MGIC's 2Q net income down as coronavirus leads to higher reserving

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Higher than expected loan loss reserving due to coronavirus-related mortgage delinquencies resulted in MGIC Investment Corp. second quarter earnings coming in well below analysts' expectations.

The Milwaukee-based private mortgage insurer had net income of $14 million for the period ended June 30, compared with $149.8 million in the first quarter and $167.6 million for the second quarter of 2019.

MGIC's adjusted earnings per share of $0.03 was well below the consensus estimate of $0.24 and B. Riley FBR's $0.13.

"We think this quarter puts a good amount of bad news behind MGIC," wrote Randy Binner, an analyst with B. Riley FBR, in a report. "Given our view that capital levels remain robust and that book value is a reasonable upside for MGIC, we reiterate our Buy rating."

MGIC's net losses incurred were $217.4 million in the second quarter, compared with $21.8 million one year ago, a result of its delinquent loan inventory growing to 69,326 loans from 29,795 loans at June 30, 2019. Approximately two-thirds of the current inventory are in a forbearance plan.

"Our second quarter net income reflects the challenges many consumers are facing in the current economic environment and was materially impacted by the loan loss reserves that were established for expected losses on new loan delinquencies," said MGIC CEO Tim Mattke in a press release.

In past quarters, MGIC's results benefitted from favorable loss reserve development trends. But in the second quarter, because of the re-estimation of its reserves as a result of COVID-19 created delinquencies, there was $10 million in adverse loss reserve development.

Its incurred but not reported reserve was doubled during the second quarter, to $61 million from $30 million. Mortgage insurers only pay claims when the loan goes into foreclosure.

But MGIC provided data that shows trends shifted at the start of the third quarter. The delinquent loan inventory shrank during July to 68,206; there were 9,452 cures versus 8,463 new delinquency notices received.

This was a big turnaround from the prior two months. New delinquency notices totaled 31,117 in May and 19,358 in June, while cures were 4,876 and 6,145 respectively

Currently, MGIC is still well above the capital standards to be in compliance with the Private Mortgage Insurer Eligibility Requirements. Its cushion of available assets above minimum required assets was $1.1 billion on June 30.

"The main story for the MIs in our opinion remains capital adequacy under PMIERs," Binner noted. "MGIC screened well in our recent analysis on capital adequacy. Also, flattening forbearance and delinquency trends and increased clarity with respect to the forbearance haircut combine to leave the MIs in a strong capital position."

Because of the record low mortgage rates, MGIC produced $28.2 billion of new insurance written in the second quarter, compared $17.9 billion in the first quarter and $14.9 billion one year ago. Binner had predicted MGIC to actually do slightly less NIW in the second quarter at $14.2 billion.

MGIC is keeping pace with Genworth and Arch, which earlier reported $28.4 billion and $24.6 billion respectively for the second quarter.

"Insurance in force, the long-term driver of our revenues, increased 7.7% from the same period last year as new business writings were only partially offset by the impact of lower persistency," Mattke said. Persistency, the measurement of how many policies remain on the books from 12 months prior, fell dramatically to 68.2% at June 30, compared with 73.0% at March 31, and 80.8% on June 30, 2019.

Its IIF ended the quarter at $230.5 billion, compared with $213.9 billion on June 30, 2019. During July, IIF grew to $232.5 billion, MGIC pointed out.

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