Q1 2021 MGIC Investment Corp Earnings Call
I continue to be encouraged by the trends, we're seeing in the credit performance, including the delinquency rate, which continues to decline as fewer loans become delinquent and existing delinquent loans continue to cure.
This trend continued through April where we saw our lowest level of new delinquency notices and more than a decade with strong cure activity on previously delinquent loans.
As a result of credit performance reinsurance transactions and continued strong cash from operations, we estimate that the spread of our pmiers available assets over pmiers minimum required assets increased by approximately $500 million in the quarter and that our P. Meyer sufficiency ratio was 169% at the end of the quarter.
While we stay keenly focused on maximizing the near term business opportunities and navigating the outstanding COVID-19 related challenges, we remain focused on our long term success of the company.
We have a strong balance sheet, we are confident of our position in the market and we like the risk reward equation that the current conditions offer.
With that let me turn it over to Nathan.
Thanks, Tim and good morning.
As Tim mentioned on the results show, we had another strong quarter of financial results is the impact on our business from the effects of COVID-19 continues to diminish.
In the first quarter, we earned $150 million and net income for 43 cents per diluted share and generated an annualized 13% return on beginning shareholders' equity.
This compares to $150 million of net income or <unk> 42 cents per diluted share and an annualized 14% return on beginning shareholders' equity in the same period last year.
Adjusted net operating income per diluted share in the first quarter was a penny lower than the reported GAAP amount.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found on the press release.
During the quarter total revenues for $298 million compared to $307 million last year with the decrease primarily due to lower investment income and lower net premium earned.
Investment income was lower as the larger investment portfolio was more than offset by lower yields.
Net premiums earned were lower primarily due to a lower net premium yield and an increase in the amount of premiums and risk.
Through our reinsurance transactions.
These effects were partially offset by an increase in accelerated premiums earned from single premium policy cancellations compared to the first quarter of 2020 and higher average insurance in force.
The net premium yield for the first quarter was approximately 41 basis points, which was down sequentially by approximately two basis points, primarily because of the enforced premium yield continues to re price through attrition of the older policies, which generally have higher premium rates.
We also realized less benefit from accelerated premiums earned from single premium policy cancellations compared to the fourth quarter of 2020.
Single premium policies represent a smaller percentage of our in force portfolio than in 2020 due to the increased level of refinances.
Over the last several quarters and there is also a smaller percentage of our new business being generated from these policies.
During the quarter accelerated premiums from single premium policy cancellations were $28 million compared to $32 million last quarter and $18 million on the first quarter of 2020.
I expect the direct.
In force premium yield to continue to trend lower throughout 2021.
As the older policies, which generally have higher premium rates run off and are replaced with new policies, which generally have lower premium rates.
However, due to the recognition of accelerated single premiums the level of profit Commission and the impact of new business. The change in the net premium yield is more difficult to reliably forecast, but is also expected to decline over time.
Despite the lower premium rates on newer policies, we expect to earn attractive risk adjusted returns on our new business written.
Shifting over to credit.
Net losses incurred were $40 million on the first quarter compared to $61 million for the same period last year.
In the first quarter, we received approximately 13000, new delinquency notices which represents one 2%.
Of the number of loans insured as of the end of 2020, which was the same percentage that rolled from current to delinquent in the first quarter last year.
We are encouraged by the fact that this ratio has returned to its pre COVID-19 level.
The estimated claim rate on new notices received in the first quarter of 2021 was approximately seven 5% compared to 9% in the first quarter of 2020.
As we do each quarter, we reevaluated our loss reserves on our existing delinquency inventory and in the first quarter of 2021 determined that there was immaterial loss reserve development compared to $3 million of unfavorable development in the first quarter last year.
We reduced our reserve for incurred but not reported or IV on our delinquencies in the first quarter of 2021 by $4 million to approximately $24 million compared to an increase of $8 million on the first quarter of 2020.
As a reminder, we adjust the IV on our reserve as we re estimate the number of loans, whose borrowers had missed a payment but that have not yet been reported to us is delinquent.
Of the 53000 loans on our delinquency inventory at quarter end, approximately 61% or 32200 loans were reported to us to be in forbearance.
Based on the information reported to US we estimate that the majority of the loans in forbearance at quarter end will reach the end of their forbearance term in the later part of 2021.
More specifically, we estimate that more than 60% of the loans in forbearance at quarter end will reach their 12 month anniversary of being in forbearance in the second quarter of 2021 on.
Though we expect some of those plans will be extended either for three months or six months.
While we continue to see loans exited forbearance without a claim payment.
Future economic conditions, including unemployment on home prices will impact the ultimate outcome of the remaining loans in forbearance on.
So it is uncertain how the current delinquency inventory will be resolved I am pleased that the favorable delinquency and cure activity has continued through April and that the downside earnings and capital risk has been materially lessen from what it was at the end of the second quarter last year.
The number of claims received in the quarter remained very low and were down nearly 64% from the same period last year due to the various foreclosure and eviction moratoriums pri.
Primary paid claims declined to just under $12 million and consisted primarily of short sales and deeds in lieu of foreclosure.
At some point for foreclosure moratoriums will expire however, we expect claim payments to remain modest for several quarters after they expire.
On average it takes approximately 18 months to complete a foreclosure should that become necessary.
Moving on to operating expenses.
During the first quarter, they totaled $51 million compared to $45 million on the same period last year.
Last quarter, we informed you that we have been making and plan to make further investments on our infrastructure to realize the value that comes with improved data analytics and operating improvements of an increasingly digitized mortgage finance industry.
The rate of spend to date is a bit lower than the guidance. We previously provided I do expect the rate of investment to increase in the coming quarters and that the full year underwriting and other expenses will still be on the range of $220 million to $225 million, but more likely towards the lower end of that range.
Reflecting our current debt outstanding interest expense was $18 million on the quarter compared to $13 million on the same period last year.
Assuming no additional transactions the annual debt service costs will be approximately $70 million.
We had approximately $800 million for cash and investments at the holding company as of March 31 2021.
At the most recent board meeting the holding company Board approved a cash dividend of <unk> <unk> per share payable on may 27th.
Any future common stock dividends will also be determined in consultation with the board.
We continue to believe that our balanced approach and maintaining a strong balance sheet.
Which includes the use of forward commitment quota share treaties and by accessing the capital markets for excess of loss reinsurance via island transactions provides the most flexibility to maximize the long term value of both the operating company and holding company, whether by writing more primary mortgage insurance pursuing new business opportunities retire.
<unk> debt paying dividends or repurchasing stock.
At quarter end, our consolidated cash and investments totaled $7 billion, including the cash and investments at the holding company.
The consolidated investment portfolio had a mix of 84% taxable and 16% tax exempt securities a pretax yield of two 5% and a duration of four five years.
Primarily reflecting the interest rate movements in the quarter. The net unrealized gain declined to $226 million at March 31, 2021, compared to $345 million at year end.
Shifting to the financial requirements for the private mortgage insurer eligibility requirements or P. Myers of the Gse's.
Mgic's available assets totaled approximately $5 5 billion, resulting in a $2 3 billion excess over the minimum required assets of $3 2 billion and our Pmiers sufficiency ratio of 169% as Tim said.
The $3 2 billion of minimum required assets at the end of the first quarter.
It reflects a 70% reduction for loans in a COVID-19 related forbearance plan as allowed under the P. Myers. This provided on the approximately $620 million of P. Myers release net of reinsurance.
This excess of available assets over minimum required assets grew by approximately $500 million in the quarter as a result of the $360 million reduction in required assets associated with the island transaction that closed in February and approximately $200 million in available assets generated organically.
Our results of operations, partially offset by the increase in required assets to support the increase in risk in force from the first quarter.
In summary, we remain encouraged that as the economy continues to recover the favorable trends in credit performance and on the housing market will continue we.
We feel we are well positioned to capitalize on the market opportunities that a robust housing market should make available to us given our strong market presence a growing in force book of business that is currently generating a low level of delinquencies.
Comprehensive reinsurance program and the quality of new business being written.
With that let me turn it back to Tim Thanks.
Thanks Nathan.
Before moving to questions, let me address a few additional topics there.
There continues to be a lot of activity in housing policy circles. The meaningful progress is slow this could be in part due to the fact that the housing finance system, while it could be improved as operating relatively efficiently and providing critical support to the economic recovery.
As widely expected it appears that the new administration is focusing its policy efforts on continued loss mitigation efforts for homeowners impacted by COVID-19, and ensuring a successful economic recovery rather than large scale changes for housing finance infrastructure policy today.
To date, we are not aware of any policy initiatives that will provide new challenges to our company our industry.
Meanwhile, we will continue to advocate for the increased use of private mortgage insurance on the housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system.
Long term I remain encouraged about the future role that our company and industry can play on housing finance and believes that other regulators and policymakers share a similar view.
The COVID-19 pandemic remind all participants that sub market options for credit enhancement can be scarce or unavailable at various points in the economic cycle, while our company and industry are organized solely to provide credit enhancement solutions to lenders borrowers and the gse's in all economic cycles now.
Not only does private mortgage insurance offer dedicated capital day in and day out for the housing industry and offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.
As I mentioned at the beginning of my remarks, we are focused on continuing to provide critical support to the current housing market, especially low and moderate income and first time homebuyers.
Currently we are writing high levels of new insurance and are experiencing decreasing levels of delinquencies both duly reported into open inventory.
We have a book of business that has strong underlying credit characteristics and is supported by a balance sheet that has a low debt to capital ratio and investment portfolio of nearly $7 billion contractual premium flow and a robust reinsurance program.
I am confident in our positioning in this market and we like the risk reward equation that the current conditions offer we have the right team in place to build off our solid foundation to continue to deliver competitive offerings and best in class service to our customers and generate strong returns for our shareholders with.
With that operator, let's take questions.
Yeah.
Please ask your question.
Star one on your telephone to withdraw.
Your question.
Hum.
I guess I'll ask a question that is star one.
And our first question is from Mike.
<unk> of Barclays.
Yeah.
Yeah. Thank you was hoping you could give us a sense of why you think insurance in force grew so much in April.
What youre seeing on in terms of pricing and whether you think any pricing adjustments might've impacted kind of your business you wrote in April.
Mark It's Tim I guess, it's tough to know exactly what the overall size.
Size of day April market is I think we.
We continue to be encouraged that home purchase volume seems to Bain remained strong even though is as we've talked about on the comments that refi activity seems to be slowing down at least for for mortgage insurers.
But I think it's really you know as home purchases remains strong I think interest rates are still very attractive.
<unk> for homebuyers.
So for the most part I think we're talking it up to that is that there's still a lot of tailwind from that standpoint.
Okay, and you're not seeing any signs that the pricing has kind of shifted in a way that might be moving business towards due this month.
Not not that I would point to I think it's more of that from a purchase we're getting into the time of the year, where that is strong and we think interest rates, even though some headlines will say that interest rates are going up and making things less affordable we still think that its attractive interest rate for for a lot of would be homebuyers and Mark This is Mike.
For others to a reminder, that the NSW right is it's clearly a trailing indicator so thats coming from non applications in activity from in April that's coming from February and March.
And then the day.
It gets close and then recognize it put on our books. So again I kind of think about that rates were just starting to move up and we had some volatility in rates you know at that time as well so just another point.
I'll, let Tim etc.
Got it.
And then on a separate topic I mean, maybe it's on alluded to the fact that 60% of borrowers in forbearance or coming up on kind of the scheduled end of their of their forbearance periods, but did you expect some some borrowers will have that extended could you talk a little bit more about that kind of what's your expectations on what youre hearing out.
Washington, and if they don't kind of what's your what's your strategy.
For those loans going forward.
Sure market, it's Nathan I think with the Gse's extending the forbearance period up to 18 months for for most of the borrowers that are in forbearance. Those that were in I think it was at the end of February.
It doesn't seem like there's going to be a lot of borrowers that follow a path for the exit forbearance after 12 months and enter foreclosure.
Partly due to the moratoriums and partly due to the option to extend out to 18 months. So we don't think that we're going to see a lot of borrowers exiting forbearance and kind of negative outcomes in the near term and that if if borrowers are going to exit forbearance and enter foreclosure that day.
That's likely pushed out towards the end of the year at this point.
Okay and are you having conversations with your with Servicers, all about kind of what their approach will be there whether it's you know start to do things like Dean Lu or I assume that the first effort will be to try and restructure on the mortgage and get to a payment that the borrower can make.
Hey, Mark it's Mike.
Yeah, I mean, absolutely we engaged the servicers, we participate in housing policy Council and clearly Theres a lot of news to with the CFPB looking at.
From a borrower perspective is getting more active and involved in reviews.
So.
What servicers strategies will be I think will be the same tried and true traditional strategies that they've always used to do loss mitigation clearly with new tools here.
Primarily the deferral option within the forbearance arrangement.
More formalized I should say tool that was always somewhat available. So I think it's too early to tell what exact strategy would be.
But you did comment on didn't lose that kind of what's happening now when you look at our page. It's dean lose its short sales, it's non foreclosure activity. So those activities are taking place where the.
The borrower thinks it makes the most sense for them and the outcome is best for for everybody quite frankly at that point in time.
Hopefully that okay.
Great. Thank you.
Our next question is from.
So can you detail for you.
Question.
Hey, guys good morning.
On a just follow up on the.
Related question.
Moving to some market share among your peers this quarter.
Stable.
Just wanted to get your thoughts on competition on pricing in the market.
Specifically.
This increase was post COVID-19.
C Corp.
On a quite wholesome food.
Yeah for it.
It's tough to say, obviously, where everybody else's, it's a competitive marketplace I think.
We view it as a very attractive risk reward.
I think generally it's safe to say that the concerns that people had onset of COVID-19.
That probably dissipated in the industry from.
From a.
Sort of thinking about the risk and how to price. So I think it's safe to think about on that term to think about what happened with market share with other participants that's tough for us to speculate on obviously, but we're very happy with the capital we were able to deploy this last quarter felt like we're getting really strong returns continuing continued that this quarter as well.
<unk>.
And so again looking forward for the remainder of the year.
Okay fair enough. That's good so it's safe to say that you'll see returns consistent with your hurdles. There is no change this quarter.
Going on on the market Yeah, I think it's safe to say that we are getting returns that are at or exceed our hurdle rates and again view it as a very good market to be participating in.
Okay, great. Thanks, and then just one on on.
Capital return you guys have a lot of excess at the holding company.
Thinking about potential capital return there while the FHFA has day.
On a constraint on dividends up to the Holdco, but you obviously have a lot of flexibility with the cash that's already there.
Yeah Bose, it's Nathan it's it's a good question on something that we obviously spend a lot of time talking about.
We have continued to pay the shareholder dividend as a form of capital return through this period.
We do have about $800 million at the holding company. So I think we have options but.
What we said last quarter and I think it's still true is that meaningful capital return given the scale of our business really can't start until dividends from the operating companies start again, so while we continue to evaluate these things I I'd be more focused on what happens after the GSE.
Expert the exploration of the GSE temporary rule that requires their approval I think we've had really constructive conversations with our regulator and.
A lot of conversations internally as well about how we want to approach that going forward then.
And continue to view that as really the the thing that's going to drive you know kind of our capital return plan longer term. So don't have a I guess a lot more to it.
To guide on today.
Okay, Great makes sense. Thanks.
Our next question is from Doug Harter.
Oh.
Please ask your question.
Thanks.
You guys mentioned, you expect premium yield to continue to drift lower.
Any sense as to how long until we kind of bottom out and kind of reached the new equilibrium.
Yeah.
Yes, Nathan it's a good question again.
I'd kind of point you to the direct in force portfolio yield as opposed to the net yield which I do think can move around for it for other reasons, it's been coming down about a basis point on a quarter over the last several quarters.
That run rate.
It seems like a pretty good thought for the remainder of 2021, but again, that's going to be influenced by the level of refinance activity I think we've been repricing a little bit faster in this environment with how much has been running off and how much has been coming on.
So if we end up in an environment, where the refinance activity is much lower I think that would that would serve all as equal to slow that pace and if if we continue on a very high refinance environment continue to see that pace.
You know beyond 2021 over the next several quarters I think there's just probably too many factors that could influence it to try to provide you know kind of longer term guidance there.
Understood. Thanks Nathan.
Our next question is from sales.
Okay.
Your line.
Yeah, Thanks, and good morning, hopefully a quick geography question for you.
I b in our adjustment that was done.
Where does that show up is it in the current period or private period loss provisioning.
That's in the current period.
Great. Thank you.
And so Nathan you had talked about expenses and I. Appreciate you know kind of your updated thoughts around that as we look at the path towards the 20 to 25 minutes is that sequential upticks throughout the year.
You know how should we think about what the fourth quarter number is I mean is that an exit run rate that we should contemplate for for forward quarters. Because it's just inherently digitization is more expensive from an operating perspective to run this business or is there some kind of catch up in 2021.
And maybe the expenses you don't have a it ticked down as we contemplate 2022 and beyond.
Yeah.
Good question I don't I don't view the.
They are being.
Unnecessarily any kind of seasonality or direct upward path or any bulge I would say in expenses quarterly over 2021. So.
We're a little bit lower than the net run rate guidance, but not a lot lower I mean, so I think what we're saying is we do think that in the second third and fourth quarters and in aggregate will be a little bit higher than the average that we had on the first quarter.
But in terms of the longer term I think what we talked about last quarter was a lot of this investment is to gain increased efficiencies as well and we're going to start to see some of those efficiencies coming online even in the say the back half of this year.
Might be masked in the near term by the incremental investment, but I don't think that where we end up in let's say the fourth quarter is the new long term run rate. That's certainly not the way that we entered this kind of investment with that in mind.
Okay.
Okay that makes sense and then just one more philosophical question as we think about deeds in lieu and short sales vs. The strength that we have in the broader housing market I mean is there.
Is there an opportunity in here to acquire the property and just sell it I think.
And again, given the Optionality that you have in the policies are on them.
Can you be more aggressive if you want to in this market.
Does it makes sense just given what you know the strength, we have on the broader housing market and home price appreciation.
Hey, Bill Mike here.
You're right, we always have the option to acquire the property.
It's somewhat.
<unk> intuitive when the markets are strong even though we have that opportunity.
And then you usually see others bid.
Bidding outbidding us because we're looking to cover basically mitigate our loss for the maximum amount possible not necessarily make a gain on the sale of the property.
In order to reduce it to offense, if you will at negative loss for lack of a better way to describe it. So yes, we see opportunities there but.
Little and plus that number is so small I mean, it just doesn't.
<unk> sense to be more aggressive to I'll say may turn it into a profit center.
Hum.
Curious thank you so much sir.
Our next question is from Hawaii and go for it.
Okay.
Yes.
Hi, Thanks, guys I jumped on a little late so sorry, if you addressed this on but just going back to that April insurance in force growth. It sounded like in response to a previous question.
The improvement in April I was.
Really driven by a stronger <unk> and IW growth and less so from declining cancellations is that is that the right way to think about it or did you see it pick up on persistency in April.
Yeah.
Persistency I don't think.
Picked up in April I mean, given the rate environment. So it's really a function of the market opportunity that was out there and again. This is the April and IW is really reflective of that February March early March activity I think of it that way where rates were just beginning to kind of bounce up.
So maybe you get above 3% before they started retreating again, so I think it's just more natural and organic from the overall market opportunity perspective.
Okay got it thanks.
Second question is on premium yield I guess on the direct premium yield.
On.
Do you think once the pre 2018 book fully runs off will can see continue to see reductions in the premium yield or do you think that you kind of stabilizes.
Ryan It's Nathan I mean, I would say our experience has been that those books never fully run off.
These things have a very long long tail to them, but you know even if you kind of generalize and say that those are primarily have having run off I mean, certainly the reason why the yield is trended down is that the newer policies have been written with kind of a better risk profile than the average enforced that we had previously and also at low.
Premium rates.
Once it's the in force contains only that then you know the in force yield what kind of mirrored that.
You know mathematically what Youre, saying is is correct, but.
Kind of looking at it beyond at least from our perspective looking at it beyond 2021, there's just a few too many moving parts to do it with with any certainty.
Okay got it thank you very much.
Our next question from me.
Yeah.
Bank of America. Please go ahead.
Quick question.
Hi, Good morning, and thank you for taking my question I just had one quick one I just wanted to talk about the and I apologize if I missed it if you're on addressed this already too, but I wanted to ask about the inflow.
I could see the delinquent inventory declining so much.
Is that something.
I guess the question is like was there something particularly unusual about that time period.
Because of the foreclosure expense.
Expiry of been getting extended or should or do you think that it is indicative of what the kind of improvement we could see for the next.
Two three months.
Because I imagine that a lot of them know what's coming up.
On a 12 six.
But reaching that 12 months in the next few months. Thank you.
Hey, Mike So I mean right.
Seasonality does still play a role in.
Credit with new notices and cares.
Regardless of the economic environment, whether it was really strong economic environment or a weak economic environment, you'll always see seasonality.
Getting part of the year and I think Thats clearly that's a influencer of it how much of it is seasonality versus I'll call. It organic.
Our reentry people moving back that's a little harder to parse out at this time.
So but seasonality.
Seasonality I think as you know when we look at it sequentially month over month, I think you've got to keep that in mind as well.
Got it okay. Thank you.
Okay.
Yeah.
And there are no further questions on queue.
Thank you.
Okay.
I want to thank everyone for their interest.
<unk> another great quarter financially and hope everyone is staying happy and healthy as we move through COVID-19, but again. Thank you for your interest in MGIC investment Corp.
Ladies and gentlemen.
Thank you for the conference call. Thank you for participating you may now disconnect.
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First on <unk> welcome to day.
Net.
Great quarter.
Thank you on earnings call.
This time all participants from Goldman is simple.
After the speaker's presentation, there will be a question from arms race session to ask a question. During this session you will need to bronze star one on your telephone.
Today's conference is being recorded.
If you require any further assistance please press star zero.
I would like to hand, the conference over to your Speaker today, Mike Zimmerman Senior Vice President Investor Relations. Please go ahead.
Thanks, Lori good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation, joining me on the call today to discuss the results for the first quarter of 2021, our Chief Executive Officer, Tim Mattke, and Chief Financial Officer, Nathan Colson.
I want to remind all participants that our earnings release of last evening, which may be accessed on our website, which is located at MTG Dot MGIC Dot com under newsroom includes additional information about the company's quarterly results that we will refer to during the call and includes a reconciliation of non-GAAP financial measures.
To their most comparable GAAP measures.
We have posted on our website a presentation that contains information pertaining to our primary risk in force new insurance written.
Reinsurance transactions and other information, which we think youll find valuable.
I also want to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations on correction for the past presentations on our website that investors and on other interested parties I should be aware of.
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 those factors, including COVID-19 that could cause actual results to differ materially from those discussed on the call are contained in the form 8-K and form 10.
10-Q that were filed last night.
If the company makes any forward looking statements we are not undertaking an obligation to update those statements in the future in light of subsequent developments further no interested parties 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 the form K or 10-Q for this time I'd like to introduce.
As Tim Mattke.
Thanks, Mike and good morning, everyone.
I am pleased to report that we produced another quarter of very strong financial results. After my opening remarks, Nathan will provide more detail about those financial results and about our capital position than.
Then before we open the line for questions I'll wrap up by discussing the current operating environment, including activities related to housing policy.
During the quarter, we earned GAAP net income of $150 million, which reflects the strong credit profile and performance of our insurance in force the favorable housing and mortgage market trends improving economic conditions in our market presence.
For some time now our main business objective has been to use our resources to provide critical support to the housing market, especially the first time in low and moderate income homebuyers.
We strive to achieve that objective by among other things, providing competitive offerings and best in class service to mortgage originators and servicers and by maintaining a sharp focus on the sources and uses of our capital.
This strategy has allowed us to capitalize on the strong demand for single family housing.
Our new insurance written or niwa continued to be weighted more heavily towards the purchase transaction versus refinance transaction transaction.
Counting for 60% of our <unk> in the first quarter.
While interest rates were higher in the first quarter than at times in 2020, there is still very attractive for many borrowers whether to purchase a home or to refinance and our industry continued to enjoy a relatively larger market share of refinances than in prior periods.
These strong housing and mortgage market conditions led to another very busy quarter for our customers and as a result of this and our market presence, we wrote nearly $31 billion of NSW in the first quarter.
While the first quarter provided a strong start for new business in 2021, we do expect that higher interest rates and the recent gains on property values will slow the volume of refinance transactions available to ensure.
In fact, we have begun to see the mix shift towards more purchase transactions and our application pipeline, a leading indicator of niwa with purchase transactions, making up more than 75% of the applications in recent weeks.
The level of new business, we wrote in the quarter more than offset the pressure of lower annual persistency on our existing book of business caused by refinance activity and resulted in our insurance in force growing to $252 billion.
More than 11% higher than the same period last year.
While the supply of housing inventory available for purchases low we still expect robust purchase market conditions to continue as demand remains strong.
That those conditions will continue to allow our insurance in force to grow although perhaps a slower annual rate than we have been enjoying in recent quarters.
Reflecting the underlying economic conditions, the quality of our existing book of business and the number of new delinquency notices received our loss ratio declined to 15, 5% in the quarter.
I continue to be encouraged by the trends we are seeing in the credit performance, including a delinquency rate, which continues to decline as fewer loans become delinquent and existing delinquent loans continue to care for.
This trend continued through April where we saw our lowest level of new delinquency notices and more than a decade with strong tier activity on previously delinquent loans.
As a result of credit performance reinsurance transactions and continued strong cash from operations, we estimate that the spread of our pmiers available assets over pmiers minimum required assets increased by approximately $500 million in the quarter and that our Pmiers sufficiency ratio was 169% at the end of the quarter.
While we stay keenly focused on maximizing the near term business opportunities and navigating the outstanding COVID-19 related challenges, we remain focused on our long term success of the company we.
We have a strong balance sheet, we are confident in our position in the market and we like the risk reward equation that the current conditions offer.
With that let me turn it over to Nathan.
Thanks, Tim and good morning.
As Tim mentioned on the results show, we had another strong quarter on financial results is the impact on our business from the effects from COVID-19 continues to diminish.
In the first quarter, we earned $150 million and net income for 43 per diluted share and generated an annualized 13% return on beginning shareholders' equity.
This compares to $150 million of net income or <unk> 42 per diluted share and an annualized 14% return on beginning shareholders' equity in the same period last year.
Adjusted net operating income per diluted share in the first quarter was a penny lower than the reported GAAP amount.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found on the press release.
During the quarter total revenues for $298 million compared to $307 million last year with the decrease primarily due to lower investment income and lower net premium earned.
Investment income was lower at the larger investment portfolio was more than offset by lower yields.
Net premiums earned were lower primarily due to a lower net premium yield and an increase in the amount of premiums and risk.
Through our reinsurance transactions.
These effects were partially offset by an increase in accelerated premiums earned from single premium policy cancellations compared to the first quarter of 2020 and higher average insurance in force.
The net premium yield for the first quarter was approximately 41 basis points, which was down sequentially by approximately two basis points, primarily because of the in force premium yield continues to re price through attrition of older policies, which generally have higher premium rates.
We also realized less benefit from accelerated premiums earned from single premium policy cancellations compared to the fourth quarter of 2020.
Single premium policies represent a smaller percentage of our in force portfolio than in 2020 due to the increased level of refinances.
Over the last several quarters and there is also a smaller percentage of our new business being generated from these policies.
During the quarter accelerated premiums from single premium policy cancellations were $28 million compared to $32 million last quarter and $18 million on the first quarter of 2020.
I expect the direct.
In force premium yield to continue to trend lower throughout 2021.
As the older policies, which generally have higher premium rates run off and are replaced with new policies, which generally have lower premium rates.
However, due to the recognition of accelerated single premiums the level of profit Commission and the impact of new business. The change in the net premium yield is more difficult to reliably forecast, but it is also expected to decline over time.
Despite the lower premium rates on newer policies, we expect to earn attractive risk adjusted returns on our new business written.
Shifting over to credit.
Net losses incurred were $40 million on the first quarter compared to $61 million for the same period last year.
In the first quarter, we received approximately 13000, new delinquency notices which represents one 2%.
Of the number of loans insured as of the end of 2020, which was the same percentage that rolled from current to delinquent in the first quarter last year.
We are encouraged by the fact that this ratio has returned to its pre COVID-19 level.
The estimated claim rate on new notices received in the first quarter of 2021 was approximately seven 5% compared to 9% in the first quarter of 2020.
As we do each quarter, we reevaluated our loss reserves on our existing delinquency inventory and in the first quarter of 2021 determined that there was immaterial loss reserve development compared to $3 million of unfavorable development in the first quarter last year.
We reduced our reserve for incurred but not reported or IV in our delinquencies in the first quarter of 2021 by $4 million to approximately $24 million compared to an increase of $8 million on the first quarter of 2020.
As a reminder, we adjust the IV on our reserve as we re estimate the number of loans, whose borrowers had missed a payment but that have not yet been reported to us is delinquent.
Of the 53000 loans on our delinquency inventory at quarter end, approximately 61% or 32200 loans were reported to us to be in forbearance.
Based on the information reported to US we estimate that the majority of the loans in forbearance at quarter end, we will reach the end of their forbearance term in the later part of 2021.
More specifically, we estimate that more than 60% of the loans in forbearance at quarter end will reach their 12 month anniversary of being in forbearance in the second quarter of 2021, although we expect some of those plans will be extended either for three months for six months.
While we continue to see loans exited forbearance without a claim payment.
For economic conditions, including unemployment on home prices will impact the ultimate outcome of the remaining loans in forbearance.
Although it is uncertain how the current delinquency inventory will be resolved I am pleased that the favorable delinquency and care activity has continued through April and that the downside earnings and capital risk has been materially lessen from what it was at the end of the second quarter last year.
The number of claims received in the quarter remained very low and were down nearly 64% from the same period last year due to the various foreclosure and eviction moratoriums.
Primary paid claims declined to just under $12 million and consisted primarily of short sales and deeds in lieu of foreclosure.
At some point for foreclosure moratoriums will expire however, we expect claim payments to remain modest for several quarters. After they expire because on average it takes approximately 18 months to complete a foreclosure should that become necessary.
Moving on to operating expenses during.
During the first quarter, they totaled $51 million compared to $45 million on the same period last year.
Last quarter, we informed you that we have been making and plan to make further investments on our infrastructure to realize the value that comes with improved data analytics and operating improvements of an increasingly digitized mortgage finance industry.
While the rate of spend a day is a bit lower than the guidance. We previously provided I do expect the rate of investment to increase in the coming quarters and that the full year underwriting and other expenses will still be on the range of $220 million to $225 million, but more likely towards the lower end of that range.
Reflecting our current debt outstanding interest expense was $18 million on the quarter compared to $13 million on the same period last year.
Assuming no additional transactions the annual debt service costs will be approximately $70 million.
We had approximately $800 million for cash and investments at the holding company as of March 31 2021.
At the most recent board meeting the holding company Board approved a cash dividend of <unk> <unk> per share payable on may 27th.
Any future common stock dividends will also be determined in consultation with the board.
We continue to believe that our balanced approach and maintaining a strong balance sheet.
Which includes the use of forward commitment quota share treaties and by accessing the capital markets for excess of loss reinsurance via island transactions provides the most flexibility to maximize the long term value of both the operating company and holding company, whether by writing more primary mortgage insurance pursuing new business opportunities retire.
<unk> debt paying dividends or repurchasing stock.
At quarter end, our consolidated cash and investments totaled $7 billion, including the cash and investments at the holding company.
The consolidated investment portfolio at a mix of 84% taxable and 16% tax exempt securities a pretax yield of two 5% and a duration of four five years.
Primarily reflecting the interest rate movements in the quarter. The net unrealized gain declined to $226 million at March 31, 2021, compared to $345 million at year end.
Shifting to the financial requirements of the private mortgage insurer eligibility requirements or P. Myers of the Gse's.
Mgic's available assets totaled approximately $5 5 billion.
Resulting in a $2 3 billion excess over the minimum required assets of $3 2 billion and our Pmiers sufficiency ratio of 169% as Tim said.
The $3 $2 billion of minimum required assets at the end of the first quarter.
Reflects a 70% reduction for loans in a COVID-19 related forbearance plan as allowed under the P. Myers. This provided on the approximately $620 million of P. Myers release net of reinsurance.
This excess of available assets over minimum required assets grew by approximately $500 million in the quarter as a result of the $360 million reduction in required assets associated with the island transaction that closed in February and approximately $200 million and available assets generated organically through our.
Our results of operations, partially offset by the increase in required assets to support the increase in risk in force in the first quarter.
In summary, we remain encouraged that as the economy continues to recover the favorable trends in credit performance and on the housing market will continue.
We feel we are well positioned to capitalize on the market opportunities that a robust housing market should make available to us given our strong market presence a growing in force book of business that is currently generating a low level of delinquencies.
Comprehensive reinsurance program and the quality of new business being written.
With that let me turn it back to Tim Thanks.
Thanks Nathan.
Before moving to questions, let me address a few additional topics there.
There continues to be a lot of activity in housing policy circles. The meaningful progress is slow this could be in part due to the fact that the housing finance system, while it could be improved as operating relatively efficiently and providing critical support to the economic recovery.
As widely expected it appears that the new administration is focusing its policy efforts on continued loss mitigation efforts for homeowners impacted by COVID-19 and interest.
Ensuring a successful economic recovery rather than large scale changes to housing finance infrastructure policy.
To date, we are not aware of any policy initiatives that will provide new challenges to our company our industry.
Meanwhile, we will continue to advocate for the increased use of private mortgage insurance on the housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system.
Long term I remain encouraged about the future role that our company and industry can play on housing finance and believes that other regulators and policymakers share a similar view.
The COVID-19 pandemic remind all participants that submarket options for credit enhancement can be scarce or unavailable at various points in the economic cycle, while our company and industry are organized solely to provide credit enhancement solutions to lenders borrowers and the gse's in all economic cycles.
Not only does private mortgage insurance offer dedicated capital day in and day out to the housing industry and offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.
As I mentioned at the beginning my remarks, we are focused on continuing to provide critical support to the current housing market, especially low and moderate income and first time homebuyers.
Currently we are writing high levels of new insurance and are experiencing decreasing levels of delinquencies, both duly reported and those in inventory we have.
Have a book of business that has strong underlying credit characteristics and is supported by a balance sheet that has a low debt to capital ratio and investment portfolio of nearly $7 billion contractual premium flow and a robust reinsurance program.
I am confident in our positioning in this market and we like the risk reward equation that the current conditions offer we have the right team in place to build off our solid foundation to continue to deliver competitive offerings and best in class service to our customers and generate strong returns for our shareholders.
With that operator, let's take questions.
In line Jay a question you will need to pause.
One on your telephone.
Julia question Zach.
And then lastly question Debbie Star one.
Our first question is from Mike <unk> of Barclays.
Okay.
Yes. Thank you was hoping you could give us a sense of why you think insurance in force grew so much in April.
What youre seeing in terms of pricing and whether you think any pricing adjustments might've impacted kind of your business you wrote in April.
Mark It's Tim I guess, it's tough to know exactly what the overall.
<unk> day April market is I think we.
We continue to be encouraged that home purchase volume seems to Bain remained strong even though is as we've talked about on the comments that refi activity seems to be on <unk>.
Flowing down at least for for mortgage insurers.
But I think it's really as home purchases remained strong I think interest rates are still.
<unk> attractive for homebuyers and sales.
For the most part I think we're talking it up to that is that there is still a lot of tailwind from that standpoint.
Okay, and youre not seeing any signs that pricing has kind of shifted in a way that might be moving business towards due this month.
Not that I would point to I think it's more of that from a purchase we're getting into the time of the year, where that strong and we think interest rates, even though some headlines will say that interest rates are going up and making things less affordable we still think that its attractive interest rate for for a lot of would be homebuyers and Mark This is Mike Sison.
And for others too the reminder, that the NSW writers.
Clearly a trailing indicator so thats coming from non applications in activity now from.
In April that's coming from February and March.
And then.
It's close and then recognize that put on our books. So again I can think about that rates were just starting to move up and we had some volatility in rates at that time as well. So just another point on that.
Tim It's Ed.
Got it.
And then on a separate topic I mean, maybe it's on alluded to the fact that 60% of borrowers into forbearance or coming up on kind of the scheduled end of their of their forbearance periods, but did you expect some some borrowers will have that extended could you talk a little bit more about that kind of what's your expectations on what youre hearing out of.
Washington, and if they don't kind of what's your what's your strategy.
For those loans going forward.
Sure market, it's Nathan I think with the Gse's extending the forbearance period up to 18 months for for most of the borrowers that are in forbearance. Those that were in I think it was at the end of February.
It doesn't seem like there's going to be a lot of borrowers that follow a path for the exit forbearance after 12 months that enter foreclosure.
Partly due to the moratoriums on partly due to the option to extend out to 18 months. So we don't think that we're going to see a lot of borrowers exiting forbearance and kind of negative outcomes in the near term and that if if borrowers are going to exit forbearance and foreclosure.
It's likely pushed out towards the end of the year at this point.
Okay and are you having conversations with your servicer is all about kind of what their approach will be there whether it's you know.
Moving to do things like Dean Lu or I assume the first effort will be to try and restructured on the mortgage and get to a payment that the borrower can make.
Hey, Mark it's Mike.
Yes, I mean, absolutely we engaged the servicers, we participate in housing policy Council and clearly there's a lot to do with the CFPB looking at.
From a borrower perspective is getting more active and involved in reviews.
So let's.
What service their strategies will be I think will be the same tried and true traditional strategies that they've always used to do loss mitigation clearly with new tools here.
Primarily the deferral option within the forbearance arrangements more.
More formalized I should say tool that was always somewhat available. So I think it's too early to tell what exact strategy would be.
But your comment on did lose Thats kind of whats happening now when you look at our page at state and lose its short sales. It's non foreclosure activity. So those activities are taking place where.
The borrower thinks it makes the most sense for them and the outcome is best for for everybody quite frankly at that point in time.
Hopefully that okay.
Great. Thank you.
Our next question is from Paul <unk> of.
Can you detail for you. Please ask your question.
Hey, guys. Good morning, So I just wanted to follow up on day.
On the sort of pricing related question.
So the movements of market share from your peers this quarter.
So he stable.
Just wanted to get your thoughts on competition on pricing in the market.
Specifically.
Price increases post COVID-19.
On the humping given that credit.
Improved.
Yes.
Tough to say, obviously, where everybody else's, it's a competitive marketplace I think we view it as a very attractive risk reward.
Generally it's safe to say that the concerns that people had onset of COVID-19.
Those are probably dissipated in the industry from from.
Sort of thinking about the risk and how to price. So I think it's safe to think about on that term.
Think about what happened with market share with other participants thats tough for us to speculate on obviously, but we're very happy with the capital we were able to deploy this last quarter felt like we're getting really strong returns continuing continued that this quarter as well.
So again looking forward for the remainder of the year.
Okay fair enough.
Good day that you'll see with terms consistent with your hurdles. There is no change this quarter given what's going on on the market. Yes, I think it's safe to say that we are getting returns that are at or exceed our hurdle rates and again viewed as a very good market to be participating in.
Okay, great. Thanks, and then just one on.
Capital return you guys have a lot of.
Excess at the holding company how are you.
Thank you, but potential capital return there while the FHFA has.
In a constrained on dividends up to the Holdco, but you obviously have a lot of flexibility with the cash that's already there.
Yeah Bose, it's Nathan it's a good question on something that we obviously spend a lot of time talking about.
We have continued to pay the shareholder dividend as a form of capital returned through this period.
We do have about $800 million at the holding company.
So I think we have options, but what we said last quarter and I think thats still true is that meaningful capital return given the scale of our business really can't start until dividends from the operating companies start again, so while we continue to evaluate these things I'd be more focused on what happens after the <unk>.
C.
Kind of expiration of the exploration of the GSC temporary rule that requires their approval I think we've had really constructive conversations with our regulator and.
A lot of conversations internally as well about how we want to approach that going forward then.
And continue to view that as really the the thing thats going to drive kind of our capital return plan longer term. So don't have I guess a lot more too.
To guide on today.
Okay, Great makes sense. Thanks.
Our next question is from card too.
Okay.
Please proceed.
Thanks.
You guys mentioned, you expect premium yield to continue to drift lower.
Any sense as to how long until we kind of.
Bottom out and kind of reached the new equilibrium.
Yes, Nathan so good question again.
I'd kind of point you to the direct in force portfolio yield as opposed to the net yield which I do think can move around for it for other reasons.
It's been coming down about a basis point on a quarter over the last several quarters.
Think that run rate it.
It seems like a pretty good thought for the remainder of 2021, but again, that's going to be influenced by the level of refinance activity I think we've been re pricing a little bit faster in this environment with how much has been running off and how much has been coming on.
If we end up in an environment, where the refinance activity is much lower I think.
That would serve all as equal to slow that pace.
We continue on a very high refinance environment continue to see that pace.
Beyond 2021 over the next several quarters I think there's probably too many factors that could influence that to try to provide kind of longer term guidance there.
Understood.
Our next question is from for the Farmer all day.
Yeah.
Yeah, Thanks, and good morning, hopefully a quick geography question for you.
The <unk>.
Adjustment that was done.
Where does that show up is it in the current period or private period loss provisioning.
It's in the current period.
Thank you.
And so Nathan you had talked about expenses and I. Appreciate you know kind of your updated thoughts around that.
As we look at the path towards the 20 to 25 is that sequential upticks throughout the year.
How should we think about what the fourth quarter number is I mean is that an exit run rate that we should.
Contemplate for for forward quarters, and it gives us just inherently digitization is more expensive from an operating perspective to run this business or is there some kind of catch up in 2021 and maybe the expenses.
It ticked down as we contemplate 2022 and beyond.
Yes.
Good question.
Don't view the.
They are being.
Kind of necessarily any kind of seasonality or direct upward path for any follow ups I would say in expenses quarterly over 2020 one so.
We're a little bit lower than that run rate guidance, but not a lot lower I mean, so I think what we're saying is we do think that.
The second third and fourth quarters in aggregate will be a little bit higher than the average that we had on the first quarter.
But in terms of the longer term I think what we talked about last quarter was a lot of this investment is to gain increased efficiencies as well and we're going to start to see some of those efficiencies coming on line even in the say the back half of this year.
Might be masked in the near term by the incremental investment, but I don't think that where we end up in let's say the fourth quarter as the new long term run rate, that's certainly not the way that we entered this risk.
Kind of investment with that in mind.
Okay.
Okay that makes sense and then just one more philosophical question as we think about deeds in lieu and short sales.
Versus the strength that we have in the broader housing market I mean is there.
Is there an opportunity in here to acquire the property and just sell it I think.
And again, given the Optionality that you have in the semi policies or can you be more aggressive if you want to in this market does it make sense just given the strength we have on the broader housing market and home price appreciation.
Hey, Phil Mike here.
So.
Youre right, we always have the option to acquire the property.
It's somewhat.
Counterintuitive when the markets are strong, even though we have that opportunity.
Then uses the others.
Bidding outbidding us because we're looking to cover basically mitigate our loss for the maximum amount possible not necessarily make a gain on the sale of the property.
On the reduce it to offset if you will at negative loss for lack of a better way to describe it. So yes, we see opportunities there but.
Very little in plus the number is so small I mean, it just doesn't.
It makes sense to be more aggressive to I'll say may turn into a profit center.
So.
Just curious thank you so much sir.
Our next question is from Hawaiian go for it.
<unk>.
Hi, Thanks, guys on.
I jumped on a little late so sorry, if you addressed this on but just going back to that April insurance in force growth. It sounded like in response to a previous question.
The improvement in April.
With.
Really driven by a.
Stronger and IW growth and less so from declining cancellations is that is that the right way to think about it or did you see a pick up in persistency in April.
Yes.
Persistency I don't think I've seen a pick.
Pickup in April have been given the rate environment. So it's really a function of the market opportunity that was out there and again. This is the April and IW is really reflective of that February March early March activity I think of it that way where rates were just beginning to kind of bounce up.
So maybe you get above 3% before they started retreating again, so I think it's just more natural and organic from the overall market opportunity perspective.
Okay got it thanks.
Second question is on premium yield I guess on the direct premium yield.
On.
Do you think once the pre 2018 book fully runs off will can see continue to see reductions in the premium yield or do you think that youll kind of stabilizes.
Ryan It's Nathan I mean, I would say our experience has been that those folks never fully run off.
These things are a very long long tail to them, but even if you kind of generalize and say that those are primarily have having runoff I mean, certainly the reason why the yield is trended down is that the newer policies have underwritten with kind of a better risk profile than the average enforced that we had previously and also at low.
Premium rates.
The in force contains only that then the in force yield will kind of mirror that so I think mathematically what youre, saying is is correct but.
Again kind of looking at it beyond at least from our perspective looking at it beyond 2021, there's just a few too many moving parts to do it with with any certainty.
Okay got it thank you very much.
Our next comes from all from Nikkei.
Well go from there.
Please proceed with your question.
Hi, Good morning, and thank you for taking my question.
One quick one I just wanted to ask about the and I apologize if I missed it if you're on addressed this already too, but I wanted to ask about the pro <unk>.
Delinquency at the delinquent inventory declining so much.
Is that something.
I guess the question is like was there something particularly unusual about that.
Ed.
Because the bulk of those Yoy X.
<unk> been getting extended or should.
Or do you think that April and May.
Good day with what the kind of improvement we could see for the next day.
Three months.
Because I imagine, there's a lot of noise coming up.
On a 12 six.
But reaching that 12 months model in the next few months. Thank you.
Hey, Harry it's Mike So I mean right.
Seasonality does still play a role.
Credit with new notices and carriers.
Regardless of the economic environment, whether it is really strong economic environment or a weak economic environment, you always see seasonality and then youre getting part of the year and I think thats clearly that does influencer of it how much of it is seasonality versus I'll call. It organic.
Reentry people moving back that's a little harder to parse out at this time.
So but.
Seasonality I think is when we look at it sequentially month over month, I think you've got to keep that in mind as well.
Got it okay.
Okay. Thank you.
And there are no further questions on queue for questions.
Keybanc.
Yes.
Okay again want to thank everyone for their interest on our questions. Another great quarter financially and hope everyone is staying happy and healthy as we move through COVID-19, but again. Thank you for your interest in MGIC investment Corp.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.