MGIC Investment Corporation Reports Third Quarter 2020 Results

MILWAUKEE, Nov. 4, 2020 /PRNewswire/ -- MGIC Investment Corporation (NYSE: MTG) today reported operating and financial results for the third quarter of 2020. Net income for the quarter was $130.8 million, or $0.38 per diluted share, compared with net income of $176.9 million, or $0.49 per diluted share, for the third quarter of 2019.

Adjusted net operating income for the third quarter of 2020 was $149.9  million, or $0.43 per diluted share, compared with $173.6 million, or $0.48 per diluted share, for the third quarter of 2019. 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.

Tim Mattke, CEO of MTG and Mortgage Guaranty Insurance Corporation ("MGIC") said, "Our third quarter financial performance improved compared to the second quarter primarily as a result of a decrease in incurred losses.  Fewer new notices of delinquency reported to us were the primary driver of the lower incurred losses in the third quarter.  During the quarter, we wrote $32.8 billion of new insurance, which despite lower annual persistency, resulted in our September 30th insurance in force, the long-term driver of our revenues, increasing 9.5% from twelve months prior. These results reflect the improved conditions of the economy and strength of the housing market, despite the ongoing challenges presented by the COVID-19 pandemic."  Mattke continued, "We continue to focus on the already strong capital position of MTG and MGIC.  We reduced the amount of holding company debt due in 2023, increased the liquidity at our holding company, and increased MGIC's statutory and PMIERs capital position organically and through intercompany restructurings."

He further stated that, "I admire the dedication of our team who remain focused on executing our business strategies, and providing critical support for our customers and the housing market, especially for first-time homebuyers.  While there is still uncertainty about the timing and pace of the economic recovery and the long-term impact of loss mitigation efforts undertaken by the GSEs and loan servicers, we are cautiously optimistic about the continuing resiliency of the housing market. "

Third Quarter Summary

• We continue to maintain full operations, using the virtual workforce model activated in the first quarter of 2020, in response to the COVID-19 pandemic.
• New insurance written was $32.8 billion, compared to $28.2 billion the second quarter and $19.1 billion in the third quarter of 2019, reflecting the resilience of the purchase mortgage market, the attractive refinance market, and our position in the market.
• Persistency, or the percentage of insurance remaining in force from one year prior, was 64.5% at September 30, 2020, compared with 68.2% at June 30, 2020 and 78.6% at September 30, 2019.
• Insurance in force (IIF) of $238.9 billion at September 30, 2020 increased by 3.6% during the quarter and 9.5% compared to September 30, 2019.
• Primary delinquency inventory of 64,418 loans at September 30, 2020 decreased from 69,326 loans at June 30, 2020, but increased from 30,028 loans at December 31, 2019 and 29,940 loans at September 30, 2019 primarily due to the adverse economic impact of COVID-19.
• As of September 30, 2020 67% of our delinquency inventory were reported to us as subject to a forbearance plans. We believe substantially all of the reported forbearance plans are COVID-19 related.
• Insurance written in 2008 and prior accounted for approximately 10% of the September 30, 2020 primary risk in force but accounted for 31% of the new primary delinquency notices received in the quarter. The primary delinquency inventory for 2008 and prior increased 2% year over year from 21,761 loans at September 30, 2019.
• The percentage of primary loans that were delinquent at September 30, 2020 was 5.79%, compared to 2.78% at December 31, 2019, and 2.78% at September 30, 2019.
• The loss ratio for the third quarter of 2020 was 15.9%, compared to 89.2% for the second quarter of 2020 and 12.7% for the third quarter of 2019.
• The underwriting expense ratio associated with our insurance operations for the third quarter of 2020 was 20.2%, compared to 20.1% for the second quarter of 2020 and 17.7% for the third quarter of 2019.
• Net premium yield was 43.6 basis points in the third quarter of 2020, compared to 42.7 basis points for the second quarter of 2020 and 49.6 basis points for the third quarter of 2019.
• MGIC Investment Corporation paid a $0.06 dividend per common share to shareholders during the third quarter of 2020.
• MGIC Investment Corporation did not repurchase any shares of common stock during the third quarter of 2020.
• Book value per common share outstanding increased by 7.4% from December 31, 2019 to $13.33 and increased by 11.7% from September 30, 2019.

_______________

Fourth Quarter 2020 Activities

• In October, MGIC entered into a $412.9 million excess of loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies issued from January 1, 2020 through July 31, 2020 totaling $9.2 billion of net risk in force as of September 30, 2020.
• $241.0 billion of IIF at October 31, 2020, compared to $238.9 billion of IIF at September 30, 2020.
• 5,228 notices of delinquency received in October 2020, compared to 6,038 notices of delinquency received in September 2020 and 6,423 notices of delinquency received in August 2020.
• 8,020 cures reported in October 2020, compared to 8,126 cures reported in September 2020 and 7,868 cures reported in August 2020.
• 61,521 loans in delinquency inventory at October 31, 2020, compared to 64,418 loans in delinquency inventory at September 30, 2020 and 66,626 loans in delinquency inventory at August 31, 2020.
• MGIC Investment Corporation declared a $0.06 dividend per common share to shareholders.

Revenues

Total revenues for the third quarter of 2020 were $296.0 million, compared to $318.4 million in the third quarter last year. The decrease reflects lower premiums earned, lower net investment income, and a decrease in realized investment gains. Net premiums written for the quarter were $228.0 million, compared to $259.4 million for the same period last year. Net premiums earned for the quarter were $256.1 million, compared to $267.9 million for the same period last year. The decrease in premium written was due to lower premium rates on our insurance in force and a decrease in profit commission that was a result of higher ceded incurred losses.  This was partially offset by higher average insurance in force.   Net premium earned was also impacted by an increase in accelerated premiums earned from single premium policy cancellations.  Investment income for the third quarter decreased to $37.3 million, from $42.7 million for the same period last year, resulting from lower investment yields, partially offset by an increase in the consolidated investment portfolio.

Losses and expenses

Losses incurred 
Net losses incurred were $40.7 million, compared to $34.0 million in the same period last year. Primarily reflecting the impact of the COVID-19 pandemic, in the third quarter of 2020, we received 36,660 fewer new delinquency notices compared to the second quarter of 2020 and 6,905 more new delinquency notices than we did in the same period last year. In the third quarter of 2020, our re-estimation of reserves on previous delinquencies resulted in insignificant loss development  compared to $27 million of favorable loss reserve development in the third quarter of 2019.  In the third quarter of 2020, we also decreased our incurred but not reported, or IBNR, reserve from $61 million to $34 million.

Underwriting and other expenses
Net underwriting and other expenses were $48.5 million in the third quarter of 2020, compared to $48.3 million in the same period last year.

Provision for income taxes
The effective income tax rate was 20.4% in the third quarter of 2020 and 20.7% in the third quarter of 2019.

Capital

• Total consolidated shareholders' equity was $4.5 billion and consolidated outstanding principal on borrowings was $1.3 billion as of September 30, 2020.
• MGIC Investment Corporation issued $650 million of its 5.25% Senior Notes due in 2028 with a 3 year call feature. A portion of the proceeds were used to repurchase $182.7 million of the 5.75% Senior notes due in 2023 and $48.1 million of the 9% Convertible Junior Debentures due in 2063. The balance of the proceeds after expenses were retained at the holding company. The transactions resulted in a pretax loss on debt extinguishment of $26.7 million that was recognized in the quarter.
• MGIC's PMIERs Available Assets totaled $5.0 billion, or $1.4 billion above its Minimum Required Assets as of September 30, 2020.
• MGIC's PMIER assets increased due to organic capital generation and the transfer of approximately $250 million of assets from MGIC Reinsurance of Wisconsin (MRCW) to MGIC
• MGIC received regulatory and GSE approval to dividend to MTG its ownership of $133 million of MTG's 9% Convertible Junior Debentures due 2063, which eliminates approximately $12 million of future annual interest payments by MTG. The debentures were not included in MGIC's PMIERs Available Assets.

Other Balance Sheet and Liquidity Metrics

• Total consolidated assets were $7.1 billion as of September 30, 2020, compared to $6.2 billion as of December 31, 2019, and $6.1 billion as of September 30, 2019.
• The fair value of our consolidated investment portfolio, cash and cash equivalents was $6.8 billion as of September 30, 2020, compared to $5.9 billion as of December 31, 2019, and $5.8 billion as of September 30, 2019.
• Investments, cash and cash equivalents at the holding company were $871 million as of September 30, 2020, compared to $325 million as of December 31, 2019, and $308 million as of September 30, 2019.
• Total consolidated debt as of September 30, 2020 was $1.2 billion, compared to $833 million as of December 31, 2019, and $832 million as of September 30, 2019.

Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call November 5, 2020, 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 December 5, 2020 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 September 30, 2020, MGIC had $238.9 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 all 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. For information about our underwriting and rates, see https://www.mgic.com/underwriting.

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. These risk factors, including the discussion of the impact of the COVID-19 pandemic, speak only as of the date of this press release and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. 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.

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%.

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.

1. Net realized investment gains (losses). The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.
2. Gains and losses on debt extinguishment. Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and/or reduce potential dilution from our outstanding convertible debt.
3. Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles, individual issuer performance, and general economic conditions.