MGIC Investment Corporation Reports Fourth Quarter 2018 Results

MILWAUKEE, Jan. 17, 2019 /PRNewswire/ -- MGIC Investment Corporation (NYSE: MTG) today reported operating and financial results for the fourth quarter of 2018. Net income for the quarter was $157.7 million, or $0.43 per diluted share, compared with net income of $27.3 million, or $0.07 per diluted share for the fourth quarter of 2017.

Adjusted net operating income for the fourth quarter of 2018 was $154.0 million, or $0.42 per diluted share, compared with $160.7 million, or $0.43 per diluted share for the fourth quarter of 2017. We present the non-GAAP financial measure "Adjusted net operating income" to increase the comparability between periods of our financial results. See "Use of Non-GAAP financial measures" below.

Fourth Quarter Summary

• New Insurance Written of $12.2 billion, compared to $12.8 billion in the fourth quarter of 2017.
• Insurance in force of $209.7 billion at December 31, 2018 increased by 1.9% during the quarter and 7.6% compared to December 31, 2017.
• Primary delinquent inventory of 32,898 loans at December 31, 2018 decreased 29.3% year-over-year from 46,556 loans at December 31, 2017.
• Insurance written in 2008 and before accounted for approximately 16% of the December 31, 2018 primary risk in force but accounted for 67% of the new primary delinquent notices received in the quarter.
• The percentage of primary loans that were delinquent at December 31, 2018 was 3.11%, compared to 4.55% at December 31, 2017, and 5.04% at December 31, 2016. The percentage of flow primary loans that were delinquent at December 31, 2018 was 2.47%, compared to 3.70% at December 31, 2017, and 4.05% at December 31, 2016.
• Persistency, or the percentage of insurance remaining in force from one year prior, was 81.7% at December 31, 2018, compared with 80.1% at December 31, 2017.
• The loss ratio for the fourth quarter of 2018 was 11.3%, compared to (0.6%) for the third quarter of 2018 and (13.1)% for the fourth quarter of 2017.
• The underwriting expense ratio associated with our insurance operations for the fourth quarter of 2018 was 19.1%, compared to 17.6% for the third quarter of 2018 and 15.9% for the fourth quarter of 2017.
• Net premium yield was 47.3 basis points in the fourth quarter of 2018, compared to 49.3 basis points for the third quarter of 2018 and 49.2 basis points for the fourth quarter of 2017.
• MGIC paid a dividend of $60 million to our holding company during the fourth quarter of 2018.
• Repurchased 6.8 million shares of common stock at an average cost per share of $11.06.
• Book value per common share outstanding increased by 4.6% during the quarter to $10.08.

Patrick Sinks, CEO of MTG and Mortgage Guaranty Insurance Corporation ("MGIC") said, "I am pleased to report that 2018 produced strong financial results.  Specifically compared to 2017, our insurance in force increased more than 7%, persistency continued to increase, investment income increased, and we wrote nearly 3% more new insurance.  The credit performance for the new business written since 2008 remains outstanding, the legacy book continued to decrease in size and contribute fewer delinquencies, and we maintained a low expense ratio." Sinks continued, "In 2018 we repurchased more than 4% of our common stock outstanding, executed an insurance linked note transaction that reduces potential future earnings volatility from credit losses, decreased our debt ratios, received an A- rating from A.M. Best for the main operating subsidiaries, and increased dividends to our holding company to $220 million."

Sinks added, "As we enter 2019, we are well positioned in the marketplace to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers, now, and in the future.  We expect that our insurance in force will continue to increase as a result of strong annual persistency and new business writings. Further we anticipate that the number of new mortgage delinquency notices, claims paid and delinquency inventory will continue to decline. We will continue to focus on capital management activities and maintaining our low expense ratio."

Revenues

Total revenues for the fourth quarter of 2018 were $285.6 million, compared to $271.5 million in the fourth quarter last year. Net premiums written for the quarter were $248.0 million, compared to $259.5 million for the same period last year. Net premiums earned for the quarter were $245.7 million, compared to $237.4 million for the same period last year. The increase was primarily due to higher average insurance in force and a decrease in ceded premiums during the quarter, partially offset by the effect of lower premium rates. The ceded premiums decreased due to lower ceded losses, resulting in a higher profit commission. Investment income for the fourth quarter increased to $38.3 million, from $31.3 million for the same period last year, resulting from an increase in the consolidated investment portfolio as well as higher yields.

Losses and expenses

Losses incurred 

Losses incurred in the fourth quarter of 2018 were $27.7 million, compared to $(31.0) million in the fourth quarter of 2017. During the fourth quarter of 2018 there was a $22 million reduction in losses incurred due to positive development on our primary loss reserves, before reinsurance, for previously received delinquent notices, compared to a reduction of $103 million in the fourth quarter of 2017.

Underwriting and other expenses

Net underwriting and other expenses were $50.0 million in the fourth quarter of 2018, compared to $43.8 million in the same period last year. The increase in expenses was due to higher compensation and other expenses.

Provision for income taxes

The effective income tax rate was 19.0% in the fourth quarter of 2018, compared to 88.9% in the fourth quarter of 2017. The decrease reflects the reduction to the statutory income tax rate and the remeasurement of our net deferred tax assets in the fourth quarter of 2017 due to the lower enacted statutory income tax rate.

Capital

• As of December 31, 2018, total shareholders' equity was $3.6 billion and outstanding principal on borrowings was $837 million.
• During 2018, we repurchased approximately 16.0 million shares of our common stock at an average cost per share of $10.95, for a total cost of approximately $175 million. Our authorized share repurchase program had approximately $25 million remaining as of December 31, 2018.
• Preliminary Consolidated Risk-to-Capital was 9.8:1 as of December 31, 2018, compared to 10.5:1 as of December 31, 2017.
• MGIC's PMIERs Available Assets totaled $4.8 billion, or $1.4 billion above its Minimum Required Assets as of December 31, 2018.

Other Balance Sheet and Liquidity Metrics

• Total assets were $5.7 billion as of December 31, 2018, compared to $5.6 billion as of December 31, 2017, and $5.7 billion as of December 31, 2016.
• The fair value of our investment portfolio, cash and cash equivalents was $5.3 billion as of December 31, 2018, compared to $5.1 billion as of December 31, 2017, and $4.8 billion as of December 31, 2016.
• Investments, cash and cash equivalents at the holding company were $248 million as of December 31, 2018, compared to $261 million as of September 30, 2018, and $216 million as of December 31, 2017.

Conference Call and Webcast Details

MGIC Investment Corporation will hold a conference call today, January 17, 2019, at 10 a.m. ET to allow securities analysts and shareholders the opportunity to hear management discuss the company's quarterly results. The conference call number is 1-866-834-4126. The call is being webcast and can be accessed at the company's website at http://mtg.mgic.com/. A replay of the webcast will be available on the company's website through February 17, 2019 under "Newsroom."

About MGIC

MGIC (www.mgic.com), the principal subsidiary of MGIC Investment Corporation, serves lenders throughout the United States, Puerto Rico, and other locations helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality. At December 31, 2018, MGIC had $209.7 billion of primary insurance in force covering over one million mortgages.

This press release, which includes certain additional statistical and other information, including non-GAAP financial information, and a supplement that contains various portfolio statistics are both available on the Company's website at https://mtg.mgic.com/ under "Newsroom."

From time to time MGIC Investment Corporation releases important information via postings on its corporate website, and via postings on MGIC's website for information related to underwriting and pricing, and intends to continue to do so in the future. Such postings include corrections of previous disclosures, and may be made without any other disclosure. Investors and other interested parties are encouraged to enroll to receive automatic email alerts and Really Simple Syndication (RSS) feeds regarding new postings. Enrollment information for MGIC Investment Corporation alerts can be found at https://mtg.mgic.com/shareholder-services/email-alerts. Enrollment information for MGIC alerts can be found https://www.mgic.com/ClearRates/index.html.

Safe Harbor Statement

Forward Looking Statements and Risk Factors:

Our actual results could be affected by the risk factors below. These risk factors should be reviewed in connection with this press release and our periodic reports to the Securities and Exchange Commission ("SEC"). These risk factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make. Forward looking statements consist of statements which relate to matters other than historical fact, including matters that inherently refer to future events. Among others, statements that include words such as "believe," "anticipate," "will" or "expect," or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. No investor should rely on the fact that such statements are current at any time other than the time at which this press release was delivered for dissemination to the public.

In addition, the current period financial results included in this press release may be affected by additional information that arises prior to the filing of our Form 10-K for the year ended December 31, 2018.

While we communicate with security analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report, and such reports are not our responsibility.

Use of Non-GAAP financial measures

We believe that use of the Non-GAAP measures of adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with accounting principles generally accepted in the United States of America (GAAP) and should not be viewed as alternatives to GAAP measures of performance.

Adjusted pre-tax operating income (loss) is defined as GAAP income (loss) before tax, excluding the effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss) and infrequent or unusual non-operating items where applicable.

Adjusted net operating income (loss) is defined as GAAP net income (loss) excluding the after-tax effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss), and infrequent or unusual non-operating items where applicable. The amounts of adjustments to components of pre-tax operating income (loss) are tax effected using a federal statutory tax rate of 21% in 2018 and 35% in 2017.

Adjusted net operating income (loss) per diluted share is calculated in a manner consistent with the accounting standard regarding earnings per share by dividing (i) adjusted net operating income (loss) after making adjustments for interest expense on convertible debt, whenever the impact is dilutive, by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the "if-converted" method.

Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these adjustments. Other companies may calculate these measures differently. Therefore, their measures may not be comparable to those used by us.

 

 

 

 

 

 

 

 

 

Risk Factors

As used below, "we," "our" and "us" refer to MGIC Investment Corporation's consolidated operations or to MGIC Investment Corporation, as the context requires; and "MGIC" refers to Mortgage Guaranty Insurance Corporation.

Our actual results could be affected by the risk factors below. These risk factors should be reviewed in connection with this press release and our periodic reports to the Securities and Exchange Commission ("SEC"). These risk factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make, including forward looking statements in these risk factors. Forward looking statements consist of statements that relate to matters other than historical fact, including matters that inherently refer to future events. Among others, statements that include words such as "believe," "anticipate," "will" or "expect," or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. No investor should rely on the fact that such statements are current at any time other than the time at which this press release was delivered for dissemination to the public.

Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.

Our private mortgage insurance competitors include:

• Arch Mortgage Insurance Company,
• Essent Guaranty, Inc.,
• Genworth Mortgage Insurance Corporation,
• National Mortgage Insurance Corporation, and
• Radian Guaranty Inc.

The private mortgage insurance industry is highly competitive and is expected to remain so. We believe that we currently compete with other private mortgage insurers based on premium rates, underwriting requirements, financial strength (including based on credit or financial strength ratings), customer relationships, name recognition, reputation, the strength of our management team and field organization, the ancillary products and services provided to lenders and the effective use of technology and innovation in the delivery and servicing of our mortgage insurance products.

Much of the competition in the industry in the last few years has centered on pricing practices which have included: (i) reductions in standard filed rates for borrower-paid mortgage insurance policies ("BPMI"); (ii) use by competitors of a spectrum of filed rates to allow for formulaic, risk-based pricing that may be adjusted more frequently within certain parameters (referred to as "loan level pricing systems"); and (iii) use of customized rates (discounted from standard rates) that are made available to lenders that meet certain criteria.

We monitor various competitive and economic factors while seeking to balance both profitability and market share considerations in developing our pricing strategies. We reduced certain of our rates in 2018, which will reduce our premium yield (net premiums earned divided by the average insurance in force) over time as older insurance policies with higher premium rates run off and new insurance policies with lower premium rates are written. Because the industry is currently experiencing relatively low levels of mortgage insurance losses and acceptable returns on new business, we expect price competition to remain strong.

In 2018, we continued to evolve our pricing from a standard rate card approach, where premium rates vary based on relatively few attributes, to a more granular approach, where more attributes are considered. In the first quarter of 2019 we introduced MiQ™, our loan level pricing system that establishes our premium rates based on more risk attributes than were considered in 2018.  The widespread use of loan level pricing systems by the private mortgage industry will make it more difficult to compare our rates to those offered by our competitors. We may not be aware of industry changes until we observe that our volume of new insurance written ("NIW") has changed and our volume may fluctuate more as a result.

There can be no assurance that our premium rates adequately reflect the risk associated with the underlying mortgage insurance policies. For additional information, see our risk factors titled "The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a result any inadequacy could materially affect our financial condition and results of operations" and "If our risk management programs are not effective in identifying, or adequate in controlling or mitigating, the risks we face, or if the models used in our businesses are inaccurate, it could have a material adverse impact on our business, results of operations and financial condition."

Our relationships with our customers, which may affect the amount of our new business written, could be adversely affected by a variety of factors, including if our premium rates are higher than those of our competitors, our underwriting requirements result in our declining to insure some of the loans originated by our customers, or our insurance policy rescissions and claim curtailments affect the customer. Regarding the concentration of our new business, our largest customer accounted for approximately 4% and 5% of our NIW in each of 2017 and 2018, respectively, and our top ten customers accounted for approximately 23% and 24% of our NIW, in each of 2017 and 2018, respectively.

Certain of our competitors have access to capital at a lower cost than we do (including, through off-shore reinsurance vehicles, which are also tax-advantaged). As a result, they may be better positioned to compete outside of traditional mortgage insurance, including by participating in alternative forms of credit enhancement pursued by Fannie Mae and Freddie Mac (the "GSEs") discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance." In addition, because of their tax advantages, all other things equal, certain competitors may be able to achieve higher after-tax rates of return on their NIW compared to us, which could allow them to leverage reduced premium rates to gain market share.

Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. The current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs require a mortgage insurer to maintain a minimum amount of assets to support its insured risk, as discussed in our risk factor titled "We may not continue to meet the GSEs' private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility." The PMIERs do not require an insurer to maintain minimum financial strength ratings; however, our financial strength ratings can affect us in the following ways:

• A downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by the GSEs and/or our customers, potentially resulting in a decrease in the amount of our new insurance written.
• Our ability to participate in the non-GSE mortgage market (which has been limited since 2008, but may grow in the future), could depend on our ability to maintain and improve our investment grade ratings for our mortgage insurance subsidiaries. We could be competitively disadvantaged with some market participants because the financial strength ratings of our insurance subsidiaries are lower than those of some competitors. MGIC's financial strength rating from Moody's is Baa2 (with a stable outlook) , from Standard & Poor's is BBB+ (with a stable outlook) and from A.M. Best is A- (with a stable outlook).
• Financial strength ratings may also play a greater role if the GSEs no longer operate in their current capacities, for example, due to legislative or regulatory action. In addition, although the PMIERs do not require minimum financial strength ratings, the GSEs consider financial strength ratings to be important when using forms of credit enhancement other than traditional mortgage insurance, as discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."

If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our insurance subsidiaries, our future new insurance written could be negatively affected.

The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance.

Alternatives to private mortgage insurance include:

• lenders using FHA, VA and other government mortgage insurance programs,
• investors using risk mitigation and credit risk transfer techniques other than private mortgage insurance,
• lenders and other investors holding mortgages in portfolio and self-insuring, and
• lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio that has private mortgage insurance.

In 2018, Freddie Mac and Fannie Mae initiated programs with loan level mortgage default coverage provided by various (re)insurers that are not mortgage insurers governed by PMIERs, and that are not selected by the lenders. These programs offer premium rates that are generally below prevalent single premium lender paid mortgage insurance ("LPMI") rates. While we view these programs as competing with traditional private mortgage insurance, we have participated in them and may participate in future GSE or other programs.

The GSEs (and other investors) have also used other forms of credit enhancement that did not involve traditional private mortgage insurance