MGIC Investment Corporation (NYSE:MTG) Q4 2023 Earnings Call Transcript

MGIC Investment Corporation (NYSE:MTG) Q4 2023 Earnings Call Transcript February 1, 2024

MGIC Investment Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the MGIC Investment Corporation Fourth 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: Good morning. Welcome, everyone. Thank you for joining us today and for your interest in MGIC. Joining me on the call 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 getting started today, I want to remind everybody 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 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 the issuance of our 8-K. So with that, let’s get started. I now have the pleasure to turn the call over to Tim.

Tim Mattke: Thanks, Dianna and good morning, everyone. I am happy to report we again delivered a solid quarter, capping another year of excellent financial results while returning meaningful capital to our shareholders. Our performance is a testament to the dedication and hard work of each member of our team. Their ability to adapt to market dynamics has been instrumental in our success. During the year, we continued to benefit from favorable credit trends, prudent risk management strategies, the disciplined approach to the market and a focus on through-the-cycle performance. We remain committed to delivering long-term value for our shareholders as we begin the new year. Turning to a few highlights. In the fourth quarter, we earned $185 million of net income and produced an annualized 15.2% return on equity.

For the full year, we earned $713 million. At the end of the quarter, insurance in force, the main driver of future revenue stood strong at $294 billion. The overall credit quality of our insurance portfolio remains solid, with an average FICO origination of 746 and an average original LTV of 93%. We wrote $11 billion of NIW in the fourth quarter and $46 billion of NIW for the full year. The level of NIW in the year is primarily a reflection of the smaller MI origination market. Underwriting standards remain strong and our NIW continues to have strong credit characteristics. We continue to experience the headwinds of small origination market, driven by current interest rates and affordability challenges. The supply of homes for sale remains limited due to the lock-in effect for homeowners with mortgages that have interest rates well below the current market rate.

The same borrowers were also significantly out of the money to refinance, which has led to historically low refinance volumes across the mortgage origination industry, including the MI market. Those headwinds are offset by the tailwinds that higher interest rates have on persistency on our insurance in force. Annual persistency ended the fourth quarter at 86%, up from 82% a year ago and 66% at the end of 2021. The net result of lower NIW 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. While prices continue to be resilient despite affordability challenges and high interest rates, although the current supply/demand dynamic creates challenges for first time homebuyers, this dynamic continues to support home prices and helps mitigate the downside risk of home prices.

Many economic forecasts indicate home prices being relatively flat in 2024 which we believe will be a long-term positive for our industry. While there is still some uncertainty, the housing market remains resilient and the outlook for it and the economy is generally positive. Although the supply of homes available for sale as well, there is pent-up demand and demographic trends suggest meaningful long-term MI opportunities as the millennial and Gen-Z populations continue to demonstrate a strong desire for homeownership. Given the cross currents I just discussed, we expect the MI market to be roughly the same size in 2024 as it was in 2023. Taking a look at the credit performance of our insurance portfolio, our delinquency inventory and rates continue to be at historic lows.

To-date, we have not seen a material change in the credit performance of our portfolio overall and early payment defaults remain at very low levels, which we believe is a good indicator of near-term credit performance. As a result of the strength and flexibility of our capital position during the year, we paid $600 million in dividends from MGIC to the holding company, including a previously announced $300 million dividend in the fourth quarter. We also returned approximately $460 million of capital to our shareholders through a combination of repurchasing common stock and paying a quarterly common stock dividend, which was increased by 15% in the third quarter. As I mentioned on our last call, with our debt-to-capital ratio and our target range and with the debentures being fully retired, we have completed our planned delevering activities and we expect our capital return payout to increase from a low level in [Technical Difficulty].

That was the case in the fourth quarter as we repurchased 7 million shares of common stock for $123 million and paid a quarterly $0.115 per share dividend to our shareholders for a total of $32 million. We continue to expect share repurchases will remain a primary means of returning capital to shareholders. In 2024, through January 26, we repurchased an additional 1.8 million shares of common stock for a total of $34 million. Our recent share repurchase activity reflects the capital strength and financial results previously highlighted and share price levels that we believe are attractive to generate long-term value for remaining shareholders. As of January 26, we had $240 million remaining on our current share repurchase authorization. The Board authorized $0.115 per common stock dividend to be paid on March 5.

We are very active across our reinsurance program during the fourth quarter and Nathan will share details on our reinsurance activities. Before turning it over to Nathan, I’d like to share a few more comments. I am happy to report that in January, S&P upgraded MGIC’s financial strength and credit ratings to A- and upgraded the credit rating of the holding company to BBB- and the holding company is now fully investment grade. The outlook for the ratings is stable. S&P’s rationale for the upgrades include an improved view of MGIC’s capital adequacy resulting from the implementation of S&P’s revised capital adequacy methodology, MGIC’s risk management, disciplined approach to underwriting, resulting in strong portfolio quality and prudent use of reinsurance.

Lastly, as many of you know, Steve Thompson, our Chief Risk Officer will be embarking on a well-earned retirement in March after serving the company for more than 25 years. I am proud to have Steve serve as my first CRO in my tenure as CEO. Thank you, Steve, for your passion and the dedication and leadership that you demonstrated everyday. Nathan will assume the responsibility for overseeing the risk management department in addition to the finance department upon Steve’s retirement. With that, let me turn it over to Nathan.

Nathan Colson: Thanks, Tim and good morning. Before getting into the details on the financial results, I also want to thank Tim for the opportunity and thank Steve for his dedication and leadership. Steve was one of the first people I met when I joined MGIC in the risk management department almost 10 years ago and he has been a friend and mentor for me. We will miss Steve’s wisdom and experience, his personality and wit, and mostly, we will miss Steve because he is a great guy that people wanted to be around. I feel very fortunate for the opportunity to oversee the risk team that Steve has developed. I am excited to lead such a talented group. Turning back to the financial results. As Tim mentioned, we had another quarter of solid financial results.

We earned net income of $0.66 per diluted share compared to $0.64 during the fourth quarter last year. For the full year, we earned net income of $2.49 per diluted share compared to $2.79 per diluted share last year. The results for the fourth quarter were reflective of continued exceptional credit performance we have been experiencing. This has again led to favorable loss reserve development and resulted in a negative 4% loss ratio this quarter. Our review and reestimation of ultimate losses on prior delinquencies resulted in $60 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from the delinquency notices received in the second half of 2021 and in 2022. In the quarter, our delinquency inventory increased by 4% to 25,700 loans, which continues to be low by historical standards.

In the quarter, we received 12,700 new delinquency notices compared to 12,300 last quarter and 11,900 in the fourth quarter last year. While new notices were higher year-over-year, they were 7% below the pre-pandemic levels seen in the fourth quarter of 2019. We continue to expect that the level of new delinquency notices may increase due to the large 2020 and 2021 book years being in what are historically higher loss emergence years. During the quarter, total revenues were $284 million compared to $292 million in the fourth quarter last year. Net premiums earned were $226 million in the quarter compared to $244 million last year. The decrease in net premiums earned was primarily due to an increase in ceded premium in the quarter resulting from previously announced transactions that included canceling the quota share agreements covering our 2020 NIW and a tender offer for certain tranches of the home reinsurance-linked notes.

Combined, these transactions resulted in an additional $13 million in ceded premium in the fourth quarter. The in-force premium yield was 38.6 basis points in the quarter, flat quarter-over-quarter, consistent with our expectations. Given our expectations for another year with higher persistency in a smaller MI market, we expect the in-force premium yields to remain relatively flat in 2024 as well. Book value per share at the end of the fourth quarter was $18.61, up 17% compared to a year ago. The increase in book value per share was due to our strong results and accretive share repurchases, offset somewhat by our quarterly shareholder dividend. While higher interest rates continue to be headwind for book value per share, higher interest rates are a 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 3.7% up 20 basis points in the fourth quarter and up 70 basis points from a year ago. Net investment income was $58 million in the quarter, up $3 million sequentially and up $12 million from the fourth quarter last year. During the fourth quarter, our reinvestment rates were above the book yield and assuming a similar interest rate environment, we expect the book yield to continue to increase but at a slower rate as the increase in book yield in the last year has narrowed the difference between our book yield and reinvestment rates. Operating expenses in the quarter were $55 million, down from $74 million in the fourth quarter last year. For the full year, expenses were $237 million, down $12 million from 2022 and towards the lower end of the $235 million to $245 million range we provided a year ago and reiterated throughout the year.

For 2024, we expect operating expenses will be lower again to a range of $215 million to $225 million, a reduction of $20 million from the range we provided last year. Our reinsurance program, which includes the use of forward commitment quota share reinsurance agreements and excess of loss reinsurance agreements executed in either the traditional or ILN market is an important component of our risk management and capital management strategies. These agreements reduce the volatility of losses in adverse macroeconomic environments and provide diversification and flexibility to our sources of capital. Our overall strategy is to focus on and prioritize the most recent book year vintages or future NIW and to recapture CDs and book year vintages if the reinsurance no longer offers significant loss protection in stress scenarios.

As Tim mentioned, we were very active across our reinsurance program in the fourth quarter. As previously announced, in the fourth quarter, we completed our seventh ILN transaction, which provides $330 million of loss protection and covers nearly all of our policies written from June 2022 through August of 2023. And we executed a 30% quota share agreement with a panel of diverse and 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 NIW and conducted a tender offer for certain tranches of seasoned dial-in deals. These actions are all consistent with our strategy to concentrate our reinsurance program and coverage on our most recent book years or future NIW.

Our reinsurance strategy is well established, and we have been consistent buyers in both the traditional and ILN markets. We have consistently placed quota share reinsurance covering our future NIW since 2013 and have had at least one Home Re ILN transaction in each of the last 6 years. This approach has served us well, and we appreciate and value the relationships and trusted partnerships we have developed over the years and look forward to continuing to build our relationships in the reinsurance markets in 2024 and beyond. With that, let me turn it back over to Tim.

Tim Mattke: Thanks, Nathan. As we celebrate another successful year, I’d like to acknowledge the collective efforts of our talented and passionate team. Each team member played a role in making 2023 a success. I want to express my appreciation and gratitude for their hard work, dedication and commitment to excellence. As we begin the new year, we continue to be encouraged by the resiliency of the housing market and optimistic about the opportunities that lie before us. With our solid foundation, talented team, financial strength and capital flexibility, we are well positioned to continue to execute on our business strategies and achieve success for all of our stakeholders. With that, operator, let’s take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Bose George from KBW.

Bose George: Good morning. Actually, first, on the expenses. Obviously, there is very good guidance on the reduction. Just curious – like this in 2023, you guys had the pension expense, apart from that, can you just talk about other drivers of the reduction. And then does this kind of suggest the expense ratio that can be like in that 23% range, down from kind of the mid-20’s.

Nathan Colson: Bose, this is Nathan. Thanks for the question. Yes, I think from an expense ratio standpoint, I think you’re kind of in the range that we’re thinking for 2024 as well. In terms of reductions, I mean, we did have some unique items in the fourth quarter of ‘22, in the first quarter of 2023. But really, the range that we’re providing for next year is consistent with the run rate that you’ve seen over the last couple of quarters, really just kind of the full year of that run rate that we’ve kind of brought on at for the third and fourth quarters of this year.

Bose George: Okay. Great. Thanks. And then actually, in terms of share buybacks, in the supplement, you show that there is going to be a sharp increase in the contingency reserves starting in 2025. Will that have an impact on capital return? Or I mean, is it – obviously, you guys are returning it at a pretty robust level already. So just curious if that changes anything.

Nathan Colson: This is Nathan. I don’t know that it changes things necessarily, but it certainly helps alleviate something that could have been a constraint. If you look at that supplement page we’ve been kind of drawing down statutory surplus over time. This year, we’re in 2024, we are going to get some 10-year releases on contingency reserves, but really in ‘25, we start to get those full years with $500 million plus of contingency reserve releases. So that would allow us flexibility to continue to pay dividends without kind of running out of – without surplus getting too low because I think that could become a constraint. But with contingency reserves now we’re kind of approaching release, I think that’s something that may not be a practical constraint for us.

Bose George: Okay, great. Thank you.

Operator: Thank you. [Operator Instructions] Our Next question comes from the line of Terry Ma from Barclays.

Terry Ma: Hi, thanks. Good morning. I think you mentioned you expect the in-force premium yield to be flat in 2024. So how should we think about the net yield? Should that kind of just track the Q4 levels?

Nathan Colson: Terry, it’s Nathan. I think it’s a lot easier for us to feel confident providing some guidance on the in-force field. I think the net yield particularly with the profit commission on our quota share agreements becomes somewhat loss sensitive. So it’s harder to provide, I think, harder for us to provide a confident level of what the net yields will be in any one quarter. But I would say we did have some unique items in the fourth quarter, about 1.9 basis point impact due to the ILN tenders and the quota share cancellation. That quota share cancellation will reduce the amount of ceded premium that we would have had in 2024 and beyond. But I think if you look over time with our program pretty consistent over time, we’ve been in that kind of maybe 5.5 to 6.5 basis point range in terms of ceded premium.

And then the accelerated earnings on single premiums, which is another volatile component really hasn’t been that way in the last couple of years because rates have been high. There hasn’t been a lot of refinance or cancellation activity. So I think there are some sources of variability there in the net yield, but I think we feel good about the in-force yield, I think, remaining flat again for 2024, as we said.

Terry Ma: Got it. Thanks, that’s helpful. And then any color you can provide on NIW for the quarter, was quite a bit lower Q-over-Q and year-over-year. Was there any, I guess, underwriting changes or pricing actions?

Tim Mattke: No, nothing really there. This is Tim. I think it’s somewhat representative of the size of the market. We’ve the first report. I think we lost a little bit of share, but I don’t think much, and I think we’re really happy with the quality of the book that we wrote. But nothing from us as far as approach to the market, anything like that. Really happy with the quality of the $11 billion that we wrote.

Terry Ma: Okay. Great, thank you.

Tim Mattke: Sure.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Geoffrey Dunn from Dowling & Partners.

Geoffrey Dunn: Thanks. Good morning, guys. First question, as you look at future underwriter dividends, how do you and the regulator think about minimum surplus levels?

Nathan Colson: I’d say that’s not a conversation we’ve had directly partly because I don’t think we’ve approached that level yet. I think we’ve noted other Wisconsin domicile companies that have much less than the $600 million of surplus that MGIC had at the end of 2023. So I think we still have some flexibility to continue to pay dividends. If our capital levels are above our target level as they have been for some time. So with the contingency reserve releases coming in as well starting in ‘24 and then in ‘25, we may not get to the point where we’re talking about how little surplus we may have to continue to support dividends at the level that we had in 2023.

Geoffrey Dunn: Are you able to give some guidance with respect to your expectations on dividends? I mean, something similar to ‘23 going forward?