Q1 2022 MGIC Investment Corp Earnings Call

May 5, 2022

Ladies and gentlemen, please standby your conference call will begin shortly again, ladies and gentlemen, please standby your conference call will begin momentarily. Thank you for your patience.

[music].

Good day and thank you for standing by welcome to the MGIC Investment Corporation first quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star.

One on your telephone keypad, if you require inferred assistance Please press star zero.

The advice that today's conference is being recorded.

I would now like to hand, the conference over to your.

Speaker today, Michael Zimmerman head of Investor Relations. Please go ahead Sir.

Thanks, Alexander 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 2022, our Chief Executive Officer, Tim Mattke, and Chief Financial Officer, Nathan Colson.

I want to remind all participants that our earnings release last evening, which may be accessed on Mgic's website, which is located at MTG 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.

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 or corrections to past presentations on our website that investors and other interested parties may also find valuable.

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 those 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 our form 8-K and Form 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 8-K, our Form 10-Q.

This time I would like to turn the call over to our CEO to Matthew Thanks.

Thanks, Mike and good morning, everyone.

I'm pleased to report another quarter of strong financial results that reflect the size and credit performance of our insurance in force and the continued resilience of the housing market.

I am proud to be part of the team of coworkers that continues to deliver on our business strategies with the goal of creating long term value for all of our constituents, including shareholders customers and co workers.

Over the last 65 years, we continually adapt to the changing needs of lenders and borrowers.

The goal has always been to help.

Overcome the largest optical achieving homeownership the downpayment.

After my opening remarks, Nate will provide more details on our quarterly financial results and capital management activities than before we open the line for questions I'll wrap up by discussing the current operating environment, including activities related to housing finance policy.

During the quarter, we earned GAAP net income of $175 million nearly 17% more than in the same period last year.

These strong quarterly financial results continue to reflect the improved cure rates on previously reported delinquent loan as well as the very low level levels of losses incurred on new delinquent loans that we are enjoying for the last several quarters.

Although higher inflation and interest rates as well as various geopolitical events, including the rush innovation of Ukraine have increased the risk to the economy to date, we have not seen a material change in the credit performance of our portfolio.

I'm optimistic that the favorable credit environment, we have been experiencing will continue.

Our insurance in force at the end of the first quarter stood at more than $277 million, a 10% increase over a year ago and a 1% increase during the quarter.

The quarterly growth in insurance in force reflects the increased persistency rate in the quarter offset by lower volumes of new insurance written.

Consensus mortgage origination forecasts are being revised lower to reflect the increase in mortgage rates, we've seen in the last month or so.

The revisions primarily reflect refinance transactions to continue to be low for the remainder of 2022.

With only modest impact purchase activity in 2022 and.

Primarily as a result of this we expect overall market opportunity for new private mortgage insurance will be smaller in 2022 and 2021.

For some context refis accounted for 20% of our total <unk> in 2021 and accounted for under 6% in the first quarter of 2022 and in our current pipeline with.

With the current and expected level of interest rates, putting the majority of loans out of the money from a pure rate perspective, we expect refinances to remain on the low end of the spectrum in 2022.

So while new business opportunity will be lower in 2022, we expect the new business, we write combined with increasing annual persistency where results in our insurance in force portfolio continues to grow but at a slower pace than last year.

Taking a look at the performance of our enforced portfolio our loss ratio was a negative 8% in the quarter.

This result reflects two things.

First our re estimation of loss reserves on prior delinquencies resulted in favorable loss reserve development, primarily to reflect better than expected cure rates on loans that became delinquent in the second and third quarters of 2020.

Second the number of new delinquencies in the first quarter was low reflecting the strong credit performance of our insurance in force.

I continue to be encouraged by the current business environment, the quality of new business right and a low level of new delinquency notices which has continued through April .

We have deliberately constructed a strong and durable capital base to increase our company's long term value to shareholders, while maintaining financial strength and flexibility.

We believe that our capital management strategy should provide us the flexibility to deliver on our business strategies, regardless of where we are in any given housing cycle.

Reflecting on the strength of our capital base in the first quarter, we not only deploy capital to support new business, but also return a significant amount of capital to our shareholders through the repurchase of eight 5 million shares of common stock for $128 million and the repayment of quarterly stock common stock dividend of $26 million.

Our board also declared a <unk> <unk> per share dividend payable on May 26, 2022.

We've also repurchased $57 million of our 9% junior convertible debentures due in 2063, which eliminates approximately $4 4 million potentially dilutive shares.

Nathan will go into more detail on these actions in a minute.

To wrap up while the tragic geopolitical events occurring in Ukraine have added increased risk to the domestic economy already contending with higher inflation and interest rates, we believe that our financial strength and capital flexibility combined with the quality offerings and superior customer service put us in the best position to achieve success.

We believe that the risk reward equation of current business conditions offer continues to be attractive and we are excited about the future with that let me turn it over to Nathan.

Thanks, Tim and good morning.

As Tim mentioned, we started 2022 with another quarter of exceptional financial results.

In the first quarter, we earned $175 million of net income or <unk> 54 per diluted share during.

During the quarter, we generated an annualized return.

14, 4% on beginning shareholders' equity on.

On an adjusted net operating income basis in the first quarter. We earned <unk> 60 per diluted share a 43% increase from the <unk> 42 per diluted share in the first quarter last year.

A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release, but the primary difference in the first quarter of 2022 was the loss on debt extinguishment that I will discuss in a minute.

We routinely disclose the amount of book value per share that results from the unrealized gain or loss position of the investment portfolio.

While higher interest rates are a long term positive for the earnings potential of the investment portfolio and for book value growth in the short term as a result of the rapid move higher interest rates over the last several months book value reflects a negative contribution of 39 per share at March 31, 2022 down from a positive contribution of <unk> 47.

Per share at December 31, 2021, and 53 per share at March 31, 2021.

Book value ended the quarter at $14 75 six.

6% higher than a year ago.

During the quarter total revenues were $295 million relatively flat with the $298 million last year.

Net premiums earned were $255 million in the quarter the same as last year.

The enforced premium yield was 40.0 basis points in the quarter down from 47 basis points last quarter.

We expect to enforce premium yield to continue to decline throughout 2022 at approximately at the same pace as we saw in the first quarter as the older policies continue to run off and are replaced with policies that generally have lower premium rates.

The net premium yield for the first quarter was $36 nine basis points down four tenths of a basis point in the quarter.

On the reinsurance front as we discussed last quarter, we placed both an additional 15% quota share on our 2022 and IW, bringing the total quota share to 30%.

And a 15% quota share on our 2023 and IW.

In April we also completed another island transaction, which covers nearly all of our policies written from June through December of 2021.

It is expected to result in approximately $470 million of capital relief under Pmiers.

During the quarter operating expenses were $57 million compared to $51 million for the same period last year.

As we discussed last quarter. The majority of the year over year increase was a result of investments we are making in our technology and data and analytics infrastructures, which are already paying dividends.

We still expect full year expenses will be in the same $225 million to $230 million range, we indicated last quarter.

Shifting over to credit.

Net losses incurred were negative $19 million in the first quarter compared to $40 million in the first quarter last year.

New delinquency activity remains very low continuing to account for fewer than 1% of the loans insured at the start of the quarter.

In the quarter, we received approximately 10700, new delinquency notices which was essentially flat to the number as of last quarter and is 18% fewer than the number of notices received in the first quarter of 2021.

We are encouraged by the continued resilience of the housing market favorable employment trends and the positive credit trends, we're experiencing including the low level of early payment defaults and believe they are good indicators of near term credit performance.

In the quarter the estimated claim rate on new delinquency notices was approximately seven 5% as it has been for the last several quarters.

In the quarter, our re estimation of loss reserves on prior delinquencies resulted in $56 million of favorable loss reserve development compared to immaterial development in the first quarter of last year.

The re estimation of loss reserves was primarily related to the cure activity on delinquencies received in the second and third quarters of 2020, what we call the peak Covid periods.

<unk> activity has exceeded our expectations and as a result, we have adjusted our ultimate loss expectations down.

We are hearing from Servicers that foreclosure activity is beginning to increase as COVID-19 related moratoriums come to an end and as a result, we expect claim activity to increase over the next several quarters from the $9 million, we reported this quarter.

Next I wanted to spend a couple of minutes talking about the capital actions, we took during the quarter.

During the quarter, the capital levels that MGIC and liquidity levels at the holding company were above our targets.

As a result, and consistent with the strategy <unk> previously discussed we repurchased eight 5 million shares about 3% at the beginning shares outstanding for $128 million and we paid an <unk> <unk> per share dividend for a total of $26 million.

During the quarter, we also repurchased an additional $57 million and principal amount of our 9% junior convertible debentures due in 2063, which eliminated approximately $4 4 million potentially dilutive shares and reduced our annualized interest expense by $5 million.

We also repaid mgic's $155 million federal home loan bank advance during the quarter.

Combined these debt repayments reduced our debt to capital ratio to approximately 17% at quarter end, we expect.

To continue to Delever over time and to approach a longer term debt to capital ratio in the low to mid teens.

At quarter end, our holding company had $409 million of liquidity and we continued our share repurchase program in April repurchasing 3 million shares for $40 million, and we repurchased an additional $10 million and principal amount of the debentures.

The board also recently declared a <unk> <unk> per share dividend payable on May 26.

At quarter end MGIC had.

We had $2 4 billion of available assets in excess of the pmiers minimum requirements or sufficiency ratio of 167%.

Mgic's level of P. Myers excess increased during the quarter due to the strong cash flows from operations, partially offset by the increase in minimum required assets due to its growth of risk in force and the runoff of the P Myers benefit on existing island deals.

As we discussed in past quarters, we expect MGIC to continue to pay dividends to our holding company, but not on the quarterly cadence at which they were paid pre COVID-19.

And we do not pay a dividend from MGIC to our holding company in the first quarter.

At the end of the first quarter Mgic's capital level exceeded our target level and was further bolstered by the island transaction that closed in April .

Reflecting this robust capital position, we have received approval to pay a $400 million dividend from MGIC, which will enhance the holding company's liquidity position as we continue to execute on our capital management strategy.

We continue to believe that our balanced approach to maintaining a strong capital position.

Using forward commitment reinsurance treaties accessing the capital markets for excess of loss reinsurance via island transactions provides flexibility to maximize the long term value of both the writing company and holding company.

This value can be created by writing more primary mortgage insurance pursuing new business opportunities retiring debt paying dividends or repurchasing stock and with that let me turn it back to Tim.

Thanks Nathan.

Before moving to questions, let me address a few additional topics.

The federal government through various agencies, putting the FHFA CFPB and the FHA continues to focus its housing policy efforts on promoting equitable access to sustainable and affordable housing mitigating foreclosure and eviction risks for homeowners impacted by COVID-19, and ensuring a successful economic recovery as opposed to making large scale changes.

So the housing finance infrastructure.

We will continue to advocate for the increased use of private mortgage insurance and housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system.

At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first time homebuyers.

We had a very successful quarter, we were up $19 billion of new business grew our in force book generated $175 million of net income delivered a 14% return on equity reduced our leverage ratio and continuing to reduce the number of potentially dilutive shares outstanding.

I am encouraged about the future of all that our company industry could play in housing finance as we are organized solely to provide credit enhancement solutions to lenders borrowers and the gse's in all economic cycles.

Our industry offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.

In summary, while there is some potential for increased risk to the economy. The current housing and employment markets remains sound and we have a book of business that is generating a low level of losses and supported by strong and durable capital base with a low debt to capital ratio the investment portfolio of nearly $7 billion contractual please premium flow and a robust reinsurer.

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 and our commitment and ability to help borrowers achieve their dream of homeownership is as strong as ever.

Our commitment and ability to deliver competitive offerings and best in class service to our customers and to generate strong returns for our shareholders with.

With that operator, let's take questions.

Thank you Sir at this point I would like to remind everyone in order to ask a question star one on your telephone keypad.

Again that is star one to ask a question.

We have your first question is from Mark <unk> with Barclays. Your line is open.

Thanks.

First I wanted to clarify Nathan your commentary on the average premium expectation that it would decline about the same amount is.

For the rest of the year as it did in <unk> or are you referencing the.

The in force yield, which was down 70 bps.

Total direct premium which was.

Down 140, or the net premium yield which was down only 40 bips.

Mark It's Nathan I was referencing the direct yield so.

The number that went from 47 basis points down to 40.

Okay. Okay.

I guess, a follow up on that it seems a little bit more favorable than your commentary on the last call. I think you indicated we might expect to see more like.

Roughly 100 basis points of pressure a quarter for the full year as is the outlook improving a little bit relative to kind of what you were saying last quarter.

I think that there is a couple of things at play I mean, one there's less refinance business in the market right now that's happened more quickly than we would've expected. So the enforce book is just turning over a little slower persistency has.

Come up fast we did expect persistency to increase but it's just come up a little bit faster.

I would also say the seven tenths of a basis point versus one basis point is probably within a range that would have been included in what I would have thought of what we guided to before so I think whether it ends up being down three basis points for the full year or something in between three and four I think it's probably.

Within the range of outcomes that we expect.

Okay Fair enough and then just a question on.

Your claim severity it looks like you've been getting the benefits of.

The significant HPA and the average claim is down a fair amount year over year.

And you referenced that there was a favorable development around reserves I think related more to the claims rate, but can you just discuss kind of the implications for reserve levels here. If we continue to see you kind of just the average claim size trend lower.

Sure I think.

What we're seeing right now is the delinquent loans that are being resolved that are resulting in claims or are those that are going generally through a non foreclosure path. So we've kind of always seen better mitigation rates on those things like <unk>.

Deed in lieu of foreclosure or short sales.

We do expect that foreclosure activity will pick up and we will start paying more of the percentage option, which has ah severity closer to that 100% level over time, but so.

I think were don't think that the most recent activity is reflective of what we expect for the full inventory of delinquent loans.

But HPA I think thats certainly been.

Benefit too.

To the industry and to our reserve levels as evidenced by the reserve releases that we've had the last couple of quarters. So if we continue to see favorable cure activity in home price appreciation.

It's something that will reflect when we're reestablishing estimates in future quarters.

Okay, great. Thank you.

We have your next question from Bose George with <unk>. Your line is open.

Hey, good morning.

What is your ultimate loss expectation that you are using now for those peak Covid delinquencies.

Infosys Nathan I think initially we would have been somewhere around 7%. If you go back to the initial estimates we would have set in the second and third quarters of 2020.

Combined with the.

The developments that we had in the fourth quarter of 2021 and now in the first quarter of 2022, I think you are in maybe 4% to 5% range for ultimate losses.

Okay, great. Thanks, and then just the profit commission benefit that comes from the reserve release did you can you break that out.

Well as you may have to follow up on that I think it does vary by treaty too.

I think.

The benefit there is really as we see.

Seed less losses. It comes through as the increased profit commission, but on a net P&L basis, theres really not any impacts because we no longer get the benefit of those seeded losses.

Okay, great. Thanks, and then thank you one more for me.

Normal what's kind of the normalized pre myers cushion that you're going to target.

Yes.

<unk> talked about kind of targeting a P myers excess for a number of reasons.

Think a pretty dynamic so.

We ended the quarter with an excess level that was above our targets, which supported the dividend activity and that's something that we'll continue to reassess in future periods.

Okay, great. Thanks.

We have your next question from Geoffrey Dunn with Dowling <unk> partners. Your line is open. Please go ahead.

Thanks, Good morning.

Yes.

Nathan.

I'm curious, how you're thinking about your 23 notes.

And bigger picture, how you think about debt leverage in the model considering.

The significant increase use of the leverage offered by reinsurance in Iowa.

Do you think you want to look to retire the 20 threes or is it still a business model, where you maintain a mid teens.

Debt to cap.

I'll take that to start Jeff Nathan was kind enough to let me speak on this slide a little bit but he can fill in the details.

Thank your question alludes to something that we've been thinking about for a while is with some of the leverage you can get from reinsurance question is what what should we have from it from a debt leverage standpoint, and I think it's fair to say that we've been aiming lower.

At least one of the rating agencies. This guidance sort of sub 15 debt to cap ratio and that's something that we've been focused on so when it comes to the 23 specifically.

That gives us some options to think about.

Either refinancing rolling some part of our pace, but paying back a chunk of it and obviously interest rates have moved we've started to look more closely at that and as the time horizon, two and those come due its coming closer, but we're thinking about that along with the 60 threes, which obviously takes out dilutive shares as well, but that's part of the deleverage the paying back the federal home loan Bank I think.

Thats, all our view of generally being lower on a debt leverage basis, recognizing that the reinsurance in our mind is cheaper cheaper than the debt leverage and it's at the right level being at the insurance company that we can pay the premiums from it also gives us lots of absorptions protection, especially downside sort of stretch.

Scenarios.

Jeff Okay.

And then I had a follow up on that but that's great I appreciate it.

Okay.

Thank you we have your next question from Doug Harter with Credit Suisse. Your line is open. Please go ahead.

Thanks.

Can you talk about your expectations for investment income.

How long the rise in rates, we saw in the first quarter kind of takes to meaningfully flows through the portfolio.

Yeah sure Doug It's Nathan I think in the same way that the kind of decrease in rates didnt come through the portfolio immediately.

Not going to see the increase in rates come through immediately as well I think reinvestment rates for us have been north of 4% recently, which is I think is a great long term, but we've got a portfolio with a duration of about four to five years. So.

That's not going to turnover overnight, certainly, but we do generate a lot of positive cash flow and also a lot of investment income and Paydowns and maturities. So I think we're excited about the opportunity to get to reinvest at these market rates.

And then can you talk about kind of how your targeted.

Returns for the Ams business is factored in investment yields and whether this environment essentially.

Provides upside to that.

Yes. This is Tim I think when we try to think about our returns we try to think about them not having sort of risks associated with investment yield and so we try to strip out sort of an investment income. If you will from that equation overall and just try to look at the risks, we're taking associated with the mortgage itself.

Not to say that from an overall GAAP basis. It doesn't it doesn't help us, but I think when we think about how we price the risks are.

Higher interest rates generally don't sort of dictate sort of invest investment rates don't really dictate a change in pricing philosophy for us on the actual mortgage loans.

Understood. Thank you.

Sure.

I am showing no further questions at this time I would now like to turn it back to management for any closing remarks.

Sure. Thanks Alexander.

Just wanted to take this moment as we previously announced Mike Zimmerman plans to retire after 27 impactful years in MGIC.

Mike mentioned this morning. This is <unk> 77 earnings call.

And while it will still be with us for a little while I want to take this opportunity to recognize and before I welcome Diane Higgins on our Q2 earnings call I think I speak for a lot of people at MGIC, both now and those that have preceded me.

First my gratitude for Mike for his countless contributions to MGIC over that time Microphonic trusted confidante for me and for those who came before me Mike.

<unk> pretty much saw everything during a time of MGIC and handle the situation with the professionalism that second to none and he also found a way to have fun in the process of doing it. So I. Thank them for that it's truly been a pleasure for me and while I'll Miss is camaraderie at work I know the memories and friendship will last pass this time at MGIC. So thank you Mike.

Thanks, Tim I appreciate that.

And with that everyone have a great day and appreciate your interest in the company.

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

Okay.

Sure.

[music].

Sure.

Yes.

[music].

Good day and thank you for standing by would come to the MGIC Investment Corporation first quarter 2022 earnings call.

At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press the star one on your telephone keypad. If you require any sort of assistance. Please press star zero.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Michael Zimmerman head of Investor Relations. Please go ahead Sir.

I want to remind all participants that our earnings release last evening, which may be accessed on Mgic's website, which is located at MTG 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.

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 those 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 our form 8-K and Form 10-Q that were filed last night.

This time I would like to turn the call over to our CEO Tim Mattke.

Thanks, Mike and good morning, everyone.

I am pleased to report another quarter of strong financial results that reflect the size and credit performance of our insurance in force and the continued resilience of the housing market.

For the last 65 years, we are continually adapting to the changing needs of lenders and borrowers, but the goal has always been to help.

Overcome the largest optical achieving homeownership the downpayment.

During the quarter, we earned GAAP net income of $175 million nearly 17% more than in the same period last year.

These strong quarterly financial results continued to reflect the improved cure rates on previously reported delinquent loan as well as the very low level levels of losses incurred on new delinquent loans that we are enjoying for the last several quarters.

Although higher inflation and interest rates.

As well as various geopolitical events, including the rush invasion of Ukraine, you have increased the rest of the economy to date, we have not seen a material change in the credit performance of our portfolio.

I'm optimistic that the favorable credit environment, we have been experiencing will continue.

Our insurance in force at the end of the first quarter stood at more than $277 million, a 10% increase over a year ago and a 1% increase during the quarter.

The quarterly growth in insurance in force reflects the increased persistency rate in the quarter offset by lower volumes of new insurance written.

Consensus mortgage origination forecasts are being revised lowered to reflect the increase in mortgage rates, we have seen in the last month or so.

The revisions primarily reflect refinance transactions to continue to be low for the remainder of 2022.

With only modest impact purchase activity in 2022, and primarily as a result of this we expect overall market opportunity for new private mortgage insurance will be smaller in 2022 and 2021.

For some context refis accounted for 20% of our total <unk> in 2021 and accounted for under 6% in the first quarter of 2022 and in our current pipeline.

So our new business opportunity will be lower in 2022, we expect the new business, we write combined with increasing annual persistency will result in our insurance in force portfolio continuing to grow but at a slower pace than last year.

Taking a look at the performance of our enforced portfolio our loss ratio was a negative 8% in the quarter.

This result reflects two things.

Second the number of new delinquencies in the first quarter was low reflecting the strong credit performance of our insurance in force.

I continue to be encouraged by the current business environment, the quality of new business right and the low level of new delinquency notices which has continued through April .

We have deliberately constructed a strong and durable capital base to increase our company's long term value to shareholders, while maintaining financial strength and flexibility.

We believe that our capital management strategy should provide us the flexibility to deliver on our business strategies, regardless of where we are in any given housing cycle.

Reflecting on the strength of our capital base in the first quarter, we not only deploy capital to support new business, but we also returned a significant amount of capital to our shareholders through the repurchase of eight 5 million shares of common stock for $128 million and the repayment of quarterly stock common stock dividend of $26 million.

Our board also declared a <unk> <unk> per share dividend payable on May 26, 2022.

We've also repurchased $57 million of our 9% junior convertible debentures due in 2063, which eliminates approximately $4 4 million potentially dilutive shares.

Nathan will go into more detail on these actions in a minute.

To wrap up while the tragic geopolitical events occurring in Ukraine have added increased risk to the domestic economy that was already contending with higher inflation and interest rates, we believe that our financial strength and capital flexibility combined with the quality offerings and superior customer service put us in the best position to achieve success.

We believe that the risk reward equation to the current business conditions offer continues to be attractive and we are excited about the future with that let me turn it over to Nathan.

Thanks, Tim and good morning.

As Tim mentioned, we started 2022 with another quarter of exceptional financial results.

In the first quarter, we earned $175 million of net income or <unk> 54 per diluted share during.

During the quarter, we generated an annualized return.

<unk> <unk> thousand 14, 4% on beginning shareholders' equity on.

On an adjusted net operating income basis in the first quarter. We earned <unk> 60 per diluted share of <unk>, 43% increase from the <unk> 42 per diluted share in the first quarter last year.

We routinely disclose the amount of book value per share that results from the unrealized gain or loss position of the investment portfolio.

While higher interest rates are a long term positive for the earnings potential of the investment portfolio and for book value growth in the short term as a result of the rapid move higher in interest rates over the last several months book value reflects a negative contribution of 39 per share at March 31, 2022 down from a positive contribution of <unk> 47.

Per share at December 31, 2021, and 53 per share at March 31, 2021.

Book value ended the quarter at $14 75 six.

6% higher than a year ago.

During the quarter total revenues were $295 million relatively flat with the $298 million last year.

Net premiums earned were $255 million in the quarter the same as last year.

The enforced premium yield was 40.0 basis points in the quarter down from 47 basis points last quarter.

We expect the enforce premium yield to continue to decline throughout 2022 at approximately the same pace as we saw in the first quarter as the older policies continue to run off and are replaced with policies that generally have lower premium rates.

The net premium yield for the first quarter was $36 nine basis points down four tenths of a basis point in the quarter.

On the reinsurance front as we discussed last quarter, we placed both an additional 15% quota share on our 2022 and IW, bringing the total quota share to 30% and a 15% quota share on our 2023 and IW.

In April we also completed another island transaction, which covers nearly all of our policies written from June through December of 2021.

It is expected to result in approximately $470 million of capital relief under Pmiers.

During the quarter operating expenses were $57 million compared to $51 million for the same period last year.

We still expect full year expenses will be in the same $225 million to $230 million range, we indicated last quarter.

Shifting over to credit <unk>.

Net losses incurred were negative $19 million in the first quarter compared to $40 million in the first quarter last year.

New delinquency activity remains very low continuing to account for fewer than 1% of the loans and shared at the start of the quarter.

In the quarter, we received approximately 10700, new delinquency notices which was essentially flat to the number received last quarter and is 18% fewer than the number of notices received in the first quarter of 2021.

In the quarter the estimated claim rate on new delinquency notices was approximately seven 5% as it has been for the last several quarters.

The re estimation of loss reserves was primarily related to the cure activity on delinquencies received in the second and third quarters of 2020, what we call the peak Covid period.

The cure activity has exceeded our expectations and as a result, we have adjusted our ultimate loss expectations down.

Next I wanted to spend a couple of minutes talking about the capital actions, we took during the quarter.

During the quarter the capital levels at MGIC and liquidity levels at the holding company were above our targets.

As a result, and consistent with the strategy <unk> previously discussed we repurchased eight 5 million shares about 3% at the beginning shares outstanding were $128 million and we paid an <unk> <unk> per share dividend for a total of $26 million.

We also repaid mgic's $155 million of federal home loan bank advance during the quarter.

Combined these debt repayments reduced our debt to capital ratio to approximately 17% at quarter end.

We expect to continue to delever over time and to approach a longer term debt to capital ratio in the low to mid teens.

The board also recently declared a <unk> <unk> per share dividend payable on May 26.

At quarter end MGIC had.

We had $2 4 billion of available assets in excess of the pmiers minimum requirements, whereas sufficiency ratio of 167%.

As we discussed in past quarters, we expect MGIC to continue to pay dividends to our holding company, but not on the quarterly cadence at which they are paid pre COVID-19.

And we do not pay a dividend from MGIC to our holding company in the first quarter.

At the end of the first quarter Mgic's capital level exceeded our target level and was further bolstered by the island transaction that closed in April .

We continue to believe that our balanced approach to maintaining a strong capital position.

Using forward commitment reinsurance treaties accessing the capital markets for excess of loss reinsurance via island transactions provide flexibility to maximize the long term value of both the writing company and holding company.

This value can be created by writing more primary mortgage insurance pursuing new business opportunities retiring debt paying dividends or repurchasing stock and with that let me turn it back to Tim.

Thanks Nathan.

Before moving to questions, let me address a few additional topics.

For the housing finance infrastructure.

At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first time homebuyers.

I am encouraged about the future role that our company industry can play in housing finance as we are organized solely to provide credit enhancement solutions to lenders borrowers and the GSE is in all economic cycles.

Our industry offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.

In summary, while there is some potential for increased risk to the economy. The current housing and employment markets remains sound and we have a book of business that is generating a low level of losses that supported by a strong and durable capital base with a low debt to capital ratio investment portfolio of nearly $7 billion contractual plead premium flow and a robust reinsurer.

<unk> 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 and our commitment and ability to help borrowers achieve their dream of homeownership is as strong as ever.

As is our commitment and ability to deliver competitive offerings and best in class service to our customers and to generate strong returns for our shareholders.

With that operator, let's take questions.

Thank you Sir at this time I would like to remind everyone in order to ask a question versus star one on your telephone keypad.

Again that is star one to ask a question.

We have your first question from Mark <unk> with Barclays. Your line is open.

Thanks.

First I wanted to clarify Nathan your commentary on the average premium expectation that it would decline about the same amount is.

For the rest of the year as it did in <unk> or are you referencing the.

The in force yield, which was down 70 bps.

Total direct premium which was.

Down 140, or the net premium yield which was down only 40 bps.

Hey, Mark it's Nathan I was referencing the direct yield so.

Number that went from 47 basis points down to 40.

Okay. Okay.

I guess, a follow up on that it seems a little bit more favorable than your commentary on the last call. I think you indicated we might expect to see more like.

Roughly 100 basis points of pressure a quarter for the full year is is the outlook improving a little bit relative to kind of what you were saying last quarter.

I think that Theres, a couple of things at play I mean, one there's less refinance business in the market right now that's happened more quickly than we would've expected. So the enforce book is just turning over a little slower persistency has.

Come up fast we did expect persistency to increase but it's just come up a little bit faster and I would also say the seven tenths of a basis point versus one basis point is probably within a range that would have been included in what I would have thought of what we guided to before so I think whether it ends up being down three.

<unk> points for the full year or something in between three and four I think it's probably.

Within the range of outcomes that we expect.

Okay Fair enough and then just a question on.

Your claim severity it looks like you have been getting the benefits of the significant HPA and the average claim is down a fair amount year over year.

Sure I think.

What we're seeing right now is the.

Delinquent loans that are being resolved that are resulting in claims or are those that are going generally through a non foreclosure path. So.

<unk> always seen better mitigation rates on those things like.

Deed in lieu of foreclosure or short sales.

We do expect that foreclosure activity will pick up and we will start paying more of the percentage option, which has.

Severity closer to that 100% level over time, but.

So I think were don't think that the most recent activity is reflective of what we expect for the full inventory of delinquent loans.

But HPA I think has certainly been.

Our benefit too.

To the industry and to our reserve levels as evidenced by the the reserve releases that we've had in the last couple of quarters. So if we continue to see favorable cure activity in home price appreciation, that's something that will reflect when we're reestablishing estimates in future quarters.

Okay, great. Thank you.

We have your next question from Bose George with <unk>. Your line is open.

Hey, good morning. Thanks.

What is your ultimate loss expectation that you are using now for those peak Covid delinquencies.

Infosys Nathan I think initially we would have been somewhere around 7%. If you go back to the initial estimates we would've set in the second and third quarters of 2020.

When combined with the.

The development that we had in the fourth quarter of 2021 and now in the first quarter of 2022, I think you are in maybe 4% to 5% range for ultimate losses.

Okay, great. Thanks, and then just the profit commission benefit that comes from the reserve release did you can you break that out.

In closing we have to follow up on that I think it does vary by treaty too.

I think.

The benefit there is really as we see.

Seed less losses. It comes through as the increased profit commission, but on a net P&L basis, Theres really not any impact because we no longer get the benefit of those seeded losses.

Okay, great. Thanks, and then actually one more from me.

Normal what's kind of the normalized pre virus cushion that you're going to target.

Yes.

You talked about kind of targeting a pmiers excess for a number of reasons that I think a pretty dynamic so.

We ended the quarter with an excess level that was above our targets, which supported the dividend activity and that's something that we'll continue to reassess in future periods.

Okay, great. Thanks.

We have your next question from Geoffrey Dunn with Dowling and partners. Your line is open. Please go ahead.

Thanks, Good morning.

Yes.

Nathan.

I'm curious, how you're thinking about your 23 notes.

And bigger picture, how you think about debt leverage in the model considering.

The significant increase use of the leverage offered by reinsurance in Iowa.

Do you think you want to look to retire the 20 threes or is it still a business model, where you maintain a mid teens.

Debt to cap.

I'll take that to start Jeff Nathan was kind enough to let me speak on this one a little bit but he can fill in the details.

Thank your question alludes to something that we've been thinking about for a while is with some of the leverage you can get from reinsurance question is what should we have from it from a debt leverage standpoint, and I think it's fair to say that we've been aiming lower.

At least one of the rating agencies as guided sort of sub 15 debt to cap ratio and that's something that we've been focused on so when it comes to the 23 specifically.

That gives us some options to think about.

Either refinancing rolling some part of our paid but paying back a chunk of it and obviously interest rates have moved we've started to look more closely at that and as the time horizon, two and those come due its coming closer, but we're thinking about that along with a 63%, which obviously takes out dilutive shares as well, but that's part of the deleverage the paying back the federal home loan bank.

Thats, all our view of generally being lower on a debt leverage basis, recognizing that the reinsurance that are in our mind is cheaper cheaper than the debt leverage and it's at the right level being at the insurance company that we can pay the premiums from and also gives us lots of absorptions protection, especially downside.

Yes scenarios.

Jeff Okay.

Nathan I had a follow up on that but that's great I appreciate it.

Okay. Thanks.

Thank you we have your next question from Dod Hartzog with Credit Suisse. Your line is open. Please go ahead.

Thanks.

Can you talk about your expectations for investment income.

How long.

The rise in rates, we saw in the first quarter kind of takes to meaningfully flow through the portfolio.

Yes, sure Doug as Nathan I think in the same way that the kind of decrease in rates Didnt come through the portfolio immediately we're not going to see the the increase in rates come through immediately as well I think reinvestment rates for us have been north of 4% recently, which is I think is a great long term.

We've got a portfolio with a duration of about four to five years. So.

That's not going to turnover overnight, certainly, but we do generate a lot of positive cash flow and also a lot of investment income in Paydowns and maturities. So I think we're excited about the opportunity to get to reinvest at these market rates.

And then can you talk about kind of how your targeted.

Returns for the MA business is factored in investment yields and whether this environment essentially.

<unk> provides upside to that.

Yes. This is Tim I think when we try to think about our returns we try to think about them.

Having sort of risks associated with investment yield and so we try to strip out sort of an investment income. If you will from that equation overall and just try to look at the risks, we're taking associated with the mortgage itself.

Not to say that from an overall GAAP basis. It doesn't doesn't help us, but I think when we think about how we price the risk.

Higher interest rates generally don't sort of dictate sort of an inverse investment rates don't really dictate a change in pricing philosophy for us on the actual mortgage loans.

Yes.

Understood. Thank you.

Sure.

I am showing no further questions at this time I would now like to turn it back to management for any closing remarks.

Sure. Thanks Alexander.

Just wanted to take this moment as we previously announced Mike Zimmerman plans to retire after 27 impactful years in MGIC.

Mike mentioned this morning. This is <unk> 77 earnings call.

And while it will still be with us for a little while I want to take this opportunity to recognize and before I welcome Diane Higgins on our Q2 earnings call.

I can speak for a lot of people at MGIC, both now and those that have preceded me.

I Express my gratitude for Mike for his countless contributions to MGIC over that time.

<unk> trusted confidante for me and for those who came before me.

<unk> pretty much saw everything during a time of MGIC and handle the situation with the professionalism that second to none and he also find a way to have fun in the process of doing it. So I. Thank them for that it's truly been a pleasure for me and while I am. This is from Henri at work I know the memories and friendship will last past this time at MGIC. So thank you Mike.

Thanks, Tim I appreciate that.

And with that everyone have a great day and appreciate your interest in the company.

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

Q1 2022 MGIC Investment Corp Earnings Call

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