MGIC Investment (MTG) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for MGIC Investment Corporation show a significant increase in net income for the three and six months ended June 30, 2021, compared to the same periods in 2020, primarily driven by a substantial decrease in net losses incurred Consolidated Balance Sheets As of June 30, 2021, total assets increased to $7.58 billion from $7.35 billion at year-end 2020, driven by growth in the investment portfolio, while shareholders' equity grew to $4.91 billion from $4.70 billion | (In thousands) | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,575,727 | $7,354,526 | | Total investment portfolio | $6,982,962 | $6,682,911 | | Cash and cash equivalents | $178,635 | $287,953 | | Total Liabilities | $2,661,020 | $2,655,540 | | Loss reserves | $936,236 | $880,537 | | Senior notes | $880,443 | $879,379 | | Total Shareholders' Equity | $4,914,707 | $4,698,986 | | Retained earnings | $2,972,362 | $2,642,096 | Consolidated Statements of Operations For the second quarter of 2021, net income surged to $153.1 million from $14.0 million in Q2 2020, primarily due to a dramatic reduction in net losses incurred, reflecting improved credit performance | (In thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $297,852 | $293,968 | $595,809 | $600,861 | | Net premiums earned | $251,539 | $243,562 | $506,584 | $504,463 | | Losses incurred, net | $29,164 | $217,374 | $68,800 | $278,330 | | Net income | $153,051 | $14,047 | $303,072 | $163,852 | | Diluted EPS | $0.44 | $0.04 | $0.87 | $0.48 | Consolidated Statements of Comprehensive Income Comprehensive income for Q2 2021 was $198.8 million, an increase from $158.2 million in Q2 2020, though the six-month figure for 2021 was impacted by a net loss in other comprehensive income primarily due to changes in unrealized investment gains and losses | (In thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $153,051 | $14,047 | $303,072 | $163,852 | | Other comprehensive income (loss), net of tax | $45,717 | $144,188 | $(47,539) | $72,704 | | Comprehensive income | $198,768 | $158,235 | $255,533 | $236,556 | Consolidated Statements of Shareholders' Equity Total shareholders' equity increased from $4.70 billion at the end of 2020 to $4.91 billion as of June 30, 2021, driven by net income partially offset by cash dividends and a decrease in accumulated other comprehensive income - An accounting standards update for convertible instruments (ASU 2020-06) was adopted on January 1, 2021, resulting in a $68.3 million cumulative effect adjustment, increasing Retained Earnings and decreasing Paid-in Capital[37][51] - Cash dividends of $41.1 million were paid during the first six months of 2021[37] Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash provided by operating activities was $349.4 million, a decrease from the prior year, while net cash used in investing activities was $407.3 million, primarily for investment purchases | (In thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $349,422 | $420,125 | | Net cash provided by (used in) investing activities | $(407,342) | $(47,466) | | Net cash provided by (used in) financing activities | $(47,807) | $(170,322) | | Net decrease in cash and cash equivalents | $(105,727) | $202,337 | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies, debt, reinsurance, loss reserves, and statutory capital, highlighting the adoption of new accounting standards and the company's compliance with capital requirements - The company provides mortgage insurance to lenders and GSEs to protect against defaults on low down payment residential mortgage loans[42] - As of June 30, 2021, MGIC's 'Available Assets' were in excess of its 'Minimum Required Assets' under the GSEs' PMIERs, maintaining its eligibility to insure loans purchased by the GSEs[45] - Effective January 1, 2021, the company adopted ASU 2020-06 for convertible instruments, resulting in a $68.3 million cumulative effect adjustment to beginning Retained Earnings and Paid-in Capital related to its 9% Debentures[50][51] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the strong financial performance in Q2 2021 to a significant decrease in losses incurred compared to the prior year, maintaining a strong capital position and intending to resume share repurchases Overview Net income for Q2 2021 was $153.1 million ($0.44/share), a substantial increase from $14.0 million ($0.04/share) in Q2 2020, driven by an $188.2 million decrease in net losses incurred as new delinquency notices fell 84% year-over-year | (In millions, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $153.1 | $14.0 | $303.1 | $163.9 | | Diluted income per share | $0.44 | $0.04 | $0.87 | $0.48 | | Losses incurred, net | $29.2 | $217.4 | $68.8 | $278.3 | - Based on PMIERs as of June 30, 2021, MGIC's Available Assets totaled $5.7 billion, which was $2.3 billion in excess of its Minimum Required Assets[189] - The company temporarily suspended stock repurchases due to COVID-19 uncertainty but intends to resume them in the third quarter of 2021, with $291 million remaining under its authorization as of June 30, 2021[187] Mortgage Insurance Portfolio New Insurance Written (NIW) increased to $33.6 billion in Q2 2021 from $28.2 billion in Q2 2020, driven by a larger mortgage origination market, while persistency declined to 57.1% from 68.2% year-over-year | (In billions) | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | New Insurance Written (NIW) | $33.6 | $28.2 | $64.4 | $46.1 | | Direct primary IIF (end of period) | $262.0 | $230.5 | $262.0 | $230.5 | | Direct primary RIF (end of period) | $65.3 | $58.7 | $65.3 | $58.7 | - Persistency, the percentage of insurance remaining in force from one year prior, was 57.1% at June 30, 2021, down from 68.2% at June 30, 2020[238] Consolidated Results of Operations Total revenues for Q2 2021 were stable at $297.9 million, with net premiums earned increasing 3% to $251.5 million, while net losses incurred decreased 87% to $29.2 million, reflecting a sharp drop in new delinquency notices | (in basis points) | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | In force portfolio yield | 42.6 | 48.1 | 43.0 | 48.6 | | Ceded premiums earned, net | (6.4) | (11.0) | (6.5) | (8.1) | | Net premium yield | 39.1 | 42.7 | 39.8 | 44.6 | - Net losses incurred decreased to $29.2 million in Q2 2021 from $217.4 million in Q2 2020, primarily due to an 84% reduction in new delinquency notices received[274] | | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Loss ratio | 11.6% | 89.2% | 13.6% | 55.2% | - The primary delinquency inventory decreased to 42,999 loans at June 30, 2021, a 38% decrease from June 30, 2020, with 55% of the delinquency inventory reported to be in forbearance plans[301] Liquidity and Capital Resources The company maintained a strong liquidity and capital position, with the holding company holding approximately $772 million in cash and investments against $1.1 billion in debt obligations, and MGIC's risk-to-capital ratio improving to 8.9:1 - As of June 30, 2021, the holding company held approximately $772 million in cash and investments, with total debt obligations of $1.1 billion[339][398] - MGIC paid a $150 million dividend to the holding company in August 2021, after paying none in the first half of 2021 due to COVID-19 uncertainty[341] | (In millions, except ratio) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | RIF - net | $46,593 | $44,511 | | Statutory policyholders' position | $5,221 | $4,857 | | Risk-to-capital | 8.9:1 | 9.2:1 | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are credit spread risk and interest rate risk within its fixed income investment portfolio, with interest rate risk quantified by a modified duration of 4.4 years as of June 30, 2021 - The modified duration of the fixed income investment portfolio was 4.4 years as of June 30, 2021, implying that a 100 basis point parallel shift in the yield curve would change the portfolio's fair value by approximately 4.4%[370] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the second quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[371] PART II — OTHER INFORMATION Legal Proceedings The company is involved in legal proceedings in the ordinary course of business, with further details provided in Note 5 to the financial statements regarding disputes over claims paying practices and contingencies - For details on legal proceedings, the report refers to Note 5 - 'Litigation and Contingencies' in the financial statements[373] Risk Factors The report updates key risk factors, emphasizing the potential impact of economic downturns, unemployment, and changes in home prices on default rates and losses, noting the uncertainty of COVID-19 related mortgage forbearance plans and the holding company's financial leverage - The national unemployment rate was 5.9% as of June 30, 2021, an improvement from its peak but still above the pre-pandemic rate of 3.5% at year-end 2019[376] - As of June 30, 2021, 23,849 loans in the delinquency inventory were in forbearance, with the ultimate cure rate of these loans post-forbearance remaining a key uncertainty[378] - The company's persistency rate was 57.1% at June 30, 2021, down from 75.8% at year-end 2019, indicating a higher rate of policy cancellations, primarily due to refinancing[384] - The holding company's debt of $1.1 billion materially exceeds its cash and investments of $772 million, highlighting its reliance on dividends from its regulated insurance subsidiaries[398] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the three months ended June 30, 2021, with approximately $291 million remaining available for repurchase under the program, and an intention to resume repurchases in the third quarter | Period | Total shares purchased | Average price paid per share | Approximate dollar value of shares that may yet be purchased | | :--- | :--- | :--- | :--- | | April 1 - June 30, 2021 | 0 | $0 | $290,818,024 | - The company had temporarily suspended stock repurchases due to uncertainty from the COVID-19 pandemic but intends to resume them in the third quarter of 2021[414]