (in millions) | Period | Current Year / New Notices | Prior Year Reserve Development | Total Losses Incurred, Net | | :--- | :--- | :--- | :--- | | Q3 2022 | $35.8 | ($140.9) | ($105.1) | | Q3 2021 | $28.5 | ($7.7) | $20.8 | | YTD 2022 | $104.1 | ($327.5) | ($223.4) | | YTD 2021 | $95.6 | ($6.0) | $89.6 | - The loss ratio was (41.7%) for Q3 2022 and (29.3%) for YTD 2022, compared to 8.1% and 11.8% in the respective prior-year periods, driven by the significant favorable loss development[289] - The primary delinquency inventory decreased to 25,878 loans at September 30, 2022, down 30.8% from 37,379 loans a year prior, with a notable decrease in delinquencies aged 12 months or more[306] Balance Sheet Review Total assets, liabilities, and shareholders' equity all decreased, primarily due to declining investment portfolio fair value, reduced loss reserves, and debt reduction - Investments decreased by $1.2 billion to $5.4 billion, primarily due to a decrease in fair value from rising market interest rates and the use of funds to reduce debt[323] - Loss reserves decreased by 32% to $603 million from $884 million at year-end 2021, primarily due to $327.5 million in favorable development on previously received delinquency notices[329] - Long-term debt decreased by $484 million to $662.7 million following the repurchase of 9% Debentures and the redemption of 5.75% Senior Notes[330] Liquidity and Capital Resources The company maintained strong liquidity and capital, with significant cash outflows for share repurchases and debt reduction, supported by robust PMIERs capital and a healthy risk-to-capital ratio - As of September 30, 2022, the holding company held $352 million in cash and investments to service debt, pay dividends, and repurchase shares[338] - In the first nine months of 2022, the company used $303.1 million for share repurchases and paid $81.3 million in dividends to shareholders[343][354] Capital Adequacy Metrics (as of Sep 30, 2022) | Metric | Value | Status | | :--- | :--- | :--- | | PMIERs Available Assets | $5.9 billion | $2.6 billion excess | | Statutory Risk-to-Capital Ratio | 9.4:1 | Below 25:1 limit | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are credit spread and interest rate risk, managed through investment policies and quantified by portfolio modified duration - The company's main market risks are credit spread risk and interest rate risk[362] - The fixed income portfolio had a modified duration of 4.4 years as of September 30, 2022. This implies a 100 basis point increase in interest rates would result in a 4.4% decrease in the portfolio's fair value[366] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of Q3 2022, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of the end of Q3 2022[367] - There were no material changes in internal control over financial reporting during the third quarter of 2022[367] PART II — OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, which are not expected to materially impact its financial position or results of operations - The company is involved in ordinary course legal proceedings which are not expected to have a material adverse effect on financial results[369][385] Risk Factors Key risks include global events, economic downturns, declining home prices, and challenges in reinsurance availability and cost, potentially impacting financial results and capital management - The COVID-19 pandemic may continue to materially impact future financial results, potentially increasing incurred losses and capital requirements under PMIERs[371] - Economic downturns, rising unemployment, and declines in home prices are significant risks that could lead to more defaults and increased losses[372][374] - Access to reinsurance, particularly through the ILN market, has become more challenging and expensive, which could impact the company's ability to manage capital and reduce returns[376] Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2022, the company repurchased over 6 million shares as part of an authorized program, with approximately $194 million remaining for future repurchases Share Repurchases for Q3 2022 | Period | Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | July 2022 | 2,097,934 | $13.31 | | August 2022 | 1,833,804 | $14.75 | | September 2022 | 2,131,690 | $13.77 | | Total Q3 | 6,063,428 | $13.90 | - As of September 30, 2022, $193.8 million remained under the company's share repurchase authorization, which is effective through the end of 2023[399] Exhibits This section lists all documents filed as part of the Form 10-Q, including CEO/CFO certifications, risk factors, and Inline XBRL data files - The report includes required CEO/CFO certifications, an updated list of risk factors (Exhibit 99), and interactive data files (Exhibits 101 and 104)[400][401]