MGIC Investment Corp

NYSE:MTG

Earnings Call Analysis

MGIC's Strong Second Quarter Earnings and Capital Management

MGIC reported a solid second quarter, earning $204 million in net income and a 16% return on equity. Insurance in force increased slightly to $292 billion, with persistency at 85%. The company repurchased 7.6 million shares worth $157 million and raised its quarterly dividend by 13%, marking four consecutive years of increases. MGIC remains optimistic despite higher interest rates affecting the mortgage market. The positive credit trends and strong capital reserves underpin their sound financial standing and ongoing ability to return capital to shareholders.

Strong Financial Performance

MGIC reported a solid quarter with net income of $204 million and an annualized return on equity of 16%. This performance is consistent with the previous quarters, demonstrating stability. The company has managed to maintain a significant insurance in force portfolio of $292 billion, which is the main driver of its revenue. Despite a challenging interest rate environment, MGIC has shown robust financial strength.

Capital Management and Returns

The company's capital management strategies were highlighted by the repurchase of 7.6 million shares of common stock for $157 million and the payment of $31 million in quarterly dividends. Additionally, MGIC announced a new $750 million share repurchase program and a 13% increase in the quarterly dividend to $0.13 per share. This marks the fourth consecutive year of dividend increases, with a compound annual growth rate of 21%. These actions reflect MGIC's strong liquidity position and commitment to returning capital to shareholders.

Credit Quality and Risk Management

MGIC continues to benefit from excellent credit quality in its existing portfolio. The company’s reestimation of ultimate losses on prior delinquencies led to a favorable reserve development of $67 million for the quarter. The delinquency inventory decreased by 3%, indicating that cures are outpacing new notices. Despite the higher interest rate environment, the credit performance of MGIC's portfolio remains a tailwind to its financial results, supported by a strong housing market and favorable employment trends.

Market Conditions and Future Outlook

The higher interest rate environment continues to challenge the mortgage origination industry, leading to affordability issues. However, MGIC remains optimistic due to pent-up demand and the strong homeownership aspirations of millennials and Gen Z. The company believes these factors will provide long-term opportunities in the mortgage insurance market. As they navigate the second half of the year, MGIC is confident in their market position and ability to execute business strategies.

Investment Portfolio and Revenue Growth

MGIC's investment portfolio yielded a book rate of 3.8%, up 10 basis points in the quarter and 55 basis points year-over-year. Net investment income increased by $9 million from the same quarter last year, reaching $61 million. This contributed to a total revenue increase to $305 million. The ongoing favorable interest rate environment for investments is expected to continue benefiting MGIC’s earnings potential.

Expense Management

The company continues to prioritize operational efficiency, as reflected in the reduction of operating expenses to $55 million, down from $61 million in the previous quarter and $57 million in the same quarter last year. This disciplined approach to expense management is expected to keep full-year operating expenses within the range of $215 million to $225 million, providing a stable foundation for financial performance.

Guidance and Shareholder Value

MGIC's dynamic approach to capital management aims to maintain financial strength across varying macroeconomic conditions. The capital structure includes $6 billion of balance sheet capital, bolstered by robust reinsurance programs. Looking ahead, MGIC expects to sustain elevated payout ratios given the excellent credit performance and limited growth in the insurance in force market. The company's actions underscore its dedication to maximizing long-term shareholder value.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Second Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

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

[Dianna Higgins, executive]

Thank you, Andrew. Good morning, and welcome, everyone. Thank you for your interest in MGIC.

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, also includes additional information about our quarterly results that we will refer to during the call today. 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 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 getting started today, I want to remind everyone that during the call today, 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 filed yesterday also.

If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. 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.

[Timothy Mattke, executive]

Thank you, Dianna, and good morning, everyone. I am pleased to report that we had another solid quarter and with that, an excellent first half of the year. .

We have been consistently generating mid-teen returns on equity while returning meaningful capital to our shareholders and creating long-term value for our stakeholders.

Our results demonstrate the strength and flexibility of our business model, prudent risk management strategies, and focus on through-the-cycle performance. Coupled with our ongoing commitment to serve our customers with quality offerings and solutions, we are able to help borrowers achieve the dream of affordable homeownership sooner.

Now let's dive into the highlights of our financial results for the second quarter. For the quarter, we earned net income of $204 million and generated an annualized 16% return on equity. Insurance in force, the main driver of our revenue ended the quarter at $292 billion, up slightly in the quarter. Our insurance in force has remained relatively flat over the past several quarters, consistent with what we expected. Annual persistency ended the first quarter at 85%, down slightly in the quarter. We were up $13.5 billion in new insurance and new insurance we write continues to have strong credit characteristics. Our focus on prudent risk management strategies has enabled us to build and maintain a strong and balanced insurance portfolio.

We continue to be very pleased with the overall credit quality performance of our portfolio. This credit performance continues to be a tailwind for our financial results.

As we expected at the beginning of the year, this year's MI market is similar to last year's market. The mortgage origination industry continues to be hindered by the higher interest rate environment resulting in affordability challenges and the supply of homes for sale being limited, creating pent-up demand. While the current supply/demand dynamic creates challenges for first-time homebuyers, we continue to support home prices. Pent-up demand and the strong desire of the millennial and Gen Z populations on homes are reasons to continue to be optimistic about the MI opportunities in the long run.

Shifting to our capital activities. The strength and flexibility of our capital position in the quarter supported the repurchase of 7.6 million shares of common stock for $157 million and the payment of a quarterly common stock dividend for a total of $31 million. This represents a 92% payout ratio of this quarter's net income. And as previously announced in the quarter, we paid a $350 million dividend from MGIC to the holding company ended the quarter with $990 million of liquidity at the holding company.

In addition, in April, the Board authorized an additional $750 million share repurchase program and last week, the Board authorized a 13% increase to our quarterly comp stock dividend to $0.13 per share marking 4 consecutive years of dividend increases for a compound annual growth rate of 21% over that period.

Maintaining financial strength and flexibility are the cornerstones of our approach to capital management. While we prioritize prudent growth over capital return, opportunities to grow our insurance in force over the last 2 years have been constrained due to the size of the market.

During that same time, operating results and credit performance have been exceptional leading to higher payout ratios in recent quarters. As part of our capital management, we assess current and expected future operating environment and the best options to deploy capital in order to maximize long-term shareholder value.

We continually monitor our risk and capital position. And as long as credit performance is excellent and our risk position is stable or improving, our expected capital levels remain above our targets at both MGIC and the holding company and payout ratios will remain elevated.

Taking a step back to a long-term view, provides perspective on our ability to grow while maintaining financial strength and managing our capital position.

We faced a wide range of operating environments over the last 5 years, in our dynamic approach to capital management, while always prioritizing financial striking flexibility to serve our stakeholders well.

Over the last 5 years, we have increased our insurance in force by $78 billion or 36% from $214 billion to $292 billion. During that same period, we generated $3.4 billion of net income, $3.5 billion in operating cash flows and GAAP equity increased by $1.1 billion after returning approximately $2 billion to shareholders through dividends and share repurchases. The combination of 97 million shares we purchased and the elimination of our legacy convertible debt has reduced diluted shares by 30%.

The growth of our PMIERs excess from $1.1 billion to $2.4 billion during the same 5-year period further demonstrates our commitment to maintaining robust financial strength.

With that, let me turn it over to Nathan to get into more details on our financial results for the quarter.

[Nathaniel Colson, executive]

Thanks, Tim, and good morning. As Tim mentioned, we had another quarter with excellent financial results. We earned net income of $0.77 per diluted share compared to $0.66 per diluted share last year. Adjusted net operating income was also $0.77 per diluted share compared to $0.68 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release.

The results for the second quarter were reflective of the strong credit performance we continue to experience, which again led to favorable loss reserve development and resulted in a negative loss ratio for this quarter.

Our reestimation of ultimate losses on prior delinquencies resulted in $67 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from delinquency notices we received in 2022 and 2023.

As curates on those delinquency notices continue to exceed our expectations, we have made favorable adjustments to our ultimate loss expectations. As a reminder, the delinquency notices we received during the quarter will include loans from many different book-year vintages. We continue to maintain our initial ultimate loss assumptions related to new delinquencies from the most recent quarters.

Our delinquency inventory decreased in the second quarter by 3%, with cures slightly outpacing new notices. We continue to expect that the level of new delinquency notices may increase in the second half of 2024 due to seasonality and the large books from 2020 through 2022 being in what were historically higher loss emergent years. The in-force premium yield was 38.4 basis points in the quarter, flat quarter-over-quarter. As I mentioned on the last call, given our expectations for another year of higher persistency in a smaller MI market, we expect the in-force premium yield to remain relatively flat for the year.

We remain disciplined in our approach to expense management and focused on operational efficiency. Operating expenses in the quarter were $55 million down from $61 million last quarter and $57 million in the second quarter last year.

We continue to expect the full year operating expenses will be in the range we previously provided of $215 million to $225 million. Our operating results, together with our strong balance sheet, enabled us to grow book value per share to $19.58, up 15% compared to a year ago after returning $568 million of excess capital to shareholders through dividends and accretive share repurchases.

While higher interest rates and the resulting lower valuations for fixed income investments continue to be a headwind for book value per share, higher interest rates have been a positive for the earnings potential of the investment portfolio.

The book yield on the investment portfolio was 3.8% at the end of the second quarter, up 10 basis points in the quarter and up 55 basis points from a year ago. Net investment income was $61 million in the quarter, up $1.7 million sequentially and up $9 million from the second quarter last year.

The increase in investment income has benefited total revenue which was $305 million in the quarter compared to $294 million last quarter and $291 million in the second quarter last year.

During the second quarter, the reinvestment rates in our fixed income portfolio were above the book yield and assuming a similar interest rate environment, we expect the book yield to continue to increase, but at a slower rate as the increase in book yield continues to narrow the difference between our book yield and reinvestment rates.

As Tim discussed, our approach to capital management is dynamic and intended to maintain financial strength that positions us to achieve our objectives in varying macroeconomic environments. MGIC's capital structure includes $6 billion of balance sheet capital. Our well-established reinsurance program remains integral to our risk and capital management strategies.

In addition to reducing the volatility of losses in stress scenarios, our reinsurance agreements provide diversification and flexibility to our sources of capital at attractive costs and reduced our PMIERs required assets at $2.2 billion at the end of the second quarter.

We further bolstered our reinsurance program in the second quarter with an excess of loss agreement with the panel of highly rated reinsurers to cover most of our 2024 NIW. This reinsurance agreement complements the 30% quota share agreement we had in place at the start of the year to cover the 2024 NIW.

And with that, let me turn it back over to Tim.

[Timothy Mattke, executive]

Thanks, Nathan. In closing, we had another successful quarter and an excellent first half of the year. We have been consistently generating meaningful returns for our shareholders. Our balance sheet and liquidity remain strong. I continue to be encouraged by the positive credit trends we are experiencing in our existing insurance portfolio, the favorable employment trends and the resiliency of the housing market. As we navigate the second half of the year, we remain confident in our position and leadership in the market, as well as our ability to execute our business strategies.

With that, Andrew, let's take questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Soham Bhonsle with BTIG.

[Soham Bhonsle, analyst]

So I'm looking at Slide 5 in your deck, which is a really helpful chart. And it looks like you've been able to sort of see 40% of your PMIER required assets to the reinsurance markets and I mean, Nathan, you noted $2 billion of credit over time. Is there sort of a good way to think about sort of the optimal funding profile for you guys going forward?

[Nathaniel Colson, executive]

Yes, Soham, thanks for the question. I think that chart really does show what -- how we really approach reinsurance, which is we try to concentrate our reinsurance buying on the most recent and future NIW. So if you look at that chart from 2020 and prior when you look at what we're covering, we're not covering very much of that. We feel very comfortable with that risk and try to concentrate the deals we do have, like the excess of loss deals that we announced this quarter and previously, the quota share agreement covering our 2024 business.

So I don't think -- overall, we don't target a specific funding level from a reinsurance standpoint in the overall book, much more concentrated on trying to get reinsurance coverage on the most recent future NIW.

[Soham Bhonsle, analyst]

Okay. And then, Tim, just zooming out a little bit. credit performance just remains stellar. It seems like the market, the MI market seems pretty disciplined on pricing, and everything feels really good right now. But maybe just walk us through how you're planning for downside scenarios from here and just making sure that we're not getting too comfortable with the current state of things right now.

[Timothy Mattke, executive]

Yes. Soham, it's Tim. I appreciate the question. It's something, I think, that we do every day. I mean, being an insurance company, we always have to stay focused on the downside. And we think about executing in the market and we think about pricing. Our focus, quite frankly, is on the downside much more than it is on sort of expectations because that's -- we think that's critical to being a healthy company over the long run, and we think that served us well for the better part of 6 decades.

So it's something we're conscious of. We look for softening in any sort of credit. The good news is we haven't really seen it in our space. But it's something we have to remain very diligent on and be right to adjust for. The good thing is with the tools we have these days, we can make moves really quickly from a pricing standpoint, and we haven't been afraid to do that in the past.

[Operator]

And our next question comes from the line of Bose George with KBW.

[Bose George, analyst]

Can we start just on the new insurance written trends just with the companies have reported so far, you guys look like you're kind of at the high end of the range. Any thoughts there on market share or just trends in the market?

[Timothy Mattke, executive]

Yes, Bose, I think we still want to report. I think we're coming in from a share perspective, probably where we would expect the size of the market is pretty similar to what we would have thought. Again, I don't look at any one quarter as there's volatility that's going to be there. Share can move a little bit here or there. So I think it's safe to say we gained a little bit but it's mostly focused on are we getting the right return for the capital we're deploying. I feel good about this quarter, just like we felt good about last quarter as well. I think as we move through the year here, we have wide customer base that gives us an opportunity to really be able to get business when we want to be able to win the business and deploy the capital at good returns. .

So again, I think, yes, it's fair to say when we picked up a little bit this quarter. But I think we look over a longer period of time and sort of the amount of customers that we have activated and are able to do business with is another barometer as well.

[Bose George, analyst]

Okay. Makes sense. And then actually in terms of capital return, how do you sort of balance the share price in terms of buybacks versus dividends? I mean the share price -- the share price is up and let's say, it continues to do that, does that play a role at some point in terms of the mix?

[Nathaniel Colson, executive]

Yes. Bose, this is Nathan. Certainly, share price is an important consideration for us as we think about share repurchases. The #1 consideration is do we have excess capital at the holding company above the other things that we use capital at the holding company for. But recently, the answer to that has been, yes. So we have looked to increase payout ratios and have returned more capital through share repurchases. But even in the month of July here, our repurchases were at a little less than 1.1x tangible book. But I think with the increase in the share price, we still think that we're at very attractive levels for long-term value accretion via share repurchases.

So obviously, the price has come up quite a bit in the sector and in our company. And I think that's great news. But we still think we're trading at very attractive levels for long-term value creation as well.

[Operator]

And our next question comes from the line of Terry Ma with Barclays.

[Terry Ma, analyst]

Is there any color you can provide on the characteristic or makeup of new notices this quarter and last quarter? The implied kind of provision per notice was elevated compared to 2023. So any color you can provide there?

[Nathaniel Colson, executive]

Terry, it's Nathan. I mean on new notices, we do have some descriptive information in the portfolio supplement. I think the new notice claim rate that we used was the same as we have for the recent quarters at 7.5%. I think the biggest driver of maybe the provision on a per notice basis increasing then really has to do with the average exposure on new notices. And that I think is to be expected as we start to shift more towards notices from the most recent 5 or 7 years and less from the, say, 2012 and prior years, those have higher average loan balances, higher coverage levels, higher risk amounts on a per loan basis.

So I think that's really driving up the severity assumption is the -- just the size of the policy, not an increase in the ratio that we have a kind of risk to reserve. We continue to target around 105% for new notices. In terms of what we're reserving for compared to the risk on those delinquent items.

[Operator]

Our next question comes from the line of Doug Harter with UBS.

[Douglas Harter, analyst]

Can you talk about the pricing you're seeing and how that compares to kind of the in-force yield and kind of, therefore, kind of what your expectation is over the coming 12 months?

[Timothy Mattke, executive]

I think, Doug, I can start and Nathan has anything to add. Again, we don't talk too specific on pricing. I think it's -- if you look at sort of our yield on the portfolio over the last few quarters, it's been really stable. And I think if you think about over the course of the year here, that's really going to be dictated by the in-force portfolio any more than anything that comes down from the new business.

So I think we can feel pretty confident in saying that we expect that's going to be relatively stable over the remainder of the year, which I think we said coming into the year, we felt that was the case.

So again, I think from an overall market perspective, we feel really comfortable with the price we're able to get on the capital we're deploying. It's a good environment. Again, we always have to be careful about downside scenarios, but we feel that we're able to get really good return for the capital we're deploying in this current market.

[Operator]

Our next question comes from the line of Mihir Bhatia with Bank of America .

[Mihir Bhatia, analyst]

I wanted to start with the cure rate a little bit. Look, it's been pretty elevated the last couple of quarters, obviously, a strong housing credit backdrop. But I was really curious about it, and I'm trying to understand is what would need to change in the backdrop for that cure activity to weaken as you think about it? And like any thoughts on where the default rate could trend here over the next few quarters? Does your activity continue to be stronger than new notices? Or will the uptick in new notices kind of push total defaults, maybe a little bit up?

[Nathaniel Colson, executive]

Mihir, it's Nathan. I'll start on that, at least. And I think what we've observed over the last 2 years is I think a return of some level of seasonalities. So the first and second quarters are historically seasonally good credit quarters, both from a number of new notices but also pure activity.

So we do expect -- and we saw this last year, we do expect some softening of that in the second half of the year. So while we had declines in the first and second quarter and the delinquency inventory really driven by cures outpacing new notices, we don't expect that to happen in the second half of the year. But kind of in terms of broader trends, things that could drive not kind of seasonally adjusted, I guess, we'll say cure activity. I think that has to do with the general macroeconomic backdrop that we operate in.

So unemployment has remained low. Wage growth has been strong. Home prices have continued to increase. So those things are all tailwinds to credit performance for us. And if one or more of those started to come under pressure, I think that would -- that could impact not only the level of new notices but also how quickly they're carrying? And ultimately, how many cure out, how many of the results in claims. But the experience that we've had over the last several years has been quite favorable because all of those key factors, whether it's macroeconomics, interest rates or home prices have all been kind of working in a very favorable direction for credit performance.

[Mihir Bhatia, analyst]

Okay. Maybe switching to capital returns. I think you talked about them staying elevated in this operating environment for a little bit. Maybe to put a final point on it, is this 90%-ish payout ratio, the right way to think about it? That gives you enough, that 10% that you store is enough to fund the growth to the extent you're seeing that?

[Nathaniel Colson, executive]

Mihir, I wouldn't target a specific payout issue in any one quarter. I think like Tim mentioned in the opening comments, for us, it really starts with making sure we have enough capital at the operating company to support the risk that we have on the books and the risk that we want to write and be able to do that in a variety of operating environments. .

From there, we've been above our target levels at the operating company, which has led us to pay dividends, larger dividends over the last several years up to the holding company that has enabled this capital return that we've seen. But it doesn't start with a target payout ratio for us. It really starts round up from what's the right level of capital for us to have at the operating company.

So there's a lot of ifs here, right? But if the environment remains similar to what we've experienced, which is excellent credit performance and not a lot of growth, I think those are the conditions that lead to the higher payout ratios.

[Mihir Bhatia, analyst]

Got it. No, that's helpful. And then just my last question. I just wanted to follow up a little bit on Bose's question about share. Really, my question is just pretty straightforward. Was there anything episodic or unusual about the second quarter that maybe drove the uptick being -- for you guys being a little bit more than some of the peers who've reported so far like did you pick up any bulk business, anything specific that you would point to in the second quarter?

[Timothy Mattke, executive]

Mihir, no, I appreciate that. No bulk type deals for us. It's all sort of winning the business every day. I think where our share is going to end up this quarter is probably more representative of where I think we normally would be when you think about sort of our broad customer base, it's not probably even a little bit higher. So probably more a reflection of being back in sort of where we -- closer to where we should be as opposed to or maybe in Q1, but no but deals this quarter, anything like that's inflated a bit. It's just -- it's winning the business every day. .

[Operator]

Our next question comes from the line of Geoffrey Dunn with Dowling.

[Geoffrey Dunn, analyst]

I know it's still early in the seasoning pattern, but you are getting a growing amount of new notices coming from the '22, '23 books. Any quality of commentary you can provide with respect to how those notices are performing with the lower HPA relative to the bigger 2021 books?

[Nathaniel Colson, executive]

Geoff, it's Nathan. I'll take that one. I mean we do look at vintage level performance and how things are looking both from a transition to notice standpoint, but also carrying out. And I think the cure activity that we've seen we kind of look at this on a monthly basis. So 1 month curates, 2 months, 3 months, 4 months. We're not seeing a lot of changes in the patterns that we've seen.

So it does feel like there should be some differential performance in some of those vintages. I think we do see 2022, which, especially the back half of the year, kind of somewhat elevated compared to the '21 or 23% vintages. But I mean this is very, very slight. And then the grand scheme of things, not a big driver we think of ultimate losses because cure activity has been so good.

And then we try to ground a lot of things and looking back to 2009, which was a vintage that incurred some stress, ultimately fully developed out into a sub point loss ratio. And the delinquency patterns that we're seeing relative to 2009, they're really favorable for more recent vintages and post-delinquency cure activity has been so strong post-COVID that actual loss ratios on more recent vintages are running much below that level.

So I think it's definitely something that we keep an eye on, and we'll keep an eye on. But I don't have a lot for you on that specifically right now just because we're not seeing much differential in terms of post-delinquency cure performance when we look at it at a cohort level.

[Geoffrey Dunn, analyst]

As far as embedded equity, I think some companies and maybe Magic has as well provided kind of the embedded equity on average for the overall portfolio. I think the latest HPM number was over 5%. Is it fair to speculate that there's, on average, maybe 5%, 6% embedded equity in the '23 book and more so on the '22 book? Or is that too general?

[Nathaniel Colson, executive]

I think that's a fair way to look at it. Again, one of the reasons that we don't have disclosed that and also don't do it for delinquent loans is those are averages over large geographic areas. And there's certainly homes that experience better than average appreciation but there's also some that experienced lower than average appreciation or even depreciation, even if the overall market is up 5%.

And in our business of ensuring you really kind of mortgage credit tail risk. We're most focused on the worst 3% to 5% to 7% of performance, not the average.

So we see those same numbers when we run that for our book. But I think we're kind of more focused on the full distribution of outcomes. But if you wanted to look at the full 2023 book using either regional or kind of localized home prices or national home prices. I think you would see those same -- that kind of same dynamic that you're describing. But I think for us, it's more focused on the kind of full distribution and really the worst 10% of the distribution because that's really what we're there to cover not kind of the average loan.

[Operator]

Thank you. There are no further questions. I will now turn the call back over to management for closing remarks.

[Timothy Mattke, executive]

Thank you, Andrew. I want to thank everyone for your interest in MGIC. We will be participating in the Barclays Financial Services Conference and the Zelman Housing Summit in September. Have a great rest of your week and summer. Thanks, everyone.

[Operator]

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