MGIC Investment Corporation (NYSE:MTG) Q4 2022 Earnings Call Transcript

MGIC Investment Corporation (NYSE:MTG) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Fourth Quarter 2022 Earnings Call. . I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Dianna Higgins: Thank you, Justin. 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 fourth quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC’s fourth 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 today. 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 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 that was 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 developments.

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 issuance of our 8-K. With that, I now have the pleasure to turn the call over to Tim.

Timothy Mattke: Thanks, Dianna. Good morning, everyone. I’m pleased to report that we had another great quarter. And for that matter, we delivered exceptional financial results for the entire year while providing meaningful capital returns to our shareholders. Simply put, we have the best financial results in our 65-year history. We will get into details of the financial results throughout this call, but we again demonstrated the strength and flexibility of our capital position in the quarter and produced an annualized 16.9% return on equity. In the quarter, we earned $191 million of net income, an increase of 10% compared to the same period last year. For the full year, net income increased 36% to $865 million, an all-time high compared to $635 million in 2021.

Insurance in force at the end of the quarter stood at more than $295 billion, a 7.6% increase from a year ago. The growth in insurance in force during the year reflects an increased persistency rate, offset by lower volumes of new insurance written. Persistency increased to 80% at the end of the quarter, up from 63% a year ago. In the quarter, we wrote $13 billion of NIW, and we finished the year with $76 billion of NIW. Although the volume of NIW is lower than the record volumes for the prior 2 years, 2022 was another great year, the third largest year in our 65-year history. We expect the reduction in our NIW volume for the fourth quarter is a reflection of the smaller MI market but also reflective of our market position as we continue to take actions based on the increased risk in the current environment with a focus on the continued long-term success of our company.

Turning to the performance of our insurance in force portfolio. Approximately 80% of our insurance in force is from the 2020 and later book years and the credit quality of those books remain strong. To date, we have not seen a material change in credit performance in our portfolio overall. We remain encouraged by the continued favorable employment trends and the positive credit trends we continue to experience, including the low level of early payment defaults, which we believe is a good indicator of near-term credit performance. I also want to highlight that the rapid home price appreciation experienced in the past couple of years allowed homeowners to build up significant equity. This equity, combined with the strong credit quality of our insured portfolio, should help reduce the incidence of claims on the related mortgages on much of our risk in force, even with the modest declines of home prices in recent months.

Our comprehensive reinsurance program will also help mitigate potential losses. As a result of the strength and flexibility of our capital position during the year, we not only deployed capital to support new business and grow our insurance in force, we also paid $800 million in dividends from MGIC to the holding company. We used our strong capital position to repurchase most of the remaining convertible junior debentures due in , repay MGIC’s Federal Home Loan Bank advance and redeem our senior notes due in 2023, reducing our leverage ratio to approximately 12% in annual interest expense by $25 million. We also returned approximately $500 million of capital to our shareholders through a combination of repurchasing common stock and paying common stock dividends, including a 25% increase in the quarterly dividend beginning in the third quarter.

As I mentioned during last quarter’s call, retiring debt and delevering has been a significant use of holding company cash in 2022. But with our debt-to-capital ratio and our target range and with the uncertainties and potential challenges in the economic environment in the near term, we continue to expect to retain higher levels of liquidity at the holding company. Our approach to capital management is dynamic so that we may continue to achieve our objectives in changing our stressed economic environment. We continually assess and evaluate the level of capital at both the operating company and holding company, including the level of capital that we retain for future deployment versus return to shareholders. As part of our assessment, we consider the operating environment we are or expect to be in.

We strive to be prudent and thoughtful in our capital allocation decision-making so that both the operating company and the holding company are positioned to achieve success in varying environments. Our balanced approach to capital management includes the use of forward commitment quota share reinsurance agreements and excess loss reinsurance agreements. These agreements reduce the volatility of losses in weaker economic environment and provide diversification and flexibility of sources of capital. Approximately 85% of our risk in force was covered to some extent by reinsurance transactions at the end of the fourth quarter. Drilling down further, approximately 97% of the risk in force relating to the 2020 and later books was covered to some extent by reinsurance transactions at the end of the fourth quarter.

We agreed to terms on a quota share agreement that will cover most of the policies written in 2023. This is in addition to the 15% quota share reinsurance agreement we already get in place to cover the 2023 NIW, bringing the total quota share that will cover most of the policies written in 2023 to 25%. In light of the current economic environment and near-term uncertainties, let me take a few minutes to provide some detail on our approach to credit risk. We employ a comprehensive risk management framework that includes our proprietary risk-based pricing engine for the majority of our customers, MiQ. MiQ allows for frequent and granular pricing changes including those to address our view of emerging and evolving market conditions and risks. We take actions intended to manage the mix of our portfolio, including expected returns with a goal of positioning ourselves for continued success in changing environments.

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The timing between taking actions and the resulting NIW is not immediate as pricing leads NIW by a month or 2 on average. So what you see in the Q4 NIW is primarily a reflection of our views of risk return from last fall. While we won’t comment on current market positioning given competitive considerations, our internal analytics indicates that our lower Q4 NIW was likely impacted by both the smaller MI market and a market share that was down a couple of percentage points in the fourth quarter. Our market position continues to be defensive in recent months, which we expect will lead to further declines in our market share in the first quarter of 2023 and may be larger than the expected decline in the fourth quarter. We are comfortable with our actions and the results because it’s reflective of our views of risk return while maintaining focus on our customer relationships and the continued long-term success of our company.

With that, let me turn it over to Nathan.

Nathaniel Colson: Thanks, Tim, and good morning. As Tim mentioned, we had another strong quarter. We earned $191 million of net income or $0.64 per diluted share compared to $0.52 per diluted share during the fourth quarter last year. For the full year, we earned $865 million in net income compared to $635 million last year. On an adjusted net operating income basis, we earned $2.91 per diluted share, a 52% increase from the $1.91 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release but the primary differences in the past 2 years have been losses on debt extinguishment from our debt reduction actions. The results for the fourth quarter and the full year were reflective of continued strong credit performance, which has led to favorable loss reserve development and resulted in losses incurred being negative each quarter in 2022.

Net losses incurred were negative $31 million in the fourth quarter compared to negative $25 million in the fourth quarter last year. For the full year, losses incurred were negative $255 million compared to $65 million last year. Our review and reestimation of ultimate losses on prior delinquencies resulted in $76 million of favorable loss reserve development compared to $141 million of favorable loss reserve development last quarter and $56 million of favorable loss reserve development in the fourth quarter of last year. The favorable development in the quarter was primarily related to new delinquencies from 2020 and 2021. As curate on those delinquencies continue to exceed our expectations, we have continued to adjust our ultimate loss expectations.

In the quarter, the delinquency inventory increased by 2% to 26,400 loans. In the quarter, we received 11,900 new delinquency notices compared to 11,000 last quarter and 13,700 in the fourth quarter of 2019 before the start of the COVID-19 pandemic. We continue to expect that the level of new delinquency notices may increase due to the seasoning of the large 2020 and 2021 vintages into what are historically the peak loss emergence years. During the quarter, total revenues were $292 million compared to $294 million for the same period last year. For the full year, total revenue was $1.2 billion, flat with last year. Net premiums earned were $244 million in the quarter compared to $253 million last year. The decrease in net premium earned was primarily due to a decrease in accelerated single premium cancellation, increase in ceded premiums and a decrease in our premium yield, offset somewhat by growth in our insurance in force.

The in-force premium yield was 38.9 basis points in the quarter, down 1/10 basis point from last quarter. The in-force portfolio yield reflects the premium rates in effect on our insurance in force and has been declining for some time, but the pace of decline has been slowing in recent quarters. With the smaller origination market, higher persistency and continued high credit quality for NIW that we expect in 2023, we expect the in-force premium yield to remain relatively flat during 2023. Book value per share increased 4.4% during the quarter to $15.82 from $15.16 last quarter and $15.18 at the end of 2021. Unrealized losses in the investment portfolio due to higher interest rates continue to be a headwind for book value per share, reducing book value per share by $1.39 at year-end, while unrealized gains on the investment portfolio added $0.47 per share last year.

While higher interest rates are a headwind for book value per share in the short term, higher interest rates are a long-term positive for the earnings potential of the investment portfolio and that is starting to come through the results. The book yield on the investment portfolio ended the year at 3%, up 20 basis points in the fourth quarter and 50 basis points from the end of last year. Sequentially, investment income was up approximately $4 million in the quarter and up $7 million from the fourth quarter of last year. Assuming a similar interest rate environment, we expect the book yield on the investment portfolio will continue to increase during the year and approach 3.5% by the end of 2023 as reinvestment rates remain significantly higher than the current book yield.

Operating expenses in the quarter were $74 million, up from $62 million last quarter and $46 million in the fourth quarter last year. For the full year, expenses were $249 million compared to $211 million last year. The increase in expenses during the fourth quarter compared to recent quarters was primarily due to higher pension settlement costs in the fourth quarter. Other factors impacting the full year expenses included higher performance-based compensation expense due to our exceptional financial results in 2022 as well as continued technology investments, particularly in our data and analytics infrastructures. We expect full year operating expenses will be down modestly in 2023 in the range of $235 million to $245 million. Turning to our capital management activities.

Our priorities have been consistent and include maintaining the financial strength and flexibility of the holding company and deploying capital for growth at the writing company. For the holding company, this means maintaining a target level of liquidity in excess of near-term needs. At the operating company, it means maintaining a robust level of PMIERs excess that we expect will enable growth in changing operating environments. During the fourth quarter, the capital levels at MGIC and liquidity levels at the holding company were above our targets, and we paid a $400 million dividend from MGIC to the holding company. Consistent with our capital strategy, we repurchased 6.1 million outstanding shares of common stock for a total cost of $80 million, and we paid a $0.10 per share dividend to our shareholders for a total of $30 million.

The holding company ended the year with cash and investments of $647 million. In January of this year, we repurchased an additional 2.1 million shares for $28 million and our Board authorized a $0.10 per share common stock dividend payable on March 2. At the end of January, we had $87 million remaining on our current share repurchase authorization, which we expect to exhaust in the first half of 2023. Any additional share repurchase authorization will be determined in consultation with the Board. At the end of 2022, MGIC had $2.3 billion of available assets in excess of the PMIERs minimum requirements compared with a $2.2 billion excess at the end of 2021. Throughout 2022, MGIC’s capital level was above our target. Consistent with our capital strategy, we received OCI approval and paid $800 million in dividends from MGIC to the holding company.

Future dividends from MGIC to the holding company will also require OCI approval. As we mentioned last quarter, in the near term, we expect to retain higher levels of liquidity at the holding company. Part of the reason for maintaining higher levels of liquidity at the holding company is the outlook for future dividends from the operating company is more uncertain than in the past 18 months. We will evaluate future dividends to the holding company using a consistent framework, but if we experienced a more challenged economic environment for mortgage credit, that will impact our target capital levels, which could extend the time between dividends or reduce the amount of future dividends. Our strong capital position entering 2022, combined with the exceptional financial results during the year, position us to reduce our debt outstanding by approximately $500 million, increased our quarterly shareholder dividend by 25%, reduced diluted shares by more than 10% and end the year with a stronger excess capital position relative to PMIERs than we started the year.

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

Timothy Mattke: Thanks, Nathan. Few additional comments before we open it up for questions. In January, under the direction of FHFA, the GSEs announced certain pricing changes effective May 1 of this year. Overall, we think the actions taken since October of 2022 have been directionally positive for low-down payment borrowers. At this point, we are uncertain what impact these changes will have on our overall business. However, we are supportive of efforts to facilitate access to low-down payment lending for first-time low- to moderate-income homebuyers. We look forward to continuing to work with FHFA, the GSEs and other industry key stakeholders to responsibly expand access to homeownership. As we look ahead into 2023, we do expect downward pressure on home prices to continue and further expect the overall market opportunity for new private mortgage insurance to be smaller compared to 2022.

Even so, we remain encouraged by favorable demographics that suggest meaningful long-term MI opportunities. As we close out another record year, we have confidence in our transformed business model and believe that our strength and flexibility position us to continue to execute and deliver on our business strategies in 2023 and beyond to create value for all of our stakeholders. Lastly, we’re often asked what differentiates us. First and foremost, it’s our people. Our people have been the cornerstone of our accomplishments. Additionally, there’s 65 years of industry thought leadership that we bring to the table. We listen, build partnerships, provide a superior customer experience and deliver quality offerings and solutions to our customers so that together, we can help borrowers to overcome the largest obstacle of homeownership, the down payment.

Our commitment and ability to help borrowers achieve the dream of affordable and sustainable homeownership has never been stronger. With that, operator, let’s take questions.

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Q&A Session

Operator: . And our first question comes from Mark DeVries from Barclays.

Mark DeVries: I had a question about how you’re thinking about the alternative uses of your excess capital. One of your competitors announced an interesting acquisition this morning. Just I’m wondering what your latest thoughts are on using some of that capital to potentially diversify the business in ways that may either kind of dampen some of the cyclicality of your earnings and/or be accretive to returns or the multiple?

Timothy Mattke: Mark, it’s Tim. I appreciate the question. It’s something that we think about from an overall strategic standpoint. It’s safe to say that on a routine basis, we consider alternative deployment of capital and whether it’s diversification underlying. Quite frankly, we haven’t seen opportunities that we think move the needle and that we think would be a benefit to the franchise and to our shareholders. That could change in the future, but to date, we have not really seen that.

Mark DeVries: Okay. Got it. And then just one question. Nathan, I heard your comment that guidance for the in-force portfolio yield to be relatively flat in 2023. What’s the outlook for the net premium yield? Should that kind of track that? Or is there still more pressure there?

Nathaniel Colson: Yes, Mark, I think the net premium yield, there’s a couple of factors that are hard to forecast, whether that’s accelerated single premiums or things like that. The one thing I would point you to is the ceded premium number was benefited in the year from our negative losses incurred, which drove profit commissions to be very high on those quota share deals. As loss levels return to more normal levels, certainly positive numbers versus negative numbers, that will have an impact on the profit commission, which was, I’d say, unusually large in 2022. So I think that ceded premium number, all else equal is likely to increase a little bit, which would — with a constant in-force premium yield number, that would lead the net premium yield to come down a little bit. But we’d also see the benefit then come through from the quota share on the loss line.

Operator: And our next question comes from Bose George from KBW.

Bose George: So your commentary on market share suggested — or just curious in terms of the commentary, is the decline that you’re anticipating driven by your tighter underwriting or prices or a combination of both? Or just a little more color on that would be great.

Timothy Mattke: No, I appreciate the question, Bose. And again, it’s not exact time to be able to predict exactly where we are, but we feel like we have a pretty good handle on that it’s not just market size. It’s down that we we’re probably down some share and want to call out probably even more so as we look to report on Q1. I think it’s safe to say that as I mentioned, MiQ allows us the ability to more granularly price — express our views on risk into the marketplace through price as well as dimensions as far as the risk factors, but it’s a combination of those. But I think the thing that I most likely think about in terms of risk return is what do you do to reflect the premium you need to get in return for the risk that you think that you’re taking.

Bose George: Okay. Yes, that makes sense. And then you noted that you maintain higher liquidity at the holding company. I mean, is there a way for us to kind of size that? What does that mean just so we can kind of triangulated to potential capital return?