MGIC Investment - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the MGIC Investment Corporation Q2 2023 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 will have a question-and-answer session to ask questions. To ask a question during the session, you will need to press star -one-one on your telephone. You will hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Dianna Higgins (SVP, Investor Relations)

Thank you, Jules. 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 Q2 are Tim Mattke, Chief Executive Officer, and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC's Q2 financial results, was issued yesterday and is available on our website at 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 Form 8-K and Form 10-Q that were also filed yesterday. If we make any 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 Form 8-K and Form 10-Q. With that, I now have the pleasure to turn the call over to Tim.

Tim Mattke (CEO)

Thanks, Dianna. Good morning, everyone. We had another quarter of solid results, writing $12.4 billion in new insurance, and ending the quarter with $292 billion of insurance in force, flat quarter-over-quarter, and 2% higher than a year ago. In the Q2, we earned net income of $191 million and generated an annualized 16% return on equity. Our strong performance in the quarter and H2 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 the 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 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 Q2.

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 H2 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 declines 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 H2 2023. The gradual stabilization of housing market conditions in the Q2 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 past 25 years. I'm 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 Investment Corporation to the holding company. With a strong liquidity position of the holding company, we repurchased 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 Q2 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 Q2, 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 reflection of our views of the market risks. During last quarter's call, I discussed pricing actions we took in the Q3 and Q4 of last year to address our views of risk and uncertainties in an environment where interest rates had spiked, affordability was stretched, and home prices were expected to fall from their peak.

I also mentioned that our views of risk were gradually improving, and that we expected our market share in the Q2 to be higher than in the first quarter, which we still expect. We believe there is 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 Q2 of last year. This improvement will still be reflected in our Q3 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 years of through-the-cycle experience, industry 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 (CFO)

Thanks, Tim, good morning. As Tim mentioned, we had another quarter of strong financial results. In the Q2, 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 Q2 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 Q2, compared to $6 million last quarter and negative $99 million in the Q2 last year.

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 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 Q2 last year.

While new notices were higher year-over-year, they were 18% below the pre-pandemic levels seen in the Q2 2019. During the quarter, total revenues were $291 million, compared to $293 million in the Q2 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 insurance -in-force premium yield was 38.6 basis points in the quarter, less down one basis points from last quarter and down less than a basis point from the Q2 of last year.

As I mentioned on the call last quarter, we continue to expect the insurance -in-force premium yield to remain relatively flat during 2023. Book value per share at the end of the Q2 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 Q2 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 Q2 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 Q2 last year.

As we talked about on the call last quarter, operating expenses were higher in the Q1, due in large part to $8 million in pension settlement charges. The settlement charges were significantly lower in the Q2, 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 Q2, 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 (CEO)

Thanks, Nathan. I'll close my comments where I started. We had another solid quarter and excellent financial results for the H2 of the year. Our strategic long-term focus, prudent risk management, and balanced approach to capital management position 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 will bring. With that, Jules, let's take questions.

Operator (participant)

Thank you. At this time, we will begin the question and answer session. Once again, to ask a question during the session, you'll need to press star one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one-one again. Please stand by as we compile the Q&A roster. Our first question comes from the line of Bose George of KBW. Your line is now open.

Bose George (Managing Director)

Hey, everyone. Good morning. Can you talk a little bit about what you're seeing in terms of pricing? If the macro environment continues to improve, is it possible that we see some of the, you know, improvements over the last year reverse?

Tim Mattke (CEO)

I, you know, it's tough, and I don't want to speculate about what will happen in the future, Bose. You know, 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 return. As we said in our script, we think over the last couple of quarters, here we've seen that moderate from our view of the ultimate risk. I think we will, you know, be a little bit higher from a market share standpoint this quarter. We, we sort of said next quarter, we think we'll continue to see things progress from an NIW standpoint as well.

It's really hard to speculate what's going to happen going out. You know, we're in a competitive industry, but we have to do what's right for us from a pricing return standpoint, and I expect others to do the same for them.

Bose George (Managing Director)

Okay, great. Thanks. Can you talk about any changes to assumptions you're using, you know, for new notices or loss severities, just based on, you know, some of the improvements that we've seen out there in the market?

Nathan Colson (CFO)

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

Bose George (Managing Director)

Okay, great. Thanks.

Tim Mattke (CEO)

Thanks, Bose.

Operator (participant)

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 (Director and Senior Equity Research Analyst)

Hey, good morning, and thank you for taking my question. I 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? You know, just any, any relative comments, or I'd be curious about that. Thank you.

Tim Mattke (CEO)

Sure, Mihir. It's Tim. I mean, I would say that there's no specific areas that I would call out. You know, if you look at our additional information that we include, you can see some minor changes above 40% to 95% LTV is an example. Above 45% DTI. I think it's fair to say that we set tolerances from a risk standpoint of how much we want to write in certain characteristics. I think I would view sort of where we, you know, want some additional volume is fairly broad-based, and nothing that I would call out specifically about certain loan characteristics or anything like that.

Mihir Bhatia (Director and Senior Equity Research Analyst)

Okay. Just maybe turning to credit for a second. It's clearly a reasonably favorable backdrop, right, for credit? As you sit there and look at your results, are there any potholes that you're looking out at? Anything in particular you're worried about? I guess I'm trying to understand from, just from a credit perspective, what are some of the metrics or some of the potential issues that are upcoming that you maybe are paying a little bit more attention to that could cause credit hiccups for you all?

Tim Mattke (CEO)

Yeah, I mean when we have negative losses incurred per period, I think we view that as not sustainable. You know, I think we've been in a phenomenal credit environment. You know, the things we watch are what a lot of people watch, right? Unemployment, what's happening there. We do think that, that the values of, of housing is, is an important characteristic of whether we'll have losses or not. We've been very, very happy with how resilient home prices have been over the last nine to 12 months. I think we're watching that. Obviously, watch for any deterioration you can see in, in other credit lines as well.

You know, a lot of times those don't, those don't, correlate exactly to what we see in mortgage credit, especially if, if home prices are solid. The, reality is the underwriting, and the,credit box for mortgage, and especially the area that we operate in, has been phenomenal for over a decade now. So while we'll be careful to say that it, it's tough to see that how, how, how well it's performed will continue because it's, it's just been phenomenal. It is, it is something that feels inherently different than it would have 15 years ago, as, as a comparison. So feel really optimistic about that.

Mihir Bhatia (Director and Senior Equity Research Analyst)

Okay. On that last point, this is my last question. I'll hop back in queue after. Like, in terms of the, you know, underwriting environment, given the high mortgage rates have been, you know, I guess almost a year now, that originators have been working with it, are you seeing any move by originators, any appetite to expand the credit box? Maybe pushing you on, "Hey, maybe we want to do some non-agency, you know, lower credit tier non-agency," I mean, like, not jumbo. Anything you're seeing, any pressure, anything from originators, anyone in the ecosystem looking to expand that credit box? Thank you.

Tim Mattke (CEO)

Yeah, no, that's a good question. I, I think from a, from a how broad that might be, no. I mean, I think you always look for lenders who are looking to do things that are the right answer, that they-- if they can find other, other borrowers that they can make eligible, that they want to do that, they still have strong credit profile. We have those conversations every day with our customer. I, I think what you were hinting at is some- a broader sort of view of, you know, let's expand the box, let's figure out ways to get more loans. It's really a supply issue as much as it is a, a demand issue at this point. Qualifying more borrowers, I don't think really helps.

I think there's plenty of qualified borrowers at this point, although we can always help those around the margins for sure. It's really a supply issue out there, and, and I think the interest rate lock-in effect is, is real. I think that'll dissipate over time as, as people get more comfortable and are in their houses longer and look to move up to, to their second home as opposed to their, their starter home.

Mihir Bhatia (Director and Senior Equity Research Analyst)

Okay. Thank you so much.

Tim Mattke (CEO)

Sure.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is now open.

Geoffrey Dunn (Equity Analyst and Partner)

Thank you. Good morning, guys.

Tim Mattke (CEO)

Morning.

Geoffrey Dunn (Equity Analyst and Partner)

With respect to new provisioning, and particularly the severity assumption, is it fair to assume that there's kind of pressure on that number for the foreseeable future as the 2021 through 2023 book season? Is there something in your approach that could soften that?

Nathan Colson (CFO)

Yeah. Jeff, it's Nathan. I mean, I do think that given the, the average loan amounts from the more recent vintages compared to the average loan amount that, that came in, certainly in the, the kind of financial crisis years, much higher. The average, the average exposures on those are a lot higher. You know, we have had a pretty consistent, you know, severity to exposure ratio that, that we're, you know, putting on new notices. We've been running better than that. You know, we've actual realized severities have been, you know, in the 60s and 70s for the last several years. You know, I think we think that's really an artifact of, of things that are not long-term sustainable.

You know, at some point, if, if that became what we thought the true new normal go forward was, I mean, that could have an impact and a consideration that we would have. I do think that we are likely to see a gradual uptick in that, just as the average exposure on new notices goes up, as more and more of those new notices come from more recent vintages at higher loan amounts.

Geoffrey Dunn (Equity Analyst and Partner)

Okay. Then just a quick number. You said you're at 7.5% claim rate assumption. Did you drop to 7.5% in the Q1, or was that incremental this quarter?

Nathan Colson (CFO)

The 7.5% has been our new notice claim rate assumption for several quarters.

Geoffrey Dunn (Equity Analyst and Partner)

Okay. I thought, I thought you were at 8% in the fourth quarter. That's why I just wanted to clarify.

Nathan Colson (CFO)

Okay. No.

Geoffrey Dunn (Equity Analyst and Partner)

Um-

Nathan Colson (CFO)

... I think, yep, 7.5% for the, for the last, several quarters.

Geoffrey Dunn (Equity Analyst and Partner)

Okay. Last question. I think, Tim, it was in your commentary about some of the competitive advantages beyond pricing for new business. How do you think the market is shaped up? It seems to me every day that goes by, mortgage insurance is almost kind of becoming more like auto insurance, where people are shopping the best rate on the engines out there. Where do you think we are in terms of mix of, you know, purely price shopping customers versus those that still value, you know, broader relationships and services? How does that today compare to maybe three years ago?

Tim Mattke (CEO)

... I think there's, there's definitely more price shoppers, if you wanted to define them that way now, than there were three years ago. I think what we like to call out is there's a, there's a fairly good percentage of, of our customers that aren't price shoppers. Now, they're not agnostic to price by any means, but they value, I think, some of the things that we can deliver, and that we have delivered for over 65 years to them in those relationships, that they, that they aren't, they aren't as focused on price as some others are. Again, that's, that's up to the customer to decide what they want to do. We, we try to reflect in what we do to understand, what our customers expect from us.

We have a core group of customers, and we have a broad-based group of customers. All of them are phenomenal. We definitely have a good sub cross-section that aren't as focused on, on prices as others are.

Geoffrey Dunn (Equity Analyst and Partner)

Does that fall into, like, a typically, like, a regional or local type of customer versus the nationals?

Tim Mattke (CEO)

I think we've always felt like we do really, really strong in community banks, regional banks, credit unions, those types of institutions. I think it's fair to say that's a, it's probably a pretty strong correlation.

Geoffrey Dunn (Equity Analyst and Partner)

Okay, great. Thank you.

Tim Mattke (CEO)

Sure.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Eric Hagen of BTIG. Your line is now open.

Eric Hagen (Managing Director, Mortgage and Specialty Finance Analyst)

Hey, thanks. Good morning. I think I've got a couple follow-ups. First, on risk, risk-based pricing. I mean, would you say risk-based pricing is more effective when mortgage rates are high, relatively volatile? Or, or what would you say is kind of the ideal environment to leverage some of the inputs that go into risk-based pricing? Second question, I mean, how are we thinking about, you know, any further rotation of mortgage origination and servicing from banks to the non-bank community? Does that drive your thoughts around any capital ratios, even how you think about the longer-term growth rate in the business, more generally, just given where the capital is being sourced and where that's coming from? Thank you.

Tim Mattke (CEO)

Sure. I'll, I'll start off from a risk-based pricing. You know, I think we think about it across a number of different dimensions. I haven't thought about it too much of, with interest rates being higher, if that makes it more conducive. I think there's a sensitivity always to, to cost. And, and us, the advantage of risk-based pricing is being able to ultimately reflect the risk that we think exists with a loan, based upon the current conditions. Interest rate's one of those, but it, it's much to do with what's going to happen with home prices and, and the ultimate, you know, credit characteristics of the loan as well. I wouldn't put it as something that is, is more pronounced in my mind in this environment.

Then the second part of your question, can you just refresh me on that again?

Eric Hagen (Managing Director, Mortgage and Specialty Finance Analyst)

Yeah, rotation of origination and servicing from bank to non-bank, thoughts around capital ratios, longer term growth rate, just given where that capital is coming from. Thank you.

Tim Mattke (CEO)

Yeah, I think, you know, there's always some, some ebbs and flows as far as where things go to. I, think the non-banks have obviously taken a larger and larger percentage recently. You know, I think we feel really great about those customers as well. I think it's, it's one of those things where, when the market sees a little bit of disruption, you sort of look for what will the shakeout be. I, I think there's still some, some more to go there ultimately. And we'll, we'll stay close to it.

The good thing is we have a broad base of customers, and do well across all those segments, and so feel really good about however, however that organizes on the origination and servicing side, that we're well positioned to, to be able to engage and, and, and win our fair share of business.

Eric Hagen (Managing Director, Mortgage and Specialty Finance Analyst)

All right, thanks for the comments. Appreciate it.

Tim Mattke (CEO)

Sure.

Operator (participant)

Thank you. At this time, there are no further questions. I will now turn the call back over to Tim Mattke for closing remarks.

Tim Mattke (CEO)

Thank you, Jules. I want to thank everyone for your interest in MGIC. We'll be participating at Zelman Housing Summit in September. We look forward to talking to all of you at some point in the near future. Have a great rest of your week.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.