Q3 2023 MGIC Investment Corporation Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation.
<unk> third quarter 2023 earnings call at this time all lines have been placed on mute to prevent any background noise.
The end of todays presentation, we will have a question and answer session.
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I'd now like to turn the conference over to Diana here against head of Investor Relations. Please go ahead.
Yes.
And Nathan Colson, Chief Financial Officer, our press release, which contains MGIC third quarter financial results was issued yesterday and is available on our website at M. T G.
MGIC Dot com under newsroom includes additional information about our quarterly results that we will refer to during this call. It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures.
In addition, we posted on our website our quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable.
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 these 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. They were also filed yesterday if.
If we make any forward looking statements we are not undertaking an obligation to update those statements in the future in light of subsequent events.
No one should rely on the fact that such guidance or forward looking statements are current at any other time than the time of this call or issuance of our 8-K and 10-Q with that I now have the pleasure to turn the call over to Tim.
Diana and good morning, everyone.
I am pleased to report we had another great quarter, we could see.
Need to benefit from favorable credit trends prudent risk management strategy is a disciplined approach to the market.
The dedication of our team we.
We are focused and committed to creating long term value for our stakeholders by executing our business strategy and maintaining exceptional financial strength and flexibility.
Turning our attention to our financial results for the third quarter. We earned net income of $183 million and generated an annualized 15.1% return on equity.
Wrote $14 $6 billion of new insurance written and insurance in force. The main driver of our revenue stayed strong ending the quarter at 294 billion.
As expected.
<unk> origination and M&A markets are smaller this year driven by higher mortgage rates, which is the challenge of affordability led to fewer homes for sale due to the lock in effect.
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Mortgage rates and significantly reduced refinance activity.
For our business those headwinds are somewhat offset by the tailwind that higher interest rates have on the persistency of our insurance in force.
Daniel Persistency has increased each of the last 10 quarters and ended the third quarter at 86, 3% up from 78, 3% a year ago.
The net result of lower volumes of new insurance and increased persistency is that our insurance in force has remained relatively flat during the year consistent with what we expected at the start of the year.
Credit performance at our in force book continues to be a tailwind for our financial results.
A link with the inventory remains at historic lows.
The new insurance, we are writing continues to have strong credit characteristics.
Home prices continued to be more resilient than expected, despite affordability challenges and higher interest rates. However.
However, the rate of home price growth has slowed in some areas, while others have seen modest declines.
I remain optimistic that home prices generally will remain relatively stable while there is noise in the market the housing market remains resilient.
The supply of homes available for sale is still tight. However, there is pent up demand and demographic trends suggest meaningful long term ni opportunities.
During the last few calls I have discussed pricing actions, we took in the third and fourth quarters of last year to address our views of risks and uncertainties environment, where interest rates. It spiked affordability was stretched and home prices were expected to fall off from their peak.
I'll also discuss their views of the markets risk return began to gradually improve during the year and then we expected our market position to also improve gradually during this year, even though our pricing was still meaningfully higher than the pricing we had in the market during the second quarter of last year.
As a reminder, the timing between taking action and the resulting in IW is not immediate as pricing leads and IW by a month or two.
So what you see in our third quarter on AWS, primarily a reflection of our views of risk return from late second quarter of this year.
During the quarter and through October we're very active in our capital management actions.
Third quarter, our share price reached the level, where we could redeem our 9% junior convertible debentures and we elected to do so.
We said all the debentures with cash at September 20th they were fully retired which also eliminated $1 6 million potentially dilutive shares.
There was only $21 million of the debentures left at the time of the election to redeem the full retirement remove the last vestiges of the financial crisis era financing remained on our balance sheet.
Nathan will provide additional details.
Also very active with our reinsurance program during the quarter. We continued our capital return program through both shareholder dividends and share repurchases.
In the quarter, we repurchased three 9 million shares of common stock for $67 million and paid a quarterly $11.05 per share common stock dividend for $33 million.
In addition through October 27, we repurchased an additional $2 2 million shares of common stock.
For a total of $37 million.
Authorized 11, five cents per share common stock dividend to be paid November 28.
Consistent with last quarter, our recent share repurchase activity reflects continued strong mortgage credit performance and financial results and share price valuation levels that we believe are very attractive to generate long term value of premium and shareholders.
Earlier this week MGIC paid of $300 million dividend to the holding company reflective of our strong capital position of MGIC.
Capital levels continue to be above our target.
The dividend from MGIC to the holding company enhances the liquidity position and the financial flexibility at the holding company.
With our debt to capital ratio and our target range and the debentures being fully retired we have completed our planned de levering activities.
With a strong credit performance and financial results, we are experiencing combined with a smaller origination market.
Which saw growth of our insurance in force and the related required capital.
Current valuation levels, we expect our capital return payout will increase from the level in recent quarters and you can begin to see that in our October repurchase activity.
Let me turn it over to Nathan.
Thanks, Tim and good morning.
Tim mentioned, we had another quarter of solid financial results and earned net income of 64 cents per diluted share compared to 81 per diluted share last year.
Adjusted net operating income was <unk> 64 per diluted share compared to 86 last year.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release.
The results for the third quarter were reflective of the continued exceptional credit performance, we have been experiencing which again led to favorable loss reserve development and resulted in close to zero losses, this quarter compared with a negative 7% loss ratio in the second quarter.
Our review and re estimation of ultimate losses on prior delinquencies resulted in $48 million of favorable loss reserve development in the quarter.
The favorable development was broad based again this quarter with about half coming from delinquency notices received in 2020 and prior and half coming from delinquencies in 2021, and the first half of 2022.
In the quarter, our delinquency inventory increased by 4% to.
24700 loans, which continues to be historically low.
In the quarter, we received 12300, new delinquency notices compared to 10600 last quarter and 11000 in the third quarter last year.
While new notices were higher year over year, they were 13% below the pre pandemic levels seen in the third quarter of 2019.
We continue to expect that the level of new delinquency notices may increase due to seasonality and the large 2020 and 2021 books being in what are historically higher loss emergence here is for vintage.
During the quarter total revenues were $297 million.
Compared to $293 million in the third quarter last year.
Net premium or net premiums earned were $242 million in the quarter compared to $252 million last year.
Okay.
The enforced premium yield was $38 six basis points in the quarter flat from last quarter.
The enforced yields has continued to remain relatively flat in 2023, consistent with what we expected at the start of the year.
Okay.
Book value per share at the end of the third quarter was $17 37.
Up 14% compared to a year ago.
The increase in book value per share it was due to our strong results and accretive share repurchases offset somewhat by our quarterly shareholder dividend.
While higher interest rates continue to be a headwind for book value per share higher interest rates are a long term positive for the earnings potential of the investment portfolio and that continues to come through in our results.
The book yield on the investment portfolio ended the quarter at three 6% up 20 basis points in the third quarter and up 70 basis points from a year ago.
Net investment income was $55 million this quarter up from $43 million in the third quarter last year.
Our reinvestment rates continue to be above the current book.
And assuming a similar interest rate environment, we expect the book yield to continue to increase.
Although we expect the rate of the increase to slow as the increase in book yield in the last year has narrowed the difference between our current book yield and reinvestment rates.
Operating expenses in the quarter were $53 million.
Down from $57 million last quarter and down from $62 million in the third quarter last year.
We expect full year operating expenses will be towards the lower end of the range. We have provided throughout the year of $235 million to $245 million.
Okay.
Turning to our capital management activities.
As Tim mentioned, we were quite active across our reinsurance program during the quarter and I wanted to provide some additional details.
Our reinsurance program includes the use of forward commitment quota share reinsurance agreements in excess of loss agreements executed in either the traditional our island markets.
These agreements reduced the volatility of losses, and adverse macroeconomic environments and provide diversification and flexibility to our sources of capital.
In October we completed our seventh Ireland transaction, which provides $330 million of loss protection and covers nearly all of our policies written from June of 2022 through August of 2023, and we agreed to terms on a 30% quota share agreement with the panel of highly rated reinsurers.
That will cover most of our policies written in 2024.
We also elected to cancel the quota share treaties covering our 2020 and IW effective December 31, and.
And participated in a tender offer for certain tranches of seasoned Ireland deals.
We expect the net effect of these transactions will be modestly positive to our pmiers excess level at year end and all of these actions are consistent with our strategy to concentrate our reinsurance coverage on our most recent or future <unk>.
At the end of the third quarter, approximately 98% of the risk in force relating to the 2020 through 2022 Bucks and 93% of the 2023 book, let's cover to some extent by our reinsurance program.
And with that let me turn it back over to Tim.
Thanks Nathan.
A few additional comments before we open it up for questions.
Tober FHFA announced this new uniform appraisal dataset public use vial.
We're very supportive of the FHFA and director Thompsons commitment to improving data transparency and the housing finance system.
We look forward to continuing to work with the FHFA. The GSE another industry key stakeholders to responsibly and sustainably expand and access to homeownership.
To wrap up we had another successful quarter and continued to deliver solid financial results.
I want to extend my appreciation to our customers shareholders and partners for their continued trust and confidence in MGIC.
As we look forward, we remain encouraged by the positive credit trends, we are experiencing on our insurance portfolio as well as the resiliency of the housing market and we remain confident in our transformed business model and ability to execute and deliver on our business strategies.
We believe that our financial strength and capital flexibility combined with our quality offerings and superior customer experience put us in the best position to continue to navigate a dynamic economic landscape and achieve success for all of our stakeholders and with that operator, let's take questions.
Thank you.
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To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
The first question comes from Bose, George with K B W. Your line is open.
Good morning.
To first ask just about the capital return you noted that it should increase and as we kind of think about the sort of the cadence of that should we think of the leverage kind of staying stable and the increase being free cash flow or it could leverage increase as well as that happens.
Thomas Thanks for the question I think the way that we think about it is we spent a good amount of our holding company resources on de levering the balance sheet.
There's just not.
More raw material there the levers so that allows us the flexibility.
So return more capital and I think as we alluded to we saw some some increased level in October as we had retired the 60 threes as an example, so it just gives us additional capacity as we move forward.
Okay, so leverage probably stays roughly stable is that.
Yes, yes.
Okay perfect.
And then just.
The expense ratio your guidance this year, I guess equates to kind of a roughly a 25%.
Longer term is that kind of a reasonable level or I.
I guess this year there was some one time items. So should we could we see that come down a little bit.
Okay closes Nathan.
We certainly did have some unique items, especially in the first quarter of this year.
Led to the full year expenses being a little bit higher, but we do expect that there's capacity for us to decrease the expense ratio going forward I think for now feel good that we're in I think in the lower part towards the lower end of the range that we've guided to for this year and we've typically provided an update for <unk>.
For the year.
Q1.
Yes.
The Q1 earnings call. So I think we will provide guidance again I expect for 2024.
In January early February.
Okay, great. Thanks, a lot.
Please standby for the next question.
The next question comes from Nathan Rich <unk> with Bank of America. Your line is open.
Good morning, Thanks for taking my question.
The premium yield has stayed pretty flat with.
What the guidance is as <unk> guided.
Can you talk about the pricing environment currently and the competitive dynamics around that.
Yes again.
We thought at the beginning of the year that the net premium yield would remain relatively stable. It has as I mentioned in the script I think what we're really view as positive as our premiums meaningfully higher than it was just a little over a year ago.
And you can see us.
We think we're probably winning sort of additional.
Sure within that sort of dimension and so while it's a competitive marketplace and it's hard to say, what's going to happen in the future I think we're really happy that the pricing actions that we took in the past to get to the right risk return level.
And we're still able to get a good amount of volume and good credit quality that we feel really comfortable about the ultimate returns that we can get off of that business.
And then on credit you noted that the doses are up a little bit quarter over quarter, but still down from <unk> levels.
I'm just kind of curious if there's any like Gerald pocket of concern you're getting close on in the macro backdrop still obviously stronger housing credit, but just curious if you're seeing anything out there that you're keeping a close eye on.
Nathan Nathan I would say as we look at the new delinquency notices that we're receiving.
There's really not a lot of kind of unique or unusual items that were seeing I think it is relatively broad based whether youre looking at geography, and vintage whether youre looking at other characteristics like like FICO or even LTV.
So I don't think that.
That calls out of pocket of concern for us just returning to kind of more normalized levels coming off of.
Very very low levels that we saw.
Particularly in 'twenty, one and 'twenty two here.
Got it thank you.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Please standby for the next question.
The next question comes from Scott <unk> with RBC capital markets. Your line is open.
Yes. Good morning, I was wondering if you could talk about the.
Can you give a little more color on the.
The sequential increase in defaults you kind of expected for Q4, I know you kind of mentioned that seasonal I guess, you just mentioned a little bit.
More on that but.
Is that just kind of a modest uptick in nothing nothing really significant just.
Just kind of off low levels.
Or you can add on that.
Yes, Scott, it's Nathan I think that is how we think about it historically the third quarter.
Back to the many years pre COVID-19 to third quarter was seasonally.
Harder.
Harder quarter, rather for new notices the first half of the year, a little better just from a seasonal credit standpoint, So I think when we look at it the.
The comparisons to 2021 and 2022 I think are less meaningful for us just given the unique dynamics in those years I think when you look at 2018 2019 for us.
Even though we have a much larger book now still seeing on account basis delinquencies that are.
13% compared to 2019, and even even lower compared to 2018, so it feels like a very strong credit environment for us.
Okay. That's helpful. And then just wondering if you're able to quantify the impact from canceling the quarter share and the tender from the aisle and a little bit further is there anything more you I think you said there was a.
Positive, but is there anything more you can add on to that or is it still too early to tell now.
Sure.
We did in the earnings release, we did.
Try to put some numbers and but but just on the quota share side, we expect that we will pay a cancellation fee of approximately $5 million.
We'll go through ceded premium in the fourth quarter and then on the on the tender side of things.
We've paid a tender premium of approximately $8 million.
And in October so that will also run through Q4 as ceded premium if those will benefit the ceded premium run rate than in 2024 and beyond.
Okay, Great. That's all I had thanks.
Please stand for the next question.
Okay.
Next question comes from Eric Hagen with BP.
Your line is open.
Hey, Thanks. Good morning Hope you guys are well hey, what's your perspective on conditions in the reinsurance market and even how those conditions drive pricing and competitiveness in the market just against the backdrop of high interest rates.
I would even kind of drives your.
Ability and your willingness or your appetite to return capital next year. Thank you guys.
I can start and Nathan can probably add a little bit I think we feel that.
The reinsurance markets I guess I sort of.
Slipping into the traditional reinsurance markets as well as the capital markets.
I think at the beginning of the year. We have said we are skeptical if we'd be able to execute an island in the capital markets and again from a from a planning standpoint, we don't plan on that but when they are opened and they're available at attractive sort of.
Conditions, we'd like to be able to execute.
So I think we feel very favorable at that aspect from the traditional reinsurance markets.
Much more stability there.
I think it's fair to say that.
As we have concerns with.
Increasing interest rates and what would happen with home prices a year ago tweak a lot of our reinsurance partners had similar questions.
I think at this point they feel.
A little bit more comfortable it seems like capacity is as strong probably stronger than it was even a year ago for us to be able to execute I think our ability to consistently execute in those markets. Since we started our quota share back in 2013 is helpful in that regard and making sure that we have capacity.
But the reality is I think that feels very good how does it play into sort of the.
But ultimately I think we want to price in the primary market such that we think we're getting appropriate returns and that the reinsurance. It's just another way for us to think about how we fund the capital and think about being able to distribute losses in a stress environment. So not tied in place too much old reliance upon what's happening in the reinsurance market as far as the impact on direct pricing versus.
Feel like when we deploy capital we want to we want to make sure that we're getting good return day, one on that Nathan anything else you'd want to add.
I think just on the traditional reinsurance market I do think 2023.
Was a challenging year from a capacity standpoint, as many reinsurers ensured a lot of mortgage risk in 'twenty, one and 'twenty. Two then persistency increased quite a bit so it wasn't running office fast, but but now that youll see the smaller origination volumes in 'twenty three and also what most expect for 2020 for I think some.
That capacity has rebounded a little bit and you can even see that in our quota share placement. We've already got we've already agreed to terms on a 30% quota share to cover our 2020 for underwriting year for 2023 that was at a 25% quota share level, just because of capacity challenges at some.
Reinsurers, but.
Now that some of their larger books are running off a little bit and there is less.
New risks coming in just because of a smaller origination market, but it does feel a little bit more normalized now than maybe the first part of 2023.
Okay, that's great detail. Thank you guys.
I mean, we're looking at both the GAAP book value and we're also presenting the one ex OCI. So is there like a market yield for the securities portfolio that we can think about relative to the.
The GAAP yield when you guys present, thank you guys.
Okay.
I'm, sorry, Eric the market yield on the on the investment portfolio is what youre asking about.
Yes exactly.
Talking about the book value with and without the OCI on there.
Got it I don't have that immediately in front of me, but it's about 200 basis points better than the.
Then the book yield so.
Can follow up and get you the exact number but I think youre looking mid fives and the book yields mid threes.
Got you that's helpful. Thank you guys.
No further questions at this time I would now like to turn the call back over to management for closing remarks.
Thanks, Michele just wanted to thank everyone for their interest in MGIC and thanks to all of our coworkers and all of our customers for another great quarter and look forward to it.
Last part of 2023, and then 2024 thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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