Q2 2022 MGIC Investment Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the MGIC.
Incorporations second quarter 2022 earnings call.
At this time all lines have been placed on mute to prevent any background noise.
At the end of today's presentation, we'll have a question and answer session.
I ask a question during this session you will need to press.
Star one one on your telephone.
You will then hear an automated message advising your hand is raised.
Please be advised that today's call is being recorded.
I will now turn the conference over to Diana Hagen head of Investor Relations. Please go ahead.
Thank you Rochelle, good morning, and welcome everyone. Thank you for your interest in MGIC Investment Corporation I am very excited to be here today and this is officially my first earnings call in the seat.
Joining me on the call today to discuss our results for the second quarter, our Tim Mattke, Chief Executive Officer, and Nathan Colson, Chief Financial Officer.
Our press release, which contains mgic's second quarter financial results was issued yesterday and is available on our website at M. G. G that MGIC dot com under newsroom includes additional information about our quarterly results that we will refer to during the call.
It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures.
In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force new insurance written reinsurance transaction and <unk>.
Other information you may find valuable.
As a reminder from time to time, we May post information about our underwriting guidelines and other presentations or corrections to past presentations on our website.
Before we get started today I want to remind everyone that during the course of this call. We may make comments about our expectations of the future actual results could differ materially from those contained in these forward looking statements additional.
Information about the factors that could cause actual results to differ materially from those discussed on the call. Today are contained in our 8-K and 10-Q that were also filed yesterday.
We make any forward looking statements we are not undertaking an obligation to update those statements in the future in light of subsequent events.
No one should rely on the fact that such guidance or forward looking statements are current at any time other than the time of this call or the issuance of our 8-K and 10-Q.
With that I will now have the pleasure to turn the call over to Tim.
Good morning, everyone and before I start with my prepared remark I wanted to welcome you to your new role in our quarterly calls I know that you and Mike Zimmer and spent a lot of time to make the transition as seamless as possible I know you do great in the new role and I look forward to the Investor is getting a chance to know you better through your interactions.
With that I am pleased to report that we had another great quarter for that matter first half of the year as we delivered exceptional financial results, while continuing to return capital to our shareholders.
We will get into detail throughout this call, but in summary, this quarter. We grew our insurance in force repurchase stock paid a common stock dividend decrease our leverage ratio and increased our financial strength and flexibility all while earning an annualized 21, 6% return on equity.
We are encouraged by the positive credit trends, we're experiencing including the low level of early payment defaults, which we believe are good indicators of near term credit performance and the continued favorable employment trends.
Ask reward equation that current business conditions offer continues to be attractive and we are excited about the future.
In the second quarter, we earned $249 million of GAAP net income.
Insurance in force at the end of the quarter stood at more than 287 billion.
A nine 5% increase from a year ago, and three 4% increase during the quarter.
Quarterly growth in insurance in force reflects the increased persistency rate in the quarter offset by lower volumes of new insurance written.
Taking a look at the credit performance of our insurance in force portfolio. Our loss ratio was a negative 38, 7% in the quarter.
This reflects the loss reserves established on a low number of new delinquencies reported to us in the quarter more than offset by a re estimation of ultimate losses on delinquencies in prior quarters.
In order to achieve our objectives and bearing business environment, we need the capital management position that maintains our financial strength and flexibility at the holding company.
<unk> capital and growth for MGIC, the writing company. So the both are positioned to succeed in the future.
And can return excess capital to shareholders in a variety of forms we believe that our current strategy does just that.
As a result of the strength and flexibility of our capital position. During the 12 months ending June 30, we deploy capital to support our new business will return a significant amount of capital to our shareholders through the repurchase of common stock and payment of common stock dividends.
We reduced our leverage ratio and interest expense by repurchasing a significant portion of our convertible junior debentures due in 2063 and by repaying Mgic's Federal home loan Bank advance.
Additionally in July of this year, we redeemed our outstanding senior notes due in 2023.
Just additional common stock and our board authorized the 10 per share common stock dividend to be paid on August 25.
25% increase in our quarterly dividend amount.
Before turning it over to Nathan to provide more detail on our financial results and capital management activities I would like to share three thoughts on the current environment.
First consensus mortgage origination forecasts have been trending lower due to the increase in interest rates and a decrease in refinance activity.
We expect refinance activity to remain low for the remainder of the year and purchase activity continued to be strong although lower than we expected at the beginning of the year.
Overall, the market opportunity for new private mortgage insurance is smaller this year than last while we anticipate that our new insurance written will be below record volumes for the last two years, we continue to expect new insurance written to remains strong.
As we look forward demographic trends suggest meaningful long term opportunities.
Next we believe that MA business is well hedged to changes in interest rates.
The increase in mortgage interest rates has materially reduced the incentive of many borrowers to refinance their first mortgages whether to tap into built in equity or lower their monthly payments.
Although our new insurance written is slowing persistency in our insurance in force is increasing extending the existing revenue stream.
In the second quarter. The result was that our insurance in force portfolio continue to grow but at a slower pace.
Persistency, along with insurance enforce our two long term drivers of future revenue.
Also while the current rising interest rate environment has increased unrealized losses in our investment portfolio has reversed the long term trend of low reinvestment interest rates, which is resulting in increases in our investment yield.
Actually while there is potential for losses to increase if there is an increase in unemployment for a decrease in home values. The presence of reinsurance will help mitigate those losses.
Lastly, we have seen significant home price appreciation over the last several years.
Primarily due to a combination of historically low mortgage rates and strong housing demand.
The significant home price appreciation over the last two years has created equity for many homeowners.
This equity should reduce the incidence of claims unrelated mortgages.
That being said there are signs of national home price appreciation may finally be slowing down in some markets even see some decline.
We believe the gradual normalization of home price depreciation is healthy for the market.
With that let me turn it over to Nathan.
Thanks, Tim and good morning.
As Tim mentioned, we had a strong second quarter in solid financial results for the first half of the year.
In the quarter, we earned $249 million of net income or <unk> 80 per diluted share compared to $153 million and net income or <unk> 44 per diluted share during the same period last year.
On an adjusted net operating income basis, we earned <unk> 81 per diluted share an 84% increase from the <unk> 44 per diluted share in the second quarter of 2021.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release.
Despite the strong net income in the quarter and year to date, our book value per common share outstanding has decreased from $15 18 as of December 31 to.
<unk> to $14 97.
As of June 30.
This decrease was primarily the result of increases in interest rates, which caused unrealized losses on our investment portfolio to increase.
Those unrealized losses are not reflected in net income but are reflected in shareholders' equity and therefore are also reflected in book value per share.
We regularly disclose the amount of book value per share that is attributable to unrealized gains and losses on our investment portfolio.
As Tim mentioned higher interest rates are a long term positive for the earnings potential of the investment portfolio. However, the rapid increase in interest rates over the last several months resulted in unrealized losses that reduced book value per share by <unk> 97 at the end of the quarter.
At December 31, unrealized gains increased book value per share by 47.
During the quarter total revenues were $293 million compared to $298 million for the same period last year.
Net premiums earned were $256 million in the quarter compared to $252 million for the same period last year.
The increase in net premiums earned was due to an increase in insurance in force and a decrease in ceded premiums from our quota share reinsurance transactions, partially offset by a decrease in our premium yield.
The net premium yield for the second quarter was $36 two basis points down seven tenths of a basis point from the first quarter and down $2 nine basis points compared to the second quarter last year.
The enforced premium yield was $39 four basis points in the quarter down six tenths of a basis point from 40.0 last quarter and $42 six in the second quarter last year.
The decline in the quarter was consistent with trends that we have previously discussed.
Turning to credit.
Net losses incurred were negative $99 million in the second quarter compared to negative $19 million last quarter and $29 million for the same period last year.
Our review and re estimation of ultimate losses on prior delinquencies resulted in $131 million of favorable loss reserve development.
<unk> to $56 million of favorable loss reserve development in the first quarter and insignificant loss reserve development in the second quarter last year.
The favorable development in the quarter was primarily related to pre covered and peak COVID-19 delinquencies as cure rates on those delinquencies continue to exceed our expectations, we have adjusted our ultimate loss expectations.
In the quarter, our delinquency inventory decreased by 12, 4% to 26900 loans, marking the eighth straight quarter of decrease from the pandemic peak of 69300 in the second quarter of 2020.
New delinquency notices received in the quarter.
Decreased by 12, 2% as compared to the first quarter and cures continued to outpace the new notices during the quarter.
The number of claims paid remained relatively flat for the quarter. However, we continue to expect paid claims to gradually grow as COVID-19 related foreclosure and eviction moratoriums come to an end and foreclosure activity increases.
Shifting to our capital management activities.
As Tim highlighted our priorities include maintaining the financial strength and flexibility of the holding company and deploying capital for growth of the writing company.
For the holding company this means maintaining a target level of liquidity in excess of near term needs. The operating company. It means maintaining a robust level of pmiers excess that we expect will enable growth and all operating environments.
These target levels are dynamic and change as the operating environment changes.
As part of our capital management activities in the quarter, we executed an excess of loss reinsurance transaction with a panel of reinsurers in the traditional reinsurance market, which will cover most of the policies written in 2022.
This is an additional layer of credit protection beyond the quota share treaty, we have in place for 2022 and IW.
Also as we discussed last quarter in April we completed another island transaction, which covers most of our policies written from June through December of 2021.
These transactions provide capital relief under Pmiers, and addition to loss protection.
More information on the excess of loss transaction can be found in our quarterly supplement for the second quarter.
Approximately 94% of our primary risk in force was covered to some extent by reinsurance transactions at the end of the quarter.
At quarter end, we had $690 million of liquidity at the holding company and MGIC had to had a $2 6 billion dollar excess to pmiers minimum requirements compared to a $2 3 billion excess last year.
Mgic's growth in P. Myers excess was primarily driven by our reinsurance strategy and strong cash flow from operations, partially offset by the increase of minimum required assets due to the growth of our risk in force.
The run off of the P Myers benefit on existing risk sharing transactions and the payment of dividends to the holding company.
As Tim highlighted during the 12 months ending June 30.
We had a robust capital position and the capital levels at MGIC and the liquidity levels at the holding company were consistently above our targets.
As a result, and consistent with our capital strategy MGIC paid a total of $800 million in dividends to the holding company.
At the holding company level, we repurchased 35 million shares of common stock for a total cost of $513 million and paid $104 million in common stock dividends to our shareholders.
We also used $237 million to repurchase $173 million and principal amount of our convertible debentures due in 2063.
This eliminated 13 million potentially dilutive shares and reduced our annualized interest expense by $16 million.
Combined since June 32021, we've reduced dilutive shares by $48 million or 13% and reduce our debt to capital ratio from approximately 20% to approximately 17%.
In July Moody's upgraded our senior debt rating to be <unk>, three and upgraded Mgic's insurance financial strength rating to <unk> with a stable outlook.
Moody's stated that the ratings reflect continued improvement in the U S mortgage insurance sector, our strong position in the market and underwriting discipline, a reduced financial leverage and debt maturity profile and extensive reinsurance program.
With that let me turn it back over to Tim.
Thanks Nathan.
A few additional comments before we open it up for questions.
The federal government through various agencies continues to focus its housing policy efforts on promoting equitable access to sustainable and affordable housing.
To further these efforts in June the Gse's released equitable housing finance plans and the Fhfa's simultaneously announced a new pilot transparency framework for the GSE to accompany these plans.
As framework requires each GSE to publish and maintain a list of pilots and test and learn activities public website.
At this point, we are uncertain what impact if any of these plans will have on the industry. We welcome the opportunity to engage with the gse's or other agencies on the topic of equitable access to housing and as always we will continue to advocate for the increased use of private mortgage insurance and housing finance.
I remain encouraged about the future role that our company and the industry can play in the housing market as we continue to provide credit enhancement solutions to lenders borrowers and the GSE.
In closing, we had another successful quarter and a strong first half of the year as we look forward. There are increased risks and uncertainties about rising inflation and interest rates and the possibilities of a recession, however housing fundamentals and employment trends remain sound.
We like our positioning in this market and the risk reward equation that the current conditions offer and believe that the strength and flexibility of our business model will contribute to our continued success.
Throughout our 65 years, our people have been the cornerstone of our accomplishments.
Gather we remain focused on executing our business strategies, providing critical uninterrupted support to the housing market and helping individuals and families achieve affordable and sustainable homeownership in all economic cycles.
Our commitment and ability to help <unk> achieve the dream of homeownership is as strong as ever.
With that operator, let's take questions.
Thank you at this time, we will conduct a question and answer session.
A reminder to ask a question you will need to press star one to one that is star one to one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
One moment please.
Okay, we're ready to take the first question.
Thank you.
Our first question comes from Mark Devries of Barclays. Thank you for standing by your line is now open.
Yes. Thank you.
A few of your competitors have commented that they were kind of selectively increasing pricing here and kind of observing.
Similar things from competitors can you comment on what if anything youre doing around pricing and what you're observing.
Mark It's Tim.
We don't like to talk too much in detail, especially about pricing, but I think it's safe to say quite frankly as we've done over the last.
A period of time, we're selective in what we think is a good way to deploy our capital and are always looking at risk return I think we've tried to be really conscious about what.
The prices in the market and what it takes to win.
Alone.
And so I think as the market continues to evolve I think there is the opportunity to shift to different segments potentially.
And we'd look to sort of make sure that we're getting the most price we can when we deploy our capital. So I think we're being consistent with that.
I think that'll continue to evolve quite frankly over the course of the year.
I think we feel really good about the overall environment I think it's safe to say that there is there is pockets where.
You might want a little bit more return from a risk adjusted basis based upon sort of that those features it alone.
Okay Fair.
Fair enough and then.
Is the seven.
Million share repurchased.
You did in the quarter or is that a reasonable cadence for us to kind of expect going forward and also is this new kind of mid teens debt to cap ratio more of a longer term target or should we see that move up or down.
Hey, Mark it's Nathan I'll take those I think on the on the debt to capital question. I think we have said for some time that we are targeting a debt to capital ratio in the kind of low to mid teens.
And we're largely there after we retired the 2020 threes here in July .
So in the near term no additional delevering activities other than continuing to try to resolve fully the 2060 threes.
I think we like that position, partly because it does afford us the ability to take on additional debt if thats, what we want to do but I think longer term, we're really comfortable with where we are and no near term plans there relative.
Relative to share repurchase activity I think what we've said for some time as you know that's really going to be funded by dividends from the operating company and dividends from the operating company are going to be.
Things that we request when our capital levels are above our targets.
Have been for some time, which is why we've requested.
Increasing amounts of dividends and over the last four quarters totaling $800 million, whether thats. The right answer in the future will be dependent on the facts and circumstances in the future. We don't expect to pay a dividend in the third quarter, given the $400 million dividend that we paid in the second quarter, but as we get later in the year I think we will evaluate.
The current conditions, what our target capital levels are and take appropriate action there.
Holding company, our catheter our liquidity levels are still above our target. So still expect as we've said, we largely view that as money to return to shareholders. So expect to continue with the programs that we've had both the increase in the dividend to shareholders, but also share repurchase activity here in <unk>.
Q3, and we kind of disclosed that we continued that with another $2 1 million shares in July .
Got it thank you.
Thank you.
Thank you.
Thank you.
Our next question comes from.
Doug Harter of credit Suisse, one moment please.
This is John <unk> on for Doug.
First question is from premium yields we saw net premium yields were down about seven bps. This quarter. While other names are flat to up on the quarter and just kind of curious about your thoughts about what might have.
I have influenced the move and then also what your outlook is for the rest of 2022.
Yes, John it's Nathan I'll take that I guess, just commenting on on our company. We had expected initial guidance for the year was something like a basis point, a quarter and I'm, referring here to the in force premium yield.
The number that we've typically talked about I think the net premium yield moves around for a variety of factors that are hard to predict.
Quarter to quarter, but on the in force premium yield we were down seven tenths of a basis point in Q1, and six tenths of a basis point in Q2, I'd say both of those were a little better than what we were expecting.
So I think for the full year, it's probably looking more like three basis points of decline for us versus for where we would have initially expected, but I think.
The activity in the quarter is consistent or a little a little bit better than what we would've thought from a decline in the in force premium yield.
Okay, Great and then second question.
Reserve activity kind of going forward it was better than expected with positive COVID-19 related cures and HPA, but also given the macro environment just curious about your thoughts for.
Kind of the rest of the year as far as reserve activity is concerned.
Yes, Nathan ill take that as well for.
For new notices we've we've been pretty consistent with our new notice claim rate for some time on where again this quarter I think where that goes I will certainly be reflective of what the conditions are at the end of the third quarter ended the fourth quarter going forward.
Relative to.
Reserve development, that's something that so far this year has been driven by actual cure activity, that's outpaced our expectations and resulted in us kind of reducing our ultimate loss expectations, particularly around the notices from 2020 and prior.
So that's something that we'll follow the same process again next quarter, if we continue to see.
Activity thats better than our expectations that will result in updates.
The activity more in line with our expectations there may not be as much as much to update in terms of ultimate losses. So some of that still to play out but we'll follow the same approach that we have for some time.
Yes.
Got it thank you.
Thank you.
Our next question comes from Bose, George with <unk>. Thank you for standing by your line is now open.
Hey, guys good morning.
<unk> came in a bit better than what we've seen from peers. I mean do you think your share has increased this quarter and also is there any was there any movement in the bulk market that you might have done some of that.
Yeah, Paul it's Tim.
Anything in the bulk market that really explains that.
I think theres still one to report it does look like our share might be up a little bit we've been really consistent quite frankly over the last couple of years as far as the range of what we've done and so while we might be a little bit up from last quarter, I think <unk> been pretty consistent range over the last over the last couple of years quite frankly, so I think we are in.
In the zone of what we would expect.
And.
We'll obviously see what the last.
Competitor comes out whether it's where we land.
But overall I think we look to deploy the capital and we think we're getting good return.
I think we're mindful of our share overall, but feel really comfortable with the range we've been operating in.
Okay, great. Thanks, and then actually on the common dividend that was a nice increase this quarter.
How do you think about just sort of the philosophy on the common dividend payout.
Payout or just how do you think about that going forward.
Closers, Nathan I'll take that I think theres a couple of factors one.
With the number of shares that we've repurchased the dollar payment of the dividend.
Continued to come down so some of that is just getting back to slightly above but more towards the levels that we were a year ago, just given the 35 million fewer shares now.
But I think we look at it both from a payout and also what's the what's the yield look like more on a on a book basis than a market basis, just because the market yield changes a little more.
More than the book yield does.
So with that I think it's less about targeting a specific.
Payout ratio, but more about ensuring that we feel comfortable that we can continue to pay the dividend in a wide range of scenarios.
So I think happy about the increase and Thats something that that we will continue to look at over time as well, but for now I think feel really good about the 25% increase in the dividend and continuing to pay that dividend going forward.
Okay, great. Thanks, a lot.
Yes.
Thank you one moment please.
Our final question from me here about <unk> of Bank of America. Thank you for standing by your line is now open.
Good morning, and thank you for taking my questions.
I would just start by maybe just talking a little bit about the potential for a slowdown or a pullback in housing a couple of questions on that just closed like are you seeing anything at all that gives you pause.
You mentioned potential for HBO, the Barclays, but anything on the credit side that Youre seeing that makes you maybe pause and then are there any geographies segment anything youre doing from an underwriting perspective way, which would be maybe characterized as tightening all pulling matter.
Tim I think from a credit standpoint, I'd say nothing that we're really seeing from a data standpoint that leads us to believe there is anything there I mean, the underwriting box.
It's still exceptionally strong.
Exceptionally strong for over a decade at this point.
And so I think that that insulate a little bit, but I think again right now we don't see anything there when you talk about HPA.
Again, I think we believe that it makes sense that HPA starts to moderate.
When we when we price quite frankly by HP and we saw the last couple of years and we price. We don't assume that that HPA is going to happen. So it's coming back more in line with how we think about it when we price.
If it does slow down I think it's safe to assume sub markets.
Could go slightly negative.
I think we need to be mindful of that overall, but I think it's how we go about our business on an everyday basis and we try to look at all the risk factors that could it could impact alone and think about what the right return we need to get when we're when we're pricing. So it's nothing that gives me great pause by any means on overall basis, but I think we're back.
And HPA environment, that's not going to be rate raising at the rate that we saw the last couple of years, but as I said in my opening remarks over the long run that much better for housing and for us quite frankly, and so we'll be mindful of it in our in our pricing and how we approach it.
Nothing that gives us tremendous positive points.
Got it.
Thank you that's helpful. And then just just staying on that theme, maybe like just delinquency trends have been normalized or is this like similar to pre buy may make what youll see are we still getting some benefits from.
Small batteries and pandemic still coming through.
Yes, Mihir, it's Nathan I mean, I think in terms of the number of new notices that we're receiving when you look at the number of new notices for our book in the second quarter of this year, it's below pre pandemic levels.
Some of that was naturally coming down as our kind of pre crisis 2008 in prior book continued to run off which is still generating some of those new delinquencies. So yes, I think so.
The new notice trends, the new delinquency trends continue to be quite favorable.
Even relative to pre COVID-19 levels.
So let's just my last question just I wanted to just.
The impact would be expense I think you had given earlier in the year guidance for like 200, and <unk> 5 million portfolio wanting it seems to be coming in a little bit better.
Is there a pickup in <unk>.
Rich.
Are we thinking of that might be a little bit.
Yes, you could add a little bit of upside I guess all that.
Outside on expenses upside on bottom line the expense guide for the full year.
And.
On that topic, maybe I'll just follow up I'll have on that.
Well, Tony when you do a bit of investment deal and should we expect that expense ratio to trend down.
2023 onwards.
Thank you.
Sure. So specific to 2022 I still think the guidance in the range that we gave is.
I think that's still appropriate we might be trending toward the lower end of that right now, but some of it we think is timing relative to certain investments that we're making too so I wouldn't.
I wouldn't kind of update that at this point.
Relative to beyond 'twenty two.
Yes, I think what we've said is we'll continue to make investments in the platform that we think youre going to have good payback and good returns.
Right now we do think that we've got a runway of investments that we think kind of meet those criteria over the next.
This year next year, but at some point do you think that that will start to trend down over time, but we will reevaluate going forward and continue to make the right investments into the platform to continue to maintain the position that we've had over the last couple of years too.
Okay, great. Thank you. Thanks.
Thanks for taking my questions.
Thank you and as there are no further questions I will now turn the call back over to management for closing remarks.
Thanks, Ralph and I want to thank everyone for their interest in MGIC. It was another exceptional quarter and look forward to talking with each of you in the future.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial one one.
[music].
Okay.
Yes.
[music].
Yes.
[music].
Yeah.
[music].
Sure.
Okay.
[music].
Okay.
[music].
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
Good.
[music].
Thank you.
Okay.
[music].
Thanks.
Okay.
[music].
Bob.
Sure.
Yes.
[music].
Okay.
[music].
Okay.
Sure.
Okay.
[music].
[music].
[music].
[music].