MGIC Investment Corporation Reports Third Quarter 2021 Results

MILWAUKEE, Nov. 3, 2021 /PRNewswire/ -- MGIC Investment Corporation (NYSE: MTG) today reported operating and financial results for the third quarter of 2021. Net income for the quarter was $158.0 million, or $0.46 per diluted share, compared with net income of $130.8 million, or $0.38 per diluted share, for the third quarter of 2020.

Adjusted net operating income for the third quarter of 2021 was $157.1 million, or $0.46 per diluted share, compared with $149.9 million, or $0.43 per diluted share, for the third quarter of 2020. 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, "I am pleased to report that the high quality of our increased insurance in force combined with a strong housing market, a decreasing number of new delinquencies, and improving economic conditions as many local economies continue to return to pre-pandemic levels of activity, allowed us to deliver another quarter of strong financial results for shareholders."

Mattke further stated, "Reflecting our robust capital position, the long-term confidence in our transformed business model and our market position, we repurchased 3.0% of shares outstanding in the third quarter totaling $150 million, and in October we repurchased an additional 1.1% shares outstanding totaling $60 million. Additionally, our Board of Directors authorized a $500 million share repurchase program, which is in addition to the amount remaining on the current authorization, and approved a quarterly $0.08/share common stock dividend to be paid on November 23, 2021."

Third Quarter Summary

• New insurance written was $28.7 billion, compared to $33.6 billion the second quarter of 2021 and $32.8 billion in the third quarter of 2020, reflecting a decrease in the refinance market.
• Persistency, or the percentage of insurance remaining in force from one year prior, was 59.5% at September 30, 2021, compared with 57.1% at June 30, 2021 and 64.5% at September 30, 2020.
• Insurance in force of $268.4 billion at September 30, 2021 increased by 2.4% during the quarter and 12.3% compared to September 30, 2020.
• Primary delinquency inventory of 37,379 loans at September 30, 2021 decreased from 42,999 loans at June 30, 2021, and 64,418 loans at September 30, 2020.
• As of September 30, 2021, 48% of the loans in our delinquency inventory were reported to us as subject to forbearance plans. We believe substantially all of the reported forbearance plans are COVID-19 related.
• The percentage of loans insured with primary insurance that were delinquent at September 30, 2021 was 3.20%, compared to 3.71% at June 30, 2021, and 5.79% at September 30, 2020.
• The loss ratio for the third quarter of 2021 was 8.1%, compared to 11.6% for the second quarter of 2021 and 15.9% for the third quarter of 2020.
• The underwriting expense ratio associated with our insurance operations for the third quarter of 2021 was 21.9%, compared to 22.3% for the second quarter of 2021 and 20.2% for the third quarter of 2020.
• Net premium yield was 38.4 basis points in the third quarter of 2021, compared to 39.1 basis points for the second quarter of 2021 and 43.6 basis points for the third quarter of 2020.
• We paid a dividend of $0.08 per common share to shareholders during the third quarter of 2021.
• Book value per common share outstanding increased by 6.7% from December 31, 2020 to $14.81 and increased by 11.1% from September 30, 2020. (September 30, 2021 book value per common share outstanding includes $0.59 in net unrealized gain on securities, compared to $0.80 at December 31, 2020 and $0.72 at September 30, 2020).
• We repurchased 10.0 million shares of common stock at an average cost of $15.01 per share.
• MGIC paid a $150 million dividend to MGIC Investment Corporation.
• In August 2021, MGIC entered into a $398.4 million excess of loss reinsurance agreement (executed through an insurance linked notes transaction) that covers the vast majority of policies issued from January 1, 2021 through May 28, 2021.

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Fourth Quarter 2021 Activities

• In October, we repurchased an additional 1.1% shares outstanding totaling $60 million under the remaining authorization that expires at year end 2021.
• Our Board of Directors authorized an additional $500 million common stock repurchase program through the end of 2023.
• We declared a dividend of $0.08 per common share to shareholders payable on November 23, 2021, to shareholders of record at the close of business on November 11, 2021.
• MGIC elected to terminate its 2017 and 2018 QSR Transactions effective December 31, 2021, and will incur an early termination fee of $5 million at December 31, 2021.

Revenues

Total revenues for the third quarter of 2021 were $295.7 million, compared to $296.0 million in the third quarter last year. Premiums earned decreased slightly in the third quarter of 2021 to $254.8 million compared with $256.1 million for the same period the prior year. Net premiums written for the quarter were $247.6 million, compared to $228.0 million for the same period last year. The increase in net premiums written was due to an increase in insurance inforce and an increase in profit commission, partially offset by a decrease in the premium yield and an increase in ceded premiums written. Profit commission was lower in the third quarter of 2020 due to higher ceded incurred losses resulting from the impacts of the COVID-19 pandemic.  The decrease in net premiums earned was due to a decrease in accelerated premiums earned from single premium policy cancellations given the decrease in refinance activity, partially offset by the increase in net premiums written.

Losses and expenses

Losses incurred   
Net losses incurred were $20.8 million, compared to $40.7 million in the same period last year. In the third quarter of 2021, we received 9,862 new delinquency notices compared with 20,924 notices in the third quarter of the prior year primarily reflecting the impact of the COVID-19 pandemic in the third quarter of 2020. Our re-estimation of reserves on previous delinquencies resulted in $18 million of favorable loss development in the third quarter of 2021 primarily attributable to delinquency notices received prior to the start of the COVID-19 pandemic compared to insignificant loss reserve development in the third quarter of 2020. In the third quarter of 2021, our adjustments to our incurred but not reported, or IBNR, reserve were insignificant compared to a decrease of $27 million in the third quarter of 2020.  

Underwriting and other expenses
Net underwriting and other expenses were $57.2 million in the third quarter of 2021, compared to $48.5 million in the same period last year primarily due to increases in professional and consulting services related to our investments in infrastructure as well as increases in employee compensation costs.

Interest expense
Interest expense was $18.0 million in the third quarter of 2021, compared to $15.7 million in the same period last year. The increase is due to the August 2020 issuance of our 5.25% Senior Notes, partially offset by the repurchase of a portion of our 5.75% Senior Notes and 9% Convertible Junior Debentures.

Loss on debt extinguishment
In the third quarter of 2020, the $26.7 million loss on debt extinguishment reflects the repurchase of a portion of our 5.75% Senior Notes in excess of carrying value and a portion of our 9% Convertible Junior Debentures in excess of their fair value.

Provision for income taxes
The effective income tax rate was 20.9% in the third quarter of 2021 and 20.4% in the third quarter of 2020.

Capital

• Total consolidated shareholders' equity was $4.9 billion as of September 30, 2021, compared to $4.7 billion as of December 31, 2020 and $4.5 billion as of September 30, 2020.
• MGIC's PMIERs Available Assets totaled $5.8 billion, or $2.6 billion above its Minimum Required Assets as of September 30, 2021, compared to PMIERs Available Assets of $5.3 billion, or $1.8 billion above its Minimum Required Assets as of December 31, 2020 and PMIERs Available Assets of $5.0 billion, or $1.4 billion above its Minimum Required Assets as of September 30, 2020

Other Balance Sheet and Liquidity Metrics

• Total consolidated assets were $7.5 billion as of September 30, 2021, compared to $7.4 billion as of December 31, 2020, and $7.1 billion as of September 30, 2020.
• The fair value of our consolidated investment portfolio, cash and cash equivalents was $7.1 billion as of September 30, 2021, compared to $7.0 billion as of December 31, 2020, and $6.8 billion as of September 30, 2020.
• The fair value of investments, cash and cash equivalents at the holding company was $716 million as of September 30, 2021, compared to $847 million as of December 31, 2020, and $871 million as of September 30, 2020.
• Total consolidated debt as of September 30, 2021, December 31, 2020 and September 30, 2020 was $1.2 billion.

Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call November 4, 2021, 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 4, 2021 under "Newsroom."

About MGIC
Mortgage Guaranty Insurance Corporation (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 through the use of private mortgage insurance. At September 30, 2021, MGIC had $268.4 billion of primary insurance in force covering more than 1.1 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 and losses on debt extinguishment, net impairment losses recognized in earnings 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 and losses on debt extinguishment, net impairment losses recognized in earnings, 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.

 

 

 

 

 

 

 

 

 

 

 

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.

Risk Factors Relating to the COVID-19 Pandemic

The COVID-19 pandemic may continue to materially impact our financial results and may also materially impact our business, liquidity and financial condition.

The COVID-19 pandemic had a material impact on our 2020 financial results. While uncertain, the future impact of the COVID-19 pandemic on the Company's business, financial results, liquidity and/or financial condition may also be material. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, efforts to reduce the transmission of COVID-19, the level of unemployment, and the impact of government initiatives and actions taken by Fannie Mae and Freddie Mac (the "GSEs") (including mortgage forbearance and modification programs) to mitigate the economic harm caused by COVID-19.

The COVID-19 pandemic may continue to impact our business in various ways, including the following, each of which is described in more detail in the remainder of these risk factors:

• Our incurred losses will increase if the number of insured mortgages in our delinquency inventory increases. We establish reserves for insurance losses when delinquency notices are received on loans that are two or more payments past due and for loans we estimate are delinquent prior to the close of the accounting period but for which delinquency notices have not yet been reported to us (this is often referred to as "IBNR"). In addition, our current estimates of the number of delinquencies for which we will receive claims, and the amount, or severity, of each claim, may increase.
• We may be required to maintain more capital under the private mortgage insurer eligibility requirements ("PMIERs") of the GSEs, which generally require more capital to be held for delinquent loans than for performing loans and require more capital to be held as the number of payments missed on delinquent loans increases.
• If the number of delinquencies increases, the number of claims we must pay over time will generally increase.
• Our access to the reinsurance and capital markets may be limited and the terms under which we are able to access such markets may be less attractive than the terms of our previous transactions.

Risk Factors Relating to the Mortgage Insurance Industry and its Regulation

Downturns in the domestic economy or declines in home prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.

Losses result from events that reduce a borrower's ability or willingness to make mortgage payments, such as unemployment, health issues, family status, and whether the home of a borrower who defaults on a mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. A deterioration in economic conditions, including an increase in unemployment, generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect home prices, which in turn can influence the willingness of borrowers with sufficient resources to make mortgage payments when the mortgage balance exceeds the value of the home. The seasonally-adjusted Purchase-Only U.S. Home Price Index of the Federal Housing Finance Agency (the "FHFA"), which is based on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac, indicates that home prices increased by 12.3% in the first eight months of 2021, after increasing by 11.5%, 5.4%, 5.7% and 6.3% in 2020, 2019, 2018 and 2017, respectively. The price-to-income ratio in some markets exceeds its historical average, in part as a result of recent home price appreciation outpacing increases in income. Home prices may decline even absent a deterioration in economic conditions due to declines in demand for homes, which in turn may result from changes in buyers' perceptions of the potential for future appreciation, restrictions on and the cost of mortgage credit due to more stringent underwriting standards, higher interest rates, changes to the tax deductibility of mortgage interest, decreases in the rate of household formations, or other factors.

The unemployment rate rose from 3.5% as of December 31, 2019, to 14.7% as of April 30, 2020. It was 4.8% as of September 30, 2021. High levels of unemployment may result in an increasing number of loans in our delinquency inventory and an increasing number of insurance claims; however, the increases are difficult to predict given the uncertainty in the current market environment, including uncertainty about the length and severity of the COVID-19 pandemic; efforts to reduce the transmission of COVID-19; effects of forbearance programs enacted by the GSEs, various states and municipalities; and effects of past and future government stimulus programs.

Forbearance for federally-insured mortgages (including those delivered to or purchased by the GSEs) allows for mortgage payments to be suspended for up to 18 months: an initial forbearance period of up to six months; if requested by the borrower following contact by the servicer, an extension of up to six months; and, for loans in a COVID-19 forbearance plan as of February 28, 2021, an additional extension of up to six months, subject to certain limits. In certain circumstances, the servicer will be unable to contact the borrower regarding an extension of the forbearance plan and it will expire without being extended, or further extended, as applicable. A delinquent loan for which the borrower was unable to be contacted and that is not in a forbearance plan may be more likely to result in a claim than a delinquent loan in a forbearance plan.

Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. At September 30, 2021, 17,793 of the loans in our delinquency inventory were reported to us as in forbearance. Of the 46,684 loans in our delinquency inventory as of June 30, 2020 that were reported to us as in forbearance, 78.4% are no longer in the default inventory as of September 30, 2021; 14.1% are still in the delinquency inventory and reported to us as in forbearance; and 7.6% are still in the delinquency inventory but no longer reported to us as in forbearance. As of September 30, 2021, 61% of the loans in forbearance have reached the twelve-month anniversary of their forbearance plans, 11% have reached the nine-month anniversary of their forbearance plans, and 10% have reached the six-month anniversary of their forbearance plans.  Whether a loan delinquency will cure, including through modification, when forbearance ends will depend on the economic circumstances of the borrower at that time. The GSEs have introduced specific loan workout options for borrowers whose COVID-19 forbearance plans end. If a servicer is unable to contact a borrower to determine a loan workout option, the forbearance plan will end and the loan may remain delinquent. The severity of losses associated with delinquencies that do not cure will depend on economic conditions at that time, including home prices.

Foreclosures on mortgages purchased or securitized by the GSEs were suspended through July 31, 2021. Under a CFPB rule that is generally effective through December 31, 2021, with limited exceptions, servicers must ensure that at least one temporary procedural safeguard has been met before referring 120-day delinquent loans for foreclosure.

We may not continue to meet the GSEs' private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility.

We must comply with a GSE's PMIERs to be eligible to insure loans delivered to or purchased by that GSE. The PMIERs include financial requirements, as well as business, quality control and certain transaction approval requirements. The financial requirements of the PMIERs require a mortgage insurer's "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are generally based on an insurer's book of risk in force and calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance agreements).

Based on our interpretation of the PMIERs, as of September 30, 2021, MGIC's Available Assets totaled $5.8 billion, or $2.6 billion in excess of its Minimum Required Assets. MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs. Our "Minimum Required Assets" reflect a credit for risk ceded under our reinsurance transactions, which are discussed in our risk factor titled "The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring." The calculated credit for excess of loss reinsurance transactions under PMIERs is generally based on the PMIERs requirement of the covered loans and the attachment and detachment points of the coverage, all of which fluctuate over time. PMIERs credit is generally not given for the reinsured risk above the PMIERs requirement. The GSEs have discretion to further limit reinsurance credit under the PMIERs. Refer to our Quarterly Supplements, which are posted on our investor website, for the calculated PMIERs credit for each of our excess of loss reinsurance transactions. We are not including the information contained in those Supplements or on our investor website as a part of, or incorporating it by reference into, this Report. There is a risk we will not receive our current level of credit in future periods for ceded risk. In addition, we may not receive the same level of credit under future reinsurance transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit under the PMIERs, under certain circumstances, MGIC may terminate the reinsurance transactions without penalty.

The PMIERs generally require us to hold significantly more Minimum Required Assets for delinquent loans than for performing loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases. For delinquent loans whose initial missed payment occurred on or after March 1, 2020 and prior to April 1, 2021 (the "COVID-19 Crisis Period"), the Minimum Required Assets are generally reduced by 70% for at least three months. The 70% reduction will continue, or be newly applied, for delinquent loans that are subject to a forbearance plan that is granted in response to a financial hardship related to COVID-19, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. Loans considered to be subject to a forbearance plan include those that are in a repayment plan or loan modification trial period following the forbearance plan. As noted above, if a servicer of a loan is unable to contact the borrower prior to the expiration of the first 180-day forbearance plan term, or if the forbearance plan reaches its twelve-month anniversary a