MGIC Investment (MTG) - 2022 Q1 - Quarterly Report

PART I Item 1. Financial Statements The financial statements present MGIC's financial position as of March 31, 2022, and results of operations for the first quarter, highlighting increased net income and a decrease in total assets and shareholders' equity | Financial Metric | Q1 2022 (in thousands) | Q1 2021 (in thousands) | | :--- | :--- | :--- | | Total Revenues | $294,616 | $297,957 | | Losses Incurred, Net | $(19,314) | $39,636 | | Net Income | $175,013 | $150,021 | | Diluted EPS | $0.54 | $0.43 | | Balance Sheet Item | March 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Assets | $6,844,801 | $7,325,008 | | Total Liabilities | $2,234,446 | $2,463,626 | | Total Shareholders' Equity | $4,610,355 | $4,861,382 | | Cash Flow Activity | Q1 2022 (in thousands) | Q1 2021 (in thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $228,011 | $198,033 | | Net Cash from Investing Activities | $349,440 | $(274,499) | | Net Cash from Financing Activities | $(392,512) | $(27,448) | Note 3 - Debt Total long-term debt decreased to $935.3 million from $1,146.7 million at year-end 2021, primarily due to debt repurchases and repayments - In Q1 2022, the company repurchased $57.0 million of its 9% Debentures, resulting in a $20.8 million loss on debt extinguishment and reducing potentially dilutive shares by approximately 4.4 million[55] - The company repaid the outstanding principal balance of the FHLB Advance for $156.3 million in Q1 2022, which included a $1.3 million prepayment fee[56] Long-term Debt Obligations | Debt Instrument | March 31, 2022 (in millions) | Dec 31, 2021 (in millions) | | :--- | :--- | :--- | | FHLB Advance | $— | $155.0 | | 5.75% Notes, due 2023 | $241.4 | $241.3 | | 5.25% Notes, due 2028 | $640.6 | $640.2 | | 9% Debentures, due 2063 | $53.3 | $110.2 | | Total Carrying Value | $935.3 | $1,146.7 | Note 4 - Reinsurance The company utilizes both Quota Share and Excess of Loss reinsurance to manage risk and capital, with significant ceded premiums and favorable loss development in Q1 2022 Reinsurance Impact on Premiums and Losses (Q1 2022 vs Q1 2021) | (In thousands) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Premiums Earned | $255,240 | $255,045 | | Ceded Premiums Earned | $(34,159) | $(43,637) | | Losses Incurred, Net | $(19,314) | $39,636 | | Ceded Losses Incurred | $1,985 | $(8,410) | - Under QSR transactions in Q1 2022, the company received a profit commission of $39.0 million and ceding commissions of $12.3 million[70] - As of March 31, 2022, "Trigger Events" were active on the Home Re 2018-1, 2019-1, and 2021-2 transactions, suspending principal payments and preserving available reinsurance coverage[76] - In April 2022, MGIC entered into a new $473.6 million excess-of-loss reinsurance agreement covering policies written from May 29, 2021, through December 31, 2021[79] Note 7 - Investments The total investment portfolio decreased in fair value to $5.95 billion, primarily due to a significant increase in gross unrealized losses on fixed income securities driven by rising interest rates Investment Portfolio Composition (Fair Value) | (In thousands) | March 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Fixed income, available-for-sale | $5,935,916 | $6,587,581 | | Equity securities | $15,191 | $16,068 | | Other invested assets | $850 | $3,100 | | Total Investment Portfolio | $5,951,957 | $6,606,749 | - Gross unrealized losses on fixed income securities increased significantly to $206.2 million as of March 31, 2022, from $28.5 million at year-end 2021, primarily due to an increase in prevailing interest rates[96][97][108] Note 11 - Loss Reserves Net loss reserves decreased to $786.6 million, marked by a significant favorable loss development of $55.7 million on prior-year delinquencies, particularly from "Peak COVID-19" cases - For Q1 2022, the company experienced favorable loss development of $55.7 million on previously received notices, primarily due to a decreased estimated claim rate on Peak COVID-19 delinquencies[145][150] Loss Reserve Reconciliation (Net of Reinsurance) | (In thousands) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Reserve at Beginning of Period | $816,617 | $785,495 | | Total Losses Incurred | $(19,314) | $39,636 | | Total Losses Paid | $10,748 | $14,922 | | Net Reserve at End of Period | $786,555 | $810,209 | Delinquency Inventory Rollforward | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Beginning Inventory | 33,290 | 57,710 | | New Notices | 10,703 | 13,011 | | Cures | (13,200) | (17,628) | | Ending Inventory | 30,462 | 52,775 | Note 12 - Shareholders' Equity During Q1 2022, the company executed significant capital return activities, repurchasing 8.5 million shares for $127.6 million and paying $25.8 million in cash dividends - In Q1 2022, the company repurchased 8.5 million shares at an average cost of $14.99 per share, for a total of $127.6 million[160] - A quarterly cash dividend of $0.08 per share ($25.8 million total) was paid in March 2022, with another $0.08 per share dividend declared on April 28, 2022[161] Note 14 - Statutory Information MGIC remains well-capitalized under statutory requirements, with a risk-to-capital ratio of 9.2 to 1 and a policyholder position $3.7 billion above the required minimum - As of March 31, 2022, MGIC's risk-to-capital ratio was 9.2 to 1, and its policyholder position was $3.7 billion above the required Minimum Policyholder Position (MPP) of $1.9 billion[167] - In April 2022, MGIC obtained approval from the Office of the Commissioner of Insurance (OCI) to pay a $400 million dividend to its holding company[169] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported a net income of $175.0 million for Q1 2022, driven by a net benefit from losses incurred, despite lower New Insurance Written and higher operating expenses Summary Financial Results | (In millions, except per share) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Income | $175.0 | $150.0 | | Diluted EPS | $0.54 | $0.43 | | Losses Incurred, Net | $(19.3) | $39.6 | | Loss on Debt Extinguishment | $22.1 | $— | - Adjusted net operating income for Q1 2022 was $192.9 million, or $0.60 per diluted share, compared to $148.0 million, or $0.42 per diluted share, in Q1 2021[179] - MGIC's Available Assets under PMIERs totaled $6.0 billion, which is $2.4 billion in excess of its Minimum Required Assets as of March 31, 2022[186] Mortgage Insurance Portfolio The mortgage insurance portfolio experienced a significant decline in New Insurance Written (NIW) to $19.6 billion due to reduced refinance activity, while persistency improved and primary Insurance in Force grew - New Insurance Written (NIW) for Q1 2022 was $19.6 billion, a decrease from $30.8 billion in Q1 2021, primarily due to a decrease in refinance transactions[227] Primary NIW by Type of Mortgage | (% of primary NIW) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Purchases | 94.2% | 59.7% | | Refinances | 5.8% | 40.3% | - Persistency increased to 66.9% at March 31, 2022, compared to 56.2% at March 31, 2021, indicating fewer policy cancellations[235] Consolidated Results of Operations Total revenues for Q1 2022 were $294.6 million, with a significant net benefit from losses incurred of $(19.3) million, resulting in a negative loss ratio of (7.6)% Premium Yield Analysis | (in basis points) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | In force portfolio yield | 40.0 | 43.9 | | Ceded premiums impact | (4.6) | (6.6) | | Net premium yield | 36.9 | 40.9 | Composition of Losses Incurred | (in millions) | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Current year / New notices | $36.3 | $41.4 | | Prior year reserve development | $(55.7) | $(1.8) | | Losses incurred, net | $(19.3) | $39.6 | - The loss ratio was (7.6%) for Q1 2022, compared to 15.5% for Q1 2021, due to the decrease in net losses incurred[273] Balance Sheet Review The balance sheet reflects a decrease in total assets to $6.8 billion, driven by a $650 million reduction in the investment portfolio's fair value and a $211 million reduction in long-term debt - The investment portfolio decreased to $6.0 billion from $6.6 billion at year-end, primarily due to a decrease in fair value from rising interest rates and the use of funds for debt reduction and capital returns[313] - Long-term debt decreased to $935.3 million from $1,146.7 million at year-end, following the repurchase of 9% Debentures and repayment of the FHLB Advance[312] - Loss reserves decreased by 4% to $851 million, primarily due to favorable development on reserves for Peak COVID-19 delinquencies[309] Liquidity and Capital Resources The company maintained strong liquidity and capital, with the holding company holding $409 million in cash and investments, and MGIC exceeding PMIERs requirements by $2.4 billion - As of March 31, 2022, the holding company had approximately $409 million in cash and investments[323] - Significant Q1 2022 cash outflows from financing activities included $123.6 million for share repurchases, $77.7 million for 9% Debenture repurchases, and repayment of the $155 million FHLB Advance[321][325][333] - As of March 31, 2022, MGIC had an excess of approximately $2.4 billion over its PMIERs Minimum Required Assets, with reinsurance providing a $1.9 billion capital credit[334] Risk-to-Capital - Combined Insurance Companies | (In millions, except ratio) | March 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | RIF - net | $51,382 | $50,748 | | Statutory policyholders' position | $5,584 | $5,348 | | Risk-to-capital | 9.2:1 | 9.5:1 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are credit spread and interest rate risk within its fixed income investment portfolio, with a modified duration of 4.6 years as of March 31, 2022 - The primary market risks for the investment portfolio are identified as credit spread risk and interest rate risk[348] - As of March 31, 2022, the modified duration of the fixed income investment portfolio was 4.6 years[352] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the first quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[353] PART II — OTHER INFORMATION Item 1A. Risk Factors The company highlights new and existing risk factors, including the Russia-Ukraine war's potential economic impact, reinsurance availability, and a shifting business mix towards higher-risk loans - The Russia-Ukraine war is identified as a new risk factor that may adversely affect the U.S. economy and the company's business through higher inflation, supply chain pressure, and financial market volatility[357] - Reinsurance may not always be available or affordable, with access to the XOL reinsurance market temporarily disrupted in Q1 2022 due to market volatility[362][363] - The mix of business is shifting, with NIW on mortgages with LTV ratios >95% increasing to 11% in Q1 2022 from 8% in Q1 2021, and NIW on mortgages with DTI ratios >45% increasing to 17% from 12% over the same period[371] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2022, MGIC repurchased 8,513,394 shares of its common stock for approximately $127.6 million under a publicly announced program Issuer Purchases of Equity Securities (Q1 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2022 | 3,887,863 | $15.43 | | Feb 2022 | 1,536,302 | $15.54 | | Mar 2022 | 3,089,229 | $14.16 | | Total | 8,513,394 | $14.99 |