MGIC Investment (MTG) - 2021 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section provides detailed unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls information Item 1. Financial Statements This section presents the unaudited consolidated financial statements for MGIC Investment Corporation as of March 31, 2021, and for the three months then ended, compared with prior periods, including balance sheets, statements of operations, comprehensive income, shareholders' equity, cash flows, and detailed notes Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time | (In thousands) | March 31, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,407,016 | $7,354,526 | | Total investment portfolio | $6,829,737 | $6,682,911 | | Cash and cash equivalents | $182,930 | $287,953 | | Total Liabilities | $2,674,723 | $2,655,540 | | Loss reserves | $913,110 | $880,537 | | Senior notes | $879,911 | $879,379 | | Total Shareholders' Equity | $4,732,293 | $4,698,986 | Consolidated Statements of Operations This section outlines the company's financial performance over a period, showing revenues, expenses, and net income | (In thousands, except per share data) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total revenues | $297,957 | $306,893 | | Net premiums earned | $255,045 | $260,901 | | Investment income, net | $37,893 | $41,347 | | Total losses and expenses | $108,340 | $118,654 | | Losses incurred, net | $39,636 | $60,956 | | Net income | $150,021 | $149,805 | | Diluted EPS | $0.43 | $0.42 | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements - The company adopted ASU 2020-06, simplifying accounting for convertible instruments, which resulted in a $68.3 million cumulative adjustment, increasing beginning Retained Earnings and decreasing Paid-in Capital to reclassify the equity component of the 9% Debentures to debt[51][52] - As of March 31, 2021, MGIC's Available Assets under the Private Mortgage Insurer Eligibility Requirements (PMIERs) were in excess of its Minimum Required Assets, maintaining its eligibility to insure loans purchased by the GSEs[46] Note 3 - Debt This note details the company's various debt instruments, including their types, interest rates, and maturity dates | (In millions) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | FHLB Advance - 1.91%, due Feb 2023 | $155.0 | $155.0 | | 5.75% Notes, due Aug 2023 | $240.8 | $240.6 | | 5.25% Notes, due Aug 2028 | $639.1 | $638.8 | | 9% Debentures, due Apr 2063 | $208.8 | $208.8 | | Total long-term debt, carrying value | $1,243.7 | $1,243.2 | Note 4 - Reinsurance This note describes the company's reinsurance arrangements and their impact on premiums and losses - The company utilizes two primary forms of reinsurance: Quota Share Reinsurance (QSR) with third-party reinsurers and Excess of Loss Reinsurance through Home Re transactions with unaffiliated special purpose insurers[62][73] | (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net premiums earned | $255,045 | $260,901 | | Direct | $296,271 | $289,868 | | Ceded | ($43,637) | ($31,576) | | Losses incurred, net | $39,636 | $60,956 | | Direct | $48,071 | $66,562 | | Ceded | ($8,410) | ($5,772) | - As of March 31, 2021, a "Trigger Event" occurred on all outstanding Insurance-Linked Note (ILN) transactions (Home Re), suspending principal payments on the notes and preserving the reinsurance coverage available to MGIC[75] Note 11 - Loss Reserves This note provides an analysis of the company's loss reserves, including changes and key factors influencing their estimation | (In thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Reserve at beginning of period | $880,537 | $555,334 | | Total losses incurred | $39,636 | $60,956 | | Total losses paid | $14,922 | $45,652 | | Reserve at end of period | $913,110 | $574,753 | - The primary delinquency inventory increased to 52,775 loans at March 31, 2021, from 27,384 at March 31, 2020, largely due to the impacts of the COVID-19 pandemic, with new delinquency notices for Q1 2021 at 13,011, slightly up from 12,398 in Q1 2020[142][143] - The company notes significant sensitivity in its loss reserves, where a $1,000 change in the average severity reserve factor would alter the loss reserve by approximately +/- $16 million, and a one percentage point change in the average claim rate would change it by +/- $31 million[132] Note 12 - Shareholders' Equity This note details changes in shareholders' equity, including share repurchases and dividend payments - No shares were repurchased in Q1 2021, but the company has authorization to repurchase up to an additional $291 million of common stock through the end of 2021, though the program was temporarily suspended due to COVID-19 uncertainty[147] - A quarterly cash dividend of $0.06 per share was paid in March 2021, totaling $21 million, with another $0.06 per share dividend declared on April 29, 2021[148] Note 14 - Statutory Information This note presents key statutory financial metrics and regulatory compliance information for the insurance operations - At March 31, 2021, MGIC's risk-to-capital ratio was 8.8 to 1, well below the maximum regulatory requirement of 25 to 1, and its policyholder position was $3.4 billion above the required Minimum Policyholder Position (MPP) of $1.7 billion[154] - MGIC did not pay any dividends to the holding company in Q1 2021 due to COVID-19 uncertainty, and any dividend payments through June 30, 2021, require GSE approval under PMIERs guidance[159][161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for Q1 2021, noting stable net income compared to Q1 2020, driven by a significant decrease in net losses incurred offset by lower net premiums earned, reduced investment income, and higher operating expenses, while detailing mortgage insurance portfolio performance and capital position Overview This section provides a high-level summary of the company's financial performance and key operational highlights for the period | (In millions, except per share data) | Q1 2021 | Q1 2020 | % Change | | :--- | :--- | :--- | :--- | | Net premiums earned | $255.0 | $260.9 | (2)% | | Losses incurred, net | $39.6 | $61.0 | (35)% | | Net income | $150.0 | $149.8 | —% | | Diluted income per share | $0.43 | $0.42 | 2% | - Net income remained flat year-over-year as a $21.3 million decrease in losses incurred was offset by lower net premiums earned, lower investment income, and higher operating and interest expenses[170][174] - As of March 31, 2021, MGIC's Available Assets under PMIERs totaled $5.5 billion, which was $2.3 billion in excess of its Minimum Required Assets[181] Mortgage Insurance Portfolio This section analyzes the performance and characteristics of the company's mortgage insurance portfolio, including new business and persistency - New Insurance Written (NIW) increased significantly to $30.8 billion in Q1 2021 from $17.9 billion in Q1 2020, driven by an increase in the mortgage origination market[228] | (In billions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | NIW | $30.8 | $17.9 | | Cancellations | ($25.7) | ($14.7) | | Increase in primary IIF | $5.1 | $3.2 | | Direct primary IIF as of March 31 | $251.7 | $225.5 | - Persistency, the percentage of insurance remaining in force from one year prior, decreased to 56.2% at March 31, 2021, compared to 73.0% at March 31, 2020, indicating a higher rate of policy cancellations, primarily due to refinancing activity[235] Consolidated Results of Operations This section provides a detailed analysis of the company's revenues, expenses, and profitability drivers for the reporting period - Net premium yield decreased to 40.9 basis points in Q1 2021 from 46.6 basis points in Q1 2020, primarily due to a lower in-force portfolio yield and higher ceded premiums, partially offset by increased accelerated earnings from single premium policy cancellations[249] - Net losses incurred decreased 35% to $39.6 million in Q1 2021 from $61.0 million in Q1 2020, driven by a lower claim rate on new delinquency notices and a $4 million decrease in IBNR reserves, compared to an $8 million increase in the prior year[271][272] - The primary delinquency inventory stood at 52,775 loans at the end of Q1 2021, a 93% increase from Q1 2020, with 61% of these delinquencies reported to be in forbearance plans[295][276] Balance Sheet Review This section reviews significant changes and trends in the company's assets, liabilities, and equity over the reporting period - Total assets increased to $7.4 billion as of March 31, 2021, with shareholders' equity remaining stable at $4.7 billion, as net income was offset by a decrease in unrealized investment gains and dividend payments[315] - Loss reserves increased by 4% to $913 million as of March 31, 2021, from $881 million at year-end 2020, primarily due to reserves established on new delinquency notices received during the quarter[320] Liquidity and Capital Resources This section discusses the company's cash position, funding sources, and capital adequacy, including regulatory capital metrics - The holding company had approximately $802 million in cash and investments as of March 31, 2021, with no dividends received from the insurance subsidiary MGIC in Q1 2021[332][334] - The combined insurance companies' risk-to-capital ratio improved to 8.8:1 at March 31, 2021, from 9.1:1 at year-end 2020, primarily due to an increase in the statutory policyholders' position[349] - Reinsurance transactions provided an aggregate of approximately $1.8 billion of capital credit under the PMIERs as of March 31, 2021[339] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's investment portfolio is primarily exposed to credit spread risk and interest rate risk, with credit risk managed through investment policies favoring investment-grade securities, and interest rate risk quantified by a modified duration of 4.5 years for the fixed income portfolio as of March 31, 2021 - The fixed income investment portfolio had a modified duration of 4.5 years as of March 31, 2021, implying that a 1% (100 basis points) increase in interest rates would result in a 4.5% decrease in the portfolio's fair value[365] Item 4. Controls and Procedures Management, including the principal executive and financial officers, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2021, with no material changes to internal control over financial reporting occurring during the first quarter of 2021 - Based on an evaluation as of the end of the reporting period, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[366] PART II — OTHER INFORMATION This section covers legal proceedings, key risk factors, details on equity security sales, and a list of filed exhibits Item 1. Legal Proceedings The company is involved in certain legal proceedings that arise in the ordinary course of business, with further details provided in Note 5 to the consolidated financial statements and in the Risk Factors section - The company states that legal proceedings arise in the ordinary course of business and refers to Note 5 and risk factors for more information[368] Item 1A. Risk Factors This section highlights key risks, with a significant focus on the ongoing impacts of the COVID-19 pandemic, which may continue to materially affect financial results through increased incurred losses from higher delinquencies and potential increases in capital requirements under PMIERs, alongside other major risks including economic downturns, changes in GSE business practices and regulations, competition, and the transition away from LIBOR - The COVID-19 pandemic is a primary risk factor, potentially leading to increased incurred losses, higher capital requirements under PMIERs, and a greater number of claims paid over time[370][371] - The PMIERs' 70% reduction in Minimum Required Assets for certain COVID-19 related delinquencies is temporary, meaning as forbearance plans expire, the company's Minimum Required Assets will increase, reducing its excess capital position, with this reduction decreasing Minimum Required Assets by approximately $700 million (from $3.9 billion to $3.2 billion) as of March 31, 2021[382] - The elimination of the "GSE Patch" for QM loans, effective for applications after July 1, 2021, will change underwriting standards, and while approximately 20% of Q1 2021 NIW had DTI ratios over 43%, the company believes less than 2% would be excluded under the new pricing threshold[392] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any of its common stock during the three months ended March 31, 2021, with approximately $291 million remaining available for future repurchases under the program authorized through the end of 2021, which was temporarily suspended due to COVID-19 uncertainty | Period | Total shares purchased | Average price paid per share | Approximate dollar value of shares that may yet be purchased (in US Dollars) | | :--- | :--- | :--- | :--- | | Q1 2021 | 0 | $0 | $290,818,024 | Item 6. Exhibits This section provides an index of all exhibits filed as part of the Form 10-Q, including certifications by the CEO and CFO, and updated risk factors - An index of exhibits filed with the Form 10-Q is provided, including Sarbanes-Oxley certifications and updated Risk Factors[443]