MGIC Investment Corp

NYSE:MTG

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Second Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded.

I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

[Dianna Higgins, IR]

Thank you, Roel. Good morning, and welcome, everyone. Thank you for your interest in MGIC Investment Corporation. I am very excited to be here today as this is officially my first earnings call in the seat. Joining me on the call today to discuss our results for the second quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer.

Our press release, which contains MGIC's second quarter financial results was issued yesterday and is available on our website at mtg.mgic.com under Newsroom, includes additional information about our quarterly results that we will refer to during the call. It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures.

In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force, new insurance written, reinsurance transactions, and other information you may find valuable. As a reminder, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before we get started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future.

Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results to differ materially from those discussed on the call today, are contained in our 8-K and 10-Q that were also filed yesterday. If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent events. No one should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of our 8-K and 10-Q.

With that, I now have the pleasure to turn the call over to Tim.

[Tim Mattke, CEO]

Good morning, everyone. And before I start with my prepared remarks, I want to welcome you Dianna to new role in our quarterly calls. I know that you and Michael Zimmerman spent a lot of time to make the transition as seamless as possible. I know you do great in the new role, and I look forward to the investors getting a chance to know you better through your interactions. With that, I'm pleased to report that we had another great quarter for that matter, first half of the year as we delivered exceptional financial results while continuing to return capital to our shareholders.

We will get into details throughout this call. But in summary, this quarter, we grew our insurance in force, repurchase stock, paid a common stock dividend, decrease our leverage ratio and increase our financial strength and flexibility, all while earning an annualized 21.6% return on equity. We are encouraged by the positive credit trends we are experiencing, including the low level of early payment default, which we believe are good indicators of near-term credit performance and the continued favorable employment trends. The risk-reward equation that current business conditions offer continues to be attractive, and we are excited about the future. In the second quarter, we earned $249 million of GAAP net income.

Insurance in force at the end of the quarter stood at more than $287 billion, a 9.5% increase from a year ago and 3.4% increase during the quarter. The quarterly growth in insurance in-force reflects the increased persistency rate in the quarter, offset by lower volumes of new insurance written. Taking a look at the credit performance of our insurance in force portfolio, our loss ratio was a negative 38.7% in the quarter. This reflects the loss reserves established on a low number of new delinquencies reported to us in the quarter, more than offset by a re-estimation of ultimate losses and delinquencies in prior quarters. In order to achieve our objectives in varying business environment, we need a capital management position that maintains the financial strength and flexibility of the holding company, deploys capital and growth for MGIC, the writing company, to both are positioned to succeed in the future and can return excess capital to shareholders in a variety of forms.

We believe that our current strategy does just that. As a result of the strength and flexibility of our capital position, during the 12 months ending June 30, we deployed capital to support our new business while we return a significant amount of capital to our shareholders through the repurchase of common stock and payment of common stock dividends. We reduced our leverage ratio and interest expense by repurchasing a significant portion of our convertible junior debentures due in 2063 and by repaying MGIC's Federal Home Loan Bank advance.

Additionally, in July of this year, we redeemed our outstanding senior notes due in 2023, we purchased additional common stock, and our Board authorized a $0.10 per share common stock dividend to be paid on August 25, a 25% increase in the quarterly dividend amount. Before turning it over to Nathan to provide more detail on our financial results and capital management activities, I would like to share 3 thoughts on the current environment. First, consensus mortgage origination forecast have been trending lower due to the increase in interest rates and the decrease in refinance activity. We expect refinance activity to remain low for the remainder of the year and purchase activity continue to be strong although lower than we expected at the beginning of the year. Overall, the market opportunity for new private mortgage insurance is smaller this year than last.

While we anticipate our new insurance written will be below record volumes for the last 2 years, we continue to expect new insurance written to remain strong.

As we look forward, demographic trends suggest meaningful long-term MI opportunities. Next, we believe the MI business is well hedged to changes in interest rates. The increase in mortgage interest rates has materially reduced the incentive of many borrowers to refinance their first mortgages, whether to tap into built in equity or lower their monthly payments. So although our new insurance written is slowing, persistency in our insurance in force is increasing, extending the existing revenue stream. In the second quarter, the result was that our insurance in force portfolio continue to grow, but at a slower pace.

Persistency, along with insurance in-force, are 2 long-term drivers of future revenue. Also, while the current rising interest rate environment has increased unrealized losses in our investment portfolio, it has reversed the long-term trend of low reinvestment interest rates, which is resulting in increases in our investment yield.

Additionally, while there is potential for losses to increase, if there's an increase in unemployment or a decrease in home values, the presence of reinsurance will help mitigate those losses. Lastly, we've seen significant home price appreciation over the last several years, primarily due to the combination of historically low mortgage rates and strong housing demand. The significant home price appreciation over the last 2 years has created equity for many homeowners.

This equity should reduce the incidence of claims on the related mortgages. That being said, there are signs that national home price appreciation may finally be slowing down and some markets may even see some declines. We believe that gradual normalization of home price depreciation is healthy for the market.

With that, let me turn it over to Nathan.

[Nathan Colson, CFO]

Thanks, Tim, and good morning. As Tim mentioned, we had a strong second quarter and solid financial results for the first half of the year. In the quarter, we earned $249 million of net income or $0.80 per diluted share compared to $153 million in net income or $0.44 per diluted share during the same period last year. On an adjusted net operating income basis, we earned $0.81 per diluted share an 84% increase from the $0.44 per diluted share in the second quarter of 2021. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release.

Despite the strong net income in the quarter and year-to-date, our book value per common share outstanding has decreased from $15.18 as of December 31 to $14.97 as of June 30. This decrease was primarily the result of increases in interest rates, which caused unrealized losses on our investment portfolio to increase. Those unrealized losses are not reflected in net income, but are reflected in shareholders' equity and therefore also reflected in book value per share.

We regularly disclosed the amount of book value per share that is attributable to unrealized gains and losses in our investment portfolio. As Tim mentioned, higher interest rates are a long-term positive for the earnings potential of the investment portfolio. However, the rapid increase in interest rates over the last several months resulted in unrealized losses that reduced book value per share by $0.97 at the end of the quarter. While at December 31, unrealized gains increased book value per share by $0.47. During the quarter, total revenues were $293 million compared to $298 million for the same period last year.

Net premiums earned were $256 million in the quarter compared to $252 million for the same period last year. The increase in net premiums earned was due to an increase in insurance in force and a decrease in ceded premiums from our quota share reinsurance transactions, partially offset by a decrease in our premium yield. The net premium yield for the second quarter was 36.2 basis points, down seven tens of a basis point from the first quarter and down 2.9 basis points compared to the second quarter last year. The in force premium yield was 39.4 basis points in the quarter, down six tens of a basis point from 40.0% last quarter and 42.6% in the second quarter last year. The decline in the quarter was consistent with trends that we have previously discussed.

Turning to credit. Net losses incurred were negative $99 million in the second quarter compared to negative $19 million last quarter and $29 million for the same period last year. Our review and re-estimation of ultimate losses on prior delinquencies resulted in $131 million of favorable loss reserve development compared to $56 million of favorable loss reserve development in the first quarter and insignificant loss reserve development in the second quarter last year. The favorable development in the quarter was primarily related to pre-COVID and peak COVID delinquencies as cure rates on those delinquencies continue to exceed our expectations, we have adjusted our ultimate loss expectations. In the quarter, our delinquency inventory decreased by 12.4% to 26,900 loans, marking the eighth straight quarter of decrease from the pandemic peak of 69,300 in the second quarter of 2020.

New delinquency notices received in the quarter decreased by 12.2% as compared to the first quarter and cures continued to outpace the new notices during the quarter. The number of claims paid remained relatively flat for the quarter; however, we continue to expect paid claims to gradually grow as COVID-related foreclosure and eviction moratoriums come to an end and foreclosure activity increases. Shifting to our capital management activities. As Tim highlighted, our priorities include maintaining the financial strength and flexibility of the holding company and deploying capital for growth to the writing company. For the holding company, this means maintaining a target level of liquidity in excess of near-term needs.

The operating company, it means maintaining a robust level of PMIERs excess that we expect will enable growth in all operating environments. These target levels are dynamic and change as the operating environment changes. As part of our capital management activities in the quarter, we executed an excess of loss reinsurance transaction with a panel of reinsurers in the traditional reinsurance market, which will cover most of the policies written in 2022. This is an additional layer of credit protection beyond the quota share treaty we have in place for 2022 NIW. Also, as we discussed last quarter, in April, we completed another ILN transaction, which covers most of our policies written from June through December of 2021.

These transactions provide capital relief under PMIERs in addition to loss protection. More information on the excess of loss transaction can be found in our quarterly supplement for the second quarter. Approximately 94% of our primary risk in force was covered to some extent by reinsurance transactions at the end of the quarter. At quarter end, we had $690 million of liquidity at the holding company and MGIC had a $2.6 billion excess to the PMIERs minimum requirements compared to a $2.3 billion excess last year. MGIC's growth in PMIERs excess was primarily driven by our reinsurance strategy and strong cash flow from operations, partially offset by the increase in minimum required assets due to the growth of our risk in force, the runoff of the PMIERs benefit on existing risk-sharing transactions and the payment of dividends to the holding company.

As Tim highlighted, during the 12 months ending June 30, we had a robust capital position and the capital levels at MGIC and the liquidity levels at the holding company were consistently above our targets.

As a result and consistent with our capital strategy, MGIC paid a total of $800 million in dividends to the holding company. At the holding company level, we repurchased 35 million shares of common stock for a total cost of $513 million and paid $104 million in common stock dividends to our shareholders. We also used $237 million to repurchase $173 million in principal amount of our convertible debentures due in 2063. This eliminated 13 million potentially dilutive shares and reduced our annualized interest expense by $16 million.

Combined, since June 30, 2021, we've reduced dilutive shares by $48 million or 13% and reduced our debt-to-capital ratio from approximately 20% to approximately 17%. In July, Moody's upgraded our senior debt rating to Baa3 and upgraded MGIC's insurance financial strength rating to A3 with a stable outlook. Moody's stated that the ratings reflect continued improvement in the U.S. mortgage insurance sector, our strong position in the market and underwriting discipline, our reduced financial leverage and debt maturity profile and extensive reinsurance program.

With that, let me turn it back over to Tim.

[Tim Mattke, CEO]

Thanks, Nathan. A few additional comments before we open it up for questions. The federal government through various agencies continues to focus the housing policy efforts on promoting equitable access to sustainable and affordable housing. To further these efforts in June, the GSEs released flexible housing finance plans and the FHFA simultaneously announced a new pilot transparency framework for the GSEs to accompany these plans.

This framework requires each GSE to publish and maintain a list of pilots and test and learn activities on its public website. At this point, we are uncertain what impact, if any, of these plans will have on the MI industry. We welcome the opportunity to engage with the GSEs or other agencies on the topic of equitable access to housing. And as always, we will continue to advocate for the increased use of private mortgage insurance and housing finance.

I remain encouraged about the future role that our company and the industry can play in the housing market as we continue to provide credit enhancement solutions to lenders, borrowers and the GSEs. In closing, we had another successful quarter and a strong first half of the year. As we look forward, there are increased risks and uncertainties about rising inflation and interest rates and the possibilities of a recession. However, housing fundamentals and employment trends remain sound. We like our positioning in this market and the risk-reward equation that the current conditions offer and believe that the strength and flexibility of our business model will contribute to our continued success.

Throughout our 65 years, our people have been the cornerstone of our accomplishments. Together, we remain focused on executing our business strategies, providing critical uninterrupted support to the housing market and helping individuals and families achieve affordable and sustainable homeownership in all economic cycles. Our commitment and ability to help ours -- achieve the dream of home ownership is as strong as ever.

With that, operator, let's take questions.

[Operator]

[Operator Instructions] Our first question comes from Mark DeVries of Barclays.

[Mark DeVries, Barclays]

A few of your competitors have commented that they were kind of selectively increasing pricing here and kind of observing similar things from competitors. Can you comment on what if anything you're doing around pricing and what you're observing?

[Tim Mattke, CEO]

Mark, it's Tim. We don't like to talk too much in detail, especially about pricing. But I think it's safe to say, quite frankly, as we've done over the last period of time, we're selective in what we think is a good way to deploy our capital and are always looking at risk return. I think we're trying to be really conscious about what the price is in the market and what it takes to win alone.

And so I think if the market continues to evolve, I think there is the opportunity to shift to different segments potentially. And we look to sort of make sure that we're getting the most price we can when we deploy our capital. So I think we're being consistent with that. And I think that will continue to evolve quite, frankly, over the course of the year. I think we feel really good about the overall environment.

But I think it's safe to say that there's pockets where you might want a little bit more return from a risk-adjusted basis based upon sort of that -- those features of the loan.

[Mark DeVries, Barclays]

Okay. Fair enough. And then is the $7 million share repurchase that you did in the quarter, is that a reasonable cadence for us to kind of expect going forward? And also, is this new kind of mid-teens debt-to-cap ratio more of a longer-term target? Or could you -- should we see that move up or down?

[Nathan Colson, CFO]

Mark, it's Nathan. I'll take those. I think on the debt-to-capital question, I think we've said for some time that we are targeting a debt-to-capital ratio in the kind of low to mid-teens. And we're largely thereafter we retired the 2023s here in July. So in the near term, no additional delevering activities other than continuing to try to resolve fully the 2063s.

I think we like that position partly because it does afford us the ability to take on additional debt if that's what we want to do. But I think longer term, we're really comfortable with where we are and no near-term plans there. Relative to share repurchase activity, I think what we've said for some time is that's really going to be funded by dividends from the operating company, and dividends from the operating company are going to be things that we request when our capital levels are above our targets.

They have been for some time, which is why we've requested increasing amounts of dividends and over the last 4 quarters, totaling $800 million. Whether that's the right answer in the future will be dependent on the facts and circumstances in the future. We don't expect to pay a dividend in the third quarter, given the $400 million dividend that we paid in the second quarter.

But as we get later in the year, I think we'll evaluate the current conditions, what our target capital levels are and take appropriate action there. At the holding company, our capital -- our liquidity levels are still above our target. So we still expect, as we've said. We largely view that as money to return to shareholders. So expect to continue with the programs that we've had, both the increase in the dividend to shareholders, but also share repurchase activity here into Q3. And we kind of disclosed that we continued that with another 2.1 million shares in July.

[Operator]

Our next question comes from Doug Harter, Credit Suisse.

[Unidentified Analyst]

This is [John Kochalski] on for Doug. First question is around premium yields. We saw net premium yields were down about 0.7 bps this quarter, while other names were flat to up on the quarter. I'm just kind of curious about your thoughts about what might have influenced the move. And then also what your outlook is for the rest of 2022?

[Nathan Colson, CFO]

John, it's Nathan. I'll take that. I guess, just commenting on our company, we had expected initial guidance for the year was something like a basis point a quarter, and I'm referring here to the in force premium yield. That's the number that we've typically talked about. I think the net premium yield moves around for a variety of factors that are hard to predict quarter-to-quarter.

But on the in force premium yield, we were down seven tens of a basis point in Q1 and six tens of a basis points in Q2. I'd say both of those were a little better than what we were expecting. So I think, for the full year, it's probably looking more like 3 basis points of decline for us versus 4 where we would have initially expected. But I think the activity in the quarter is consistent or a little bit better than what we would have thought from a decline in the in-force premium yield.

[Unidentified Analyst]

Okay. Great. And then second question. Reserve activity kind of going forward, it was better than expected with positive COVID-related cures and HPA, but also given the macro environment. Just curious about your thoughts for kind of the rest of the year as far as reserve activity is concerned?

[Nathan Colson, CFO]

Yes, it's Nathan, I'll take that as well. For new notices, we've been pretty consistent with our new notice claim rate for some time. And we're again this quarter, I think where that goes will certainly be reflective of what the conditions are at the end of the third quarter, end of the fourth quarter going forward. Relative to reserve development, that's something that so far this year has been driven by actual cure activity. That's outpaced our expectations and resulted in us kind of reducing our ultimate loss expectations, particularly around the notices from 2020 and prior.

So that's something that we'll follow the same process again next quarter. If we continue to see activity that's better than our expectations, that will result in updates. If we see activity more in line with our expectations, there may not be as much to update in terms of ultimate losses. So some of that's still to play out, but we'll follow the same approach that we have for some time.

[Operator]

Our next question comes from Bose George of KBW.

[Bose George, KBW]

Your NIW came in a bit better than what we've seen from peers. I mean, do you think your share has increased this quarter? And also, is there any -- was there any movement in the bulk market that might have done some of that?

[Tim Mattke, CEO]

Yes, Bose, it's Tim. I don't think anything in the bulk market that really explains that. I think there's still 1 MI to report. It does look like our share might be up a little bit. We've been really consistent, quite frankly, over the last couple of years as far as the range of what we've been in.

So while we might be a little bit up from last quarter, I think we're in a pretty consistent range over the last, like I said, a couple of years, quite frankly.

So I think we're in the zone of what we would expect. And we'll obviously see when the last competitor comes out, whether it's where we land. But overall, I think we look to deploy the capital, and we think we're getting good returns. I think we're mindful of our share overall, but feel really comfortable with the range we've been operating in.

[Bose George, KBW]

Okay. Great. And then actually on the common dividend, there was a nice increase this quarter. How do you think about just sort of the philosophy on the common dividend? Is it a payout? Or just -- how do you think about that going forward?

[Nathan Colson, CFO]

This is Nathan. I'll take that. I think there's a couple of factors. One, with the number of shares that we've repurchased, the dollar payment of the dividend had continued to come down. So some of that is just getting back to slightly above, but more towards the levels that we were a year ago, just given there's 35 million fewer shares now.

But I think we look at it both from a payout and also what's the yield look like more on a book basis than a market basis just because the market yield changes a little more than the book yield does.

So with that, I think it's less about targeting a specific payout ratio, but more about ensuring that we feel comfortable that we can continue to pay the dividend in a wide range of scenarios. So I think happy about the increase, and that's something that we'll continue to look at over time as well. But for now, I think, feel really good about the 25% increase in the dividend and continuing to pay that dividend going forward.

[Operator]

Our final question comes from Mihir Bhatia of Bank of America.

[Mihir Bhatia, Bank of America]

I wanted to just start by maybe just talking a little bit about the potential for a slowdown or a pullback in housing. A couple of questions on that. Just, first, like are you seeing anything at all that gives you for the -- you mentioned potential for HPA to decrease. But anything on the credit side that you're seeing that makes you maybe pause? And then are there any geographies segment, anything you're doing from an underwriting perspective where -- which would be maybe characterized as tightening or pulling back?

[Tim Mattke, CEO]

Mihir, it's Tim. I think from a credit standpoint, I see nothing that we're really seeing from a data standpoint that leads us to believe there's anything there. I mean the underwriting box is still exceptionally strong. It's been exceptionally strong for over a decade at this point. And so I think that insulates a little bit. But I think, again, right now, we don't see anything there.

When you talk about HPA, again, I think we believe that it makes sense that HPA starts to moderate. When we price, quite frankly, that HPA we saw the last couple of years and we price, we don't assume that, that HPA is going to happen. So it's coming back more in line with how we think about it when we price. If it does slow down, I think it's safe to assume some markets could go slightly negative. I think we need to be mindful of that overall.

But I think it's how we go about our business on everyday basis, and we try to look at all the risk factors that could impact the loan and think about what the rate of return we need to get when we're pricing. So nothing that gives me great pause by any means on an overall basis. But I think we're back in the HPA environment that's not going to be raising at the rate that we saw in the last couple of years.

But as I said in my opening remarks, over the long run, that's much better for housing and for us, quite frankly. And so we'll be mindful of it in our pricing and how we approach it. But nothing that gives us tremendous pause at this point.

[Mihir Bhatia, Bank of America]

Got it. That's helpful. And then just staying on this theme maybe like the delinquency trends, have they normalized now? Is this like similar to pre-pandemic what you're seeing? Or are we still getting some benefits from [indiscernible] and pandemic still coming through?

[Nathan Colson, CFO]

Yes. Mihir, it's Nathan. I mean I think in terms of the number of new notices that we're receiving, if you look at the number of new notices for our book in the second quarter of this year, it's below pre-pandemic levels. Some of that was naturally coming down as our kind of pre-crisis 2008 and prior book continued to run off, which is still generating some of those new delinquencies. So I think the new notice trends, the new delinquency trends continue to be quite favorable even relative to pre-COVID levels.

[Mihir Bhatia, Bank of America]

And this is my last question. Just I wanted to get back on the expense. I think you had given earlier in the year guidance for like $225 million for full year. One, it seems to be coming in a little bit better. Is there a pickup in 2-ish?

Or are we thinking that might be a little bit -- you could have a little bit of upside, I guess -- or downside on expenses, upside on bottom line, your expense guide for the full year?

And on that topic, maybe I'll just ask a follow-up I'll have on that is just what's 2022 a bit of an investment year? And should we expect that expense ratio to trend down 2023 onwards there?

[Nathan Colson, CFO]

Sure. So specific to 2022, I still think the guidance in the range that we gave is, I think that's still appropriate. We might be trending towards the lower end of that right now. But some of it, we think is timing relative to certain investments that we're making, too. So I wouldn't kind of update that at this point.

Relative to beyond '22, I think what we've said is we'll continue to make investments in the platform that we think are going to have good payback and good returns.

Right now, we do think that we've got a runway of investments that we think kind of meet those criteria over the next -- this year, next year. But at some point, do think that, that will start to trend down over time. But we'll reevaluate going forward and continue to make the right investments into the platform to continue to maintain the position that we've had over the last couple of years, too.

[Operator]

And it seems there are no further questions. I will now turn the call back over to management for closing remarks.

[Tim Mattke, CEO]

Thanks, Roel, and I want to thank everyone for their interest in MGIC. It was another exceptional quarter and look forward to talking with each of you in the future.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.