MGIC Investment Corporation (NYSE:MTG) Q2 2023 Earnings Call Transcript

MGIC Investment Corporation (NYSE:MTG) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Second Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Dianna Higgins: Thank you, Joel. Good morning, and welcome, everyone. Thank you for your interest in MGIC Investment Corporation. Joining me on the call today to discuss our results for the second quarter are Tim Mattke, Chief Executive Officer, and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC’s second quarter financial results was issued yesterday and is available on our website at mtg.mgic.com under Newsroom, 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 and other information you may find valuable.

As a reminder, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before 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 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. 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 the issuance of our 8-K and 10-Q. With that, I now have the pleasure to turn the call over to Tim.

Tim Mattke: Thanks, Diana, and good morning, everyone. We had another quarter of solid results, writing $12.4 billion in new insurance and ending the quarter was $292 billion of insurance in force, flat quarter-over-quarter and 2% higher than a year ago. In the second quarter, we earned net income of $191 million and generated an annualized 16% return on equity. Our strong performance in the quarter and first half of the year reflects our disciplined approach to the market. We consistently focus on the long-term success of our company through executing our business strategies and maintaining exceptional financial strength and flexibility. We remain in an excellent position to serve our customers with quality offerings and solutions, while creating shareholder value.

As we expected at the beginning of the year, both mortgage origination and MI markets are smaller this year, driven by higher mortgage rates, which are leading to fewer homes for sale due to the lock-in effect for borrowers with lower mortgage rates. Higher mortgage rates have also dramatically reduced refinance transactions that were a large part of the market in 2021 and in early 2022. For our business, those headwinds are somewhat offset by the tailwinds that higher interest rates have on the persistency of our insurance in force. Annual persistency has increased in each of the last nine quarters to 83.5% at the end of the second quarter. The net result of lower volumes of new insurance written and increased persistency is that our insurance in force has remained relatively flat for the first half of 2023, consistent with what we expected at the start of the year.

While the affordability issues and high interest rates continue to put downward pressure on home prices, the home price decline seen in the last year or so have been more modest than many had forecasted. The outlook for the housing market and economy has been gradually improving and remains resilient. As a result, our view for the market risk began to steadily improve during the first half of 2023. The gradual stabilization of housing market conditions in the second quarter resulted in another quarter of strong credit performance. Our quarterly loss ratio was negative 7.3% in the quarter and our ending delinquent inventory was at the lowest level in the last 25 years. I am optimistic that a gradual normalization of home prices will continue, which I believe is healthy for the housing market and overall economy.

As we previously announced, in the quarter, we paid a $300 million dividend from MGIC to the holding company. With a strong liquidity position of the holding company, we have purchased another 5 million shares in the quarter for $73 million and ended June 30 with $817 million at the holding company. In July, we repurchased an additional 1.1 million shares for $18 million. The strong financial position of both the holding company and the operating company were key factors in the Board recently authorizing a 15% increase to our quarterly dividend, which brings the quarterly dividend to $0.115 per share. We continue to focus on maintaining financial strength and flexibility in order to create long-term value for shareholders and to protect operating company policyholders.

Our capital management strategy includes a comprehensive reinsurance program which reduces the volatility of losses in dynamic economic environments and provides diversification and flexibility of sources of capital. We bolstered our reinsurance program in the second quarter with an excess of loss agreement with a panel of highly rated reinsurers to cover most of our 2023 NIW. This reinsurance agreement complements the 25% quota share agreement we had in place at the start of the year to cover the 2023 NIW. At the end of the second quarter, approximately 98% of the risk in force relating to the 2020 through 2022 books and 93% of the 2023 book was covered to some extent by our reinsurance program. Before turning it over to Nathan to provide more detail on our financial results, I’d like to share a few thoughts on pricing and our market position.

Pricing we have in the market is dependent on many factors, including the credit characteristics of a given loan and a reflection of our views of the market risk. During last quarter’s call, I discussed pricing actions we took in the third and fourth quarters of last year to address our views of risk and uncertainties in an environment where interest rates have spiked, affordability was stretched and home prices were expected to fall from their peak. I also mentioned our views of risk for gradually improving, and that we expect our market share in the second quarter to be higher than the first quarter, which we still expect. We believe there’s additional improvement in our market position over recent months, even though our recent pricing was still meaningfully higher than the pricing we had in the market during the second quarter of last year.

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This improvement will be reflected in our third quarter NIW. While pricing is an important component of market position, it’s just one component, and we believe that we have advantages that allow us to outperform our price position. This includes a differentiated business model in terms of our breadth of our customer relationships, geographic diversification and who we do business with. Additionally, with 65-plus years of through-the-cycle experience, thought leadership and additional resources that we bring to the table to help our customers, ultimately we believe our broader value proposition allows us to outperform our pricing. With that, let me turn it over to Nathan.

Nathan Colson: Thanks, Tim, and good morning. As Tim mentioned, we had another quarter of strong financial results. In the second quarter, we earned net income of $0.66 per diluted share compared to $0.80 per diluted share last year. Adjusted net operating income was $0.68 per diluted share compared to $0.81 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. The results for the second quarter were reflective of continued strong credit performance, which led to favorable loss reserve development and resulted in a negative 7% loss ratio this quarter. Net losses incurred were negative $18 million in the second quarter compared to $6 million last quarter and negative $99 million in the second quarter last year.

Our review and re-estimation of ultimate losses on prior delinquencies resulted in $60 million of favorable loss reserve development in the quarter. The favorable development in the quarter was broad-based with about half coming from new delinquency notices received in 2020 and prior and half coming from new delinquencies in 2021 and early 2022. We continue to maintain our initial ultimate loss assumptions related to new delinquencies from the most recent quarters. In the quarter, our delinquency inventory decreased by 4% to 23,800 loans, which is the lowest level in at least the last 25 years. In the quarter, we received 10,600 new delinquency notices compared to 11,300 last quarter and 9,400 in the second quarter last year. While new notices were higher year-over-year, they were 18% below the pre-pandemic levels seen in the second quarter of 2019.

During the quarter, total revenues were $291 million compared to $293 million in the second quarter last year. Net premiums earned were $243 million in the quarter compared to $256 million last year. The decrease in net premiums earned was primarily due to an increase in ceded premium and a decrease in accelerated single premium cancellation. The in-force premium yield was 38.6 basis points in the quarter, down one-tenth of a basis point from last quarter and down less than 1 basis point from the second quarter of last year. As I mentioned on the call last quarter, we continue to expect the in-force premium yield to remain relatively flat during 2023. Book value per share at the end of the second quarter was $17.09, up 3% during the quarter.

Book value per share increased more than 14% compared to a year ago due to our strong results and accretive share repurchases despite our quarterly shareholder dividend payment and the headwinds from increased unrealized losses in the investment portfolio due to changes in interest rates. While interest rates have been a headwind for book value per share for the last year, 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 3.4%, up 20 basis points in the second quarter and up 70 basis points from a year ago. Sequentially, net investment income was up $3 million again this quarter and was up $12 million from the second quarter last year.

Our reinvestment rates continue to be well above the current book yield and assuming a similar interest rate environment, we expect the book yield to continue to increase and be modestly higher than the 3.5% book yield we were expecting by the end of 2023. Operating expenses in the quarter were $57 million, down from $73 million last quarter and flat with the second quarter last year. As we talked about on the call last quarter, operating expenses were higher in the first quarter due in large part to the $8 million in pension settlement charges. The settlement charges were significantly lower in the second quarter, coming in at $1 million. We anticipate the settlement charges will remain closer to the Q2 level for the remainder of 2023. We continue to expect full year operating expenses will be down modestly in 2023 to the range of $235 million to $245 million, the same range we provided in February and May.

Turning to our capital management activities. During the second quarter, the capital levels at MGIC and liquidity levels at the holding company continued to be above our targets. As Tim mentioned, the Board of Directors authorized a 15% increase in our quarterly shareholder dividend. Like the $500 million share repurchase authorization we announced in April, the increase in the quarterly dividend reflects our strong capital position and outlook on continuing to generate excess capital at the operating company and paying dividends to the holding company. Even with the increase in the quarterly shareholder dividend, we expect share repurchases will remain our primary means of returning capital to shareholders. 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 for remaining shareholders.

With that, let me turn it back over to Tim.

Tim Mattke: Thanks, Nathan. I’ll close my comments where I started. We had another solid quarter and excellent financial results for the first half of the year. Our strategic long-term focus, prudent risk management and balanced approach to capital management positions us to serve our customers with quality offerings and solutions, so together, we can help borrowers overcome the largest obstacle to homeownership, the down payment. As we look forward to the second half of the year, we remain encouraged by the positive credit trends we are experiencing on our existing insurance portfolio, including the favorable employment trends as well as the resiliency of the housing market. We’re excited for the rest of the year we’ll bring. With that, Joel, let’s take questions.

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Q&A Session

Operator: Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Bose George of KBW. Your line is now open.

Bose George: Hey, everyone. Good morning. Actually, can you talk a little bit about what you’re seeing in terms of pricing? And if the macro environment continues to improve, is it possible that we see some of the improvements over the last year reverse?

Tim Mattke: I know it’s tough, and I don’t want to speculate about what will happen in the future, Bose. I think as we said, we took pricing actions in the third, fourth quarter of last year because we saw that the risk was elevated, and we needed to get the appropriate sort of pricing to get the right returns. As we said in our script, we think over the last couple of quarters, we’ve seen that moderate from our view of the ultimate risk. I think we will be a little bit higher from a market share standpoint this quarter. And we sort of said next quarter, we think we’ll continue to see things progress from an NIW standpoint as well. But it’s really hard to speculate what’s going to happen going out. We’re in a competitive industry, but we have to do what’s right for us from a pricing and return standpoint, and I expect others to do the same for them.

Bose George: Okay, great. Thanks. And then can you talk about any changes to assumptions you’re using for new notices or loss severities just based on some of the improvements that we’ve seen out there in the market?

Nathan Colson: Bose, it’s Nathan. On the new notice ultimate claim rate assumption, it was still at 7.5% in the quarter. Historically, that’s a very, very good level. We have been running better than that, hence, the favorable loss reserve development that we’ve seen over the last couple of years, but no change to that assumption. And then on the severity side, we’re really just following the exposure that comes in on new notices. So as we’ve seen more new notices from more recent vintages with higher loan amounts and higher exposures, the severity has ticked up a little bit, but on the order of maybe a 1% change this quarter. So not a big change to the severity assumptions.

Bose George: Okay. Great. Thanks.

Tim Mattke: Thanks, Bose.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Mihir Bhatia of Bank of America. Your line is now open.

Mihir Bhatia: Hey, good morning, and thank you for taking my questions. Wanted to just ask about the NIW in the quarter. Obviously, you saw a nice uptick, a little bit more than some of the others. I guess what I’m really curious about is, are there particular markets or segments where you are seeing strength this quarter? Like, where do you think you picked up share? What changed this quarter versus last quarter? Just any relative comments, I’ll be curious about that. Thank you.

Tim Mattke: Sure, Mihir, it’s Tim. I mean I would say that there’s no specific areas that I would call out. If you look at our additional information that we include, you can see some minor changes above 95% LTVs as an example and above 45% DTI. I think it’s fair to say that we said tolerances from a risk standpoint of how much we want to write and certain characteristics. But I think I would view sort of where we won some additional volume, it’s fairly broad-based and nothing that I would call out specifically about certain loan characteristics or anything like that.