Mgic Investment Corp Q1 FY2024 Earnings Call

Thank you, Nadia. Good morning, and welcome, everyone. Thank you for your interest in MGIC. Joining me on the call today to discuss our results for the first quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer and Chief Risk Officer. Our press release, which contains MGIC's first quarter financial results, was issued yesterday and is available on our website at mtgmgic.com under Newsroom, included additional information about our quarterly results that we'll 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 full 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 results 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're 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 time other than the time of this call or the issuance of our 8-K and 10-Q. Now with that, I have the pleasure to turn the call over to Tim.

Thank you, Dianna, and good morning, everyone. The company reported net income of $174 million in the first quarter, resulting in an annualized return on equity of 13.7%. These results are the continuation of another quarter of exceptional financial results and highlight the strength of our business model. Our focus on through-the-cycle performance is demonstrated in the way we acquire, manage, and distribute risk, reflecting a balanced approach to the market. Reinsurance programs that address both risk of loss and capital efficiency and capital allocation for the benefit of stakeholders. The execution of our business model is responsive to market conditions and has consistently generated attractive returns. During the quarter, we wrote $9 billion of new insurance. Insurance in force, the main driver of our revenue, was $291 billion, down 0.5% from a year ago. There's been very little change recently in underwriting standards, and the new insurance we write continues to have strong credit characteristics. We're pleased with the overall credit quality and performance of our insurance portfolio. The mortgage origination industry continues to experience headwinds from a smaller origination market as we transition away from record volumes over the recent past, driven by elevated interest rates and affordability challenges. The supply of homes for sale is still limited due to the lock-in effect from homeowners with mortgages that have interest rates well below the current market rate. While the current supply and demand dynamics create challenges for first-time homebuyers, it continues to support home prices. As I mentioned on prior calls, the headwinds to mortgage originations have largely been offset by the tailwinds that higher interest rates have on the persistency of our insurance in force. Annual persistency ended the first quarter at 86%, flat quarter-over-quarter. The net result of lower NIW and high persistency is that our insurance in force has remained relatively flat over the past several quarters, consistent with what we expected. We continue to believe that the MI market is shaping up to look pretty similar to last year. Pent-up demand and the strong desire of the millennial and Gen Z populations to own homes are reasons to be optimistic about MI opportunities in the long term. Shifting to our capital activities, in the quarter, we repurchased 4.7 million shares of common stock for $93 million and paid a quarterly common stock dividend for a total of $32 million, representing a 72% payout ratio of this quarter's net income. In addition, in April, we repurchased an additional 2.7 million shares of common stock for a total of $55 million. Last week, we announced the Board authorized an additional $750 million share repurchase program. In our earnings release, we announced that earlier this week, MGIC paid a $350 million dividend to the holding company. Both of these announcements were supported by capital levels, which are above our targets for both MGIC and the holding company. Our approach to capital management has been and will continue to be dynamic so that we can maintain financial strength and remain well-positioned to achieve our objectives in varying macroeconomic environments. MGIC's capital structure includes $6 billion of balance sheet capital, and our well-established reinsurance program, which remains integral to our risk and capital management strategies. In addition to reducing the volatility of losses in stress scenarios, our reinsurance agreements provide diversification and flexibility to our sources of capital at attractive costs and reduce our PMIERs required assets by $2.2 billion at the end of the first quarter. We continually monitor the level of capital of both MGIC and the holding company, considering the level of capital to retain versus return to shareholders. As part of this, we assess the current and expected future operating environment, and we continually evaluate the best options to deploy capital to maximize long-term shareholder value. With strong credit performance, financial results, and capital generation we're experiencing, combined with a smaller origination market, which is challenging the growth of our insurance in force and the related required capital, we continue to expect share repurchase will remain our primary means of returning capital to shareholders. With that, let me turn it over to Nathan to give you more details on our financial results.

Thanks, Tim, and good morning. As Tim mentioned, we began the year with a solid quarter of financial results. We earned net income of $0.64 per diluted share compared to $0.53 per diluted share last year. Adjusted net operating income was $0.65 per diluted share compared to $0.54 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 first quarter were reflective of continued strong credit performance we've been experiencing, which again led to favorable loss reserve development and resulted in a 2% loss ratio this quarter. Our re-estimation of ultimate losses on prior delinquencies resulted in $49 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from delinquency notices received in 2022 and the first quarter of 2023. As cure rates on those delinquency notices continue to exceed our expectations, we've made favorable adjustments to our ultimate loss expectations. As a reminder, the delinquency notices we received during a quarter will include loans from many different book-year vintages. 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 6% to approximately 24,100 loans, with cures outpacing new notices. For some context on the current delinquency inventory level, it is 22% lower than the pre-pandemic level from the first quarter of 2019. We continue to expect that the level of new delinquency notices may increase due to the seasoning of the large 2020 and 2021 book years being in what are historically higher loss emergence years and seasonality. Regarding seasonality, historically February, March, and April were seasonally the best months for mortgage credit performance. The pandemic and subsequent governmental response significantly disrupted mortgage credit seasonality, but it appears it may be returning. We do not expect a decline in the delinquency inventory we had in the first quarter to repeat in subsequent quarters this year. The in-force premium yield was 38.5 basis points in the quarter, flat quarter-over-quarter. As I mentioned on the last call, given our expectations for another year with high persistency and a smaller MI market, we expect the in-force premium yield to remain relatively flat for the year. Book value per share at the end of the first quarter was $18.97, up 14% 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. Higher interest rates continue to be a headwind for book value per share, but they have been 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 3.8%, up 10 basis points in the first quarter and up 70 basis points from a year ago. Net investment income was $60 million in the quarter, up $2 million sequentially and up $11 million from the first quarter of last year. During the first 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 continues to narrow the difference between our current book yield and reinvestment rates. We remain disciplined in our approach to expense management and focus on efficiency. Operating expenses in the quarter were $61 million, down from $73 million in the first quarter last year. We continue to expect the full-year operating expenses will be in the range we provided in February of $215 million to $225 million. Lastly, as we mentioned on the last call, 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 S&P rating is stable. In March, Moody's affirmed MGIC's A3 rating and changed the outlook to positive from stable. The rating outlook for MGIC's rating from AM Best was changed to positive from stable last September.

Thanks, Nathan. A few last comments. We're proud of the critical role we play in supporting the housing market, and we take pride in knowing that what we do every day matters and has an impact on families and communities. We started the year with a solid quarter. While there are still some uncertainties in the economic landscape, the housing market remains resilient and the outlook for it is generally positive. We have an unwavering commitment to delivering value to our shareholders, customers, and stakeholders. Our ability to continuously adapt and evolve has contributed significantly to our long-term success. As we navigate the road ahead, we remain confident in our position and leadership in the market, as well as our ability to execute our business strategies. With that, operator, let's take questions.

And now we're going to take our first question from Bose George at KBW.

Actually, first I wanted to ask about the NIW growth this quarter. It looked a little slower than what we saw from peers. Is there anything that caused you to sort of slow down a bit or is it just a blip in a seasonally slow quarter?

Well, Bose, I appreciate the question. I mean, I think it's safe to say we probably lost a little bit of share this quarter; that's not a surprise to us. I mean, the NIW in Q1 is really reflective of the pricing environment sort of November, December, January. And I think it's safe to say that we lost a little bit of share. But from our perspective, good return, we want to remain disciplined on price. We haven't lost any access to customers, that type of thing. And so for us, we look at it over the long run and aren't overly concerned about that dip from a Q1 perspective.

Okay. Great. And then in terms of capital return, you noted insurance in force to be flattish this year, I guess, leverage low. Should we assume essentially all your earnings this year could go towards capital return?

I believe we've shown over the past couple of years that we are willing to return capital. This has been evident at MGIC and the holding company through actions like increasing the dividend to shareholders and engaging in share repurchase programs. Recently, with less cash needed at the holding company for debt servicing or debt repurchases, we've had the opportunity for more share repurchase activity. The last few quarters reflect our flexibility in this area and our willingness to repurchase shares when we believe it's a good value.

Now, we're going to take our next question. And the next question comes from the line of Doug Harter from UBS.

I'm just wondering if you can provide a little bit more color on the cure activity in the quarter. I think you mentioned there could be a return of seasonality. So maybe just speak to, I guess, what's driving that return now? And then there was also a meaningful increase in the cures from the 3 payments or less bucket. Is that purely attributable to seasonality, or is there something else in there?

Thanks for the question, Nathan. Yes, I think we've seen some seasonality in credit performance, particularly concerning new notices and cure activity and the relationship between the two. Historically, the months of February, March, and April see cures outpacing new notices, even when overall delinquency rates are relatively flat. However, during 2020, 2021, and into 2022, the impact of the pandemic and government responses overshadowed any seasonal trends, resulting in a lack of seasonality. Starting in 2023, we've begun to notice this trend again. We're observing similar early cure activity for loans in the three-month or less category, and we've also reported on cures that occurred within the same quarter as new notices. This quarter, that rate was higher, and I believe we can attribute it more to seasonality rather than a significant decrease in delinquency rates.

Got it. That's helpful. And on the reserve release in the quarter, you mentioned mainly from 2022 and first quarter '23 notices. Any more color you can provide on, I guess, kind of like what vintage of origination they came from?

The delinquencies we've experienced for those years show that 30% to 40% of them have been from our 2008 and earlier loans. This quarter, about 98% of those loans had been delinquent before. We have many loans fluctuating in and out of delinquency from that group. Aside from that, there isn't much noteworthy; it just reflects a range across our portfolio. Regarding cure activity, it doesn't seem to be focused on any particular segment, as it spans various loan-to-value ratios, credit scores, debt-to-income ratios, and regions. Overall, it appears to be quite widespread. Initially, we had loss expectations based on a claim rate of 7.5% for those notice quarters, but now our estimates, in many instances, are less than half of that due to actual cure activity. Some of those quarters are now 96%, 97%, or even 98% developed. We are refining our projections for ultimate losses on these, which are much lower than we had anticipated.

Now, we're going to take our next question. And the next question comes from the line of Soham Bhonsle from BTIG.

Tim, could you share some insights on how you and the Board decided on the $750 million buyback figure? I'm particularly interested in any assumptions regarding the macro environment or the business portfolio that you considered while formulating your plan leading up to the end of 2026.

Yes. I appreciate the question. I take a number of things into account. I think the previous ones we'd authorized were about $500 million over a similar time period. Obviously, I think we've a little bit more capacity now, but ultimately wanted to be something that we believe we'll be able to execute over that period of time under a range of different scenarios. And that's been one of the principles we've had when we've declared sort of repurchase program is that it shouldn't just be able to work in the current environment; it should be able to work in a range of scenarios. And even as we went through the pandemic as an example, we were able to execute on our repurchase plan. So, we looked at it from obviously a size of what our market cap is. But more importantly, when we think about capital generation expectations under varying scenarios over the next few years, feeling confident that we should be able to execute against that and use the full authorization.

Okay, great. I’m looking at Slide 6, and I might not be interpreting this correctly, but when I examine the percentage of development related to the other category, it appears that much of the improvement did not stem from the claim rate this quarter. Instead, it seems to be associated with factors like severity. Am I misunderstanding that? What should we take away from this?

Yes, it's Nathan. I’ll address that. I believe the severity in the fourth quarter was somewhat less severe due to an improvement in the claim rate. This affected the ratio between the two. The 16% reflects another quarter where our actual severity on claims was in the low 60s, whereas our reserving assumptions are usually above 100%. Many of these actual claims have come in at lower severities than expected, and as loans are curing, those severities are also being adjusted. Moving forward, I don't think it will resemble what we saw in the first quarter of last year, which was 100% and 0. I anticipate a split between claim rate and severity in the current environment. If this environment continues, I believe both claim rate and severity will see improvements, as actual severities are currently running much lower than our reserve assumptions.

Got it. And Nathan, just one more. On the net investment income line, it looks like you've been growing that line about $2 million every quarter. I mean, is that sort of a sustainable run rate here as portfolio rolls off and you come into new money yield? How should we sort of think about that developing through the year?

I would like to highlight two things. We believe that the book yield will keep increasing, but likely at a slower rate. We’ve observed this trend already, with increases of about 20 basis points per quarter for a while; this quarter, it was around 10 basis points. So, while it is still growing, the pace has slowed, which will affect the growth in net investment income. Another point to consider is the amount of balance sheet assets we’ve invested in. Over the past couple of years, this has grown along with the increasing yield. Depending on our capital return levels, if we maintain the balance sheet capital close to flat, it will also constrain the growth of net investment income. However, in terms of our strategy and what we are invested in, there are no significant changes. Reinvestment rates remain around 150 basis points higher than the current book yield, so as this rolls over and new funds come in, it will create opportunities for incremental increases in the book yield.

Now we're going to take our next question. And the question comes from the line of Mihir Bhatia from Bank of America.

This is actually Nate on. Nate Richam on for Mihir. Can you talk a little bit about the embedded equity in the delinquent inventory? Any stats you can share there? And then also, I know you expect delinquency to kind of normalize over time, but where you think that settles out like on a steady state relative to pre-pandemic levels?

It's Nathan. I'll address the embedded equity, but I missed the final part of your question, so I may need you to repeat it regarding the recovery of the embedded equity. We've received this question frequently, and we do have the relevant statistics. However, those statistics are generally based on average home prices at the CBSA level. Currently, our delinquent inventory stands at about 2%. In this situation, we aren't dealing with typical averages, but rather with specific cases that reflect the extremes of home prices and economic circumstances. We're not really holding capital for the average; our focus is on these extreme scenarios. While we can look at that data, it may not provide us much assurance regarding the resolution of delinquent loans, as it seems more likely that those loans haven't benefited from typical home price appreciation.

Got it. That's helpful. And then my follow-up to that was just like where you think delinquencies like normalize on like a steady state, like relative to pre-pandemic levels? Like I realized that you think they're going to go upwards, but like how much higher do they go like until things normalize? And if I can ask my follow-up now, too, just curious what you're hearing from origination partners as we enter like peak housing season and has the recent move up in like interest rates changed any impact there?

Got it. I'll let Tim address the origination question. Regarding delinquency rates, we are currently experiencing a low 2% rate on an account basis. We believe that new notices might increase slightly, but in the current economic environment, we expect rates to remain in the 2% to 3% range. What we want to highlight is that the decrease seen this quarter does not suggest that this trend will continue. Delinquency rates, including those for mortgages, are closely linked to unemployment. If unemployment remains low, it will help keep delinquency rates down. However, if unemployment or overall economic conditions deteriorate, we expect delinquency rates to respond negatively.

It's Tim, and to respond to your question regarding what we're hearing from originators and the origination market, we anticipated that this year could present some challenges for them, with volumes not significantly exceeding last year's metrics. Initially, there was some optimism that interest rate reductions throughout the year could boost activity. However, it seems there is now more skepticism surrounding that idea. From our perspective, we believe that in terms of mortgage insurance origination, we're in a similar position to where we were at the start of the year since we didn't expect much refinancing volume. I do think people tend to adjust to interest rates and become more comfortable with transactions at those rates. This presents an interesting challenge regarding the housing supply, particularly with the lock-in effect we've mentioned. There's minimal supply entering the market, and homeowners have little incentive to sell. This creates significant tension regarding home prices and the volume of origination. Nevertheless, as we noted in our opening remarks, this situation is providing support for home prices, which is beneficial for us overall.

That's helpful. Sorry about the audio.

Now we're going to take our next question. And the question comes from the line of Doug Harter from UBS.

Hoping you could talk about the opportunity to retire some of your older reinsurance deals as a potential use of capital and kind of how the returns on that look today?

Thank you for the question. This is Nathan. We've integrated this aspect into many of our reinsurance agreements, particularly in the traditional reinsurance market. We've utilized several options, allowing us to recapture risk up until 2020, and we have some options available for deals related to 2021. The ILN market operates differently, as there are no straightforward ways to exit other than through specific call options that typically occur after 5 to 7 years, depending on the transactions. We have initiated a tender offer for certain older tranches of deals that we aim to recapture. However, this remains an area we constantly assess, particularly as we consider our retained risk profile with and without reinsurance, our target PMIERs, and the implications for our excess capital position. Primarily, our strategy focuses on purchasing reinsurance for the most recent vintages, where we identify the greatest economic risk and financial volatility. Our current reinsurance program is heavily concentrated on the past 3 to 4 years, and we have effectively recaptured all risk from 2020 and earlier, retaining that risk ourselves. Therefore, I am quite satisfied with the current setup of our reinsurance program. Of course, we need to continue engaging in new deals and managing older agreements to maintain our existing position. I expect we will keep evaluating these options, and as we have previously, we will feel comfortable recapturing that seasonal risk when it makes sense for us.

Dear speakers, there are no further questions. I'll now turn the call back over to management for closing remarks.

Sure. Thank you, Nadia. I want to thank everyone for your interest in MGIC. We'll be participating in the BTIG Housing Conference on Tuesday, May 7. I look forward to talking to all of you in the near future. Have a great rest of your week.

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