Earnings Call Transcript - MTG Q3 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MGIC Investment Corporation Third Quarter 2024 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. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Dianna Higgins, Head of Investor Relations

Thank you, Gerald. Good morning, and welcome, everyone. Thank you for your interest in MGIC. Joining me on the call today to discuss our results for the third quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC's third quarter financial results, was issued yesterday and is available on our website at mtg.mgic.com under Newsroom. It 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 and 10-Q, 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 other time than the time of this call or the issuance of our 8-K and 10-Q. With that, I now have the pleasure to turn the call over to Tim.

Tim Mattke, CEO

Thank you, Dianna, and good morning, everyone. We are very pleased with our third quarter financial results, which continue to demonstrate the strength of our business model in response to changing market conditions. Our disciplined approach to risk management and prudent capital management strategies, together with our leadership in the market and focus on serving our customers with quality offerings and best-in-class service continue to drive value for our stakeholders. Let's get started with a few financial highlights. In the quarter, we earned net income of $200 million and generated an annualized return on equity of 15.6%. Insurance in force ended the quarter at $293 billion, up slightly quarter-over-quarter, with annual persistency ending the quarter at 85%, flat compared to the last quarter. We wrote $17.2 billion of new insurance in the quarter, up 27% from the prior quarter. Underwriting standards remain high, and we are focused on maintaining a strong and balanced insurance portfolio. We continue to be pleased with the overall credit quality and performance of our portfolio and our financial results have benefited from the favorable credit performance we have been experiencing. Turning to our capital activities. The strength and flexibility of our capital position in the quarter supported the repurchase of 5.2 million shares of common stock for $123 million and the payment of a quarterly common stock dividend of $34 million. Combined, these represent a 79% payout ratio of the quarter's net income. In addition, in October, we repurchased an additional 2.9 million shares of common stock for a total of $72 million. When determining our repurchase activity, we consider and evaluate a variety of internal and external factors and metrics, including share price. The repurchase activity I just discussed was reflective of continued strong credit performance and financial results and also higher market valuation levels than we have experienced in recent years. We expect share repurchases will remain our primary means of returning capital to shareholders. As previously announced, the Board authorized a $0.13 per share quarterly common stock dividend payable on November 21. And last week, MGIC paid a $400 million dividend to the holding company. The dividend from MGIC to the holding company reflected capital levels at MGIC that continue to be above our target. Our approach to capital management continues to be dynamic and maintaining both financial strength and flexibility is the cornerstone of our strategy. This approach enables us to position ourselves to achieve our objectives in varying macroeconomic environments and it serves our stakeholders well. MGIC's capital structure includes $6 billion of PMIERs available assets. Our well-established reinsurance program 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 reduced our PMIERs required assets by $2.2 billion or 40% at the end of the third quarter. PMIERs operational and risk-based capital requirements provide a strong foundation to serve low down payment borrowers, while protecting the GSEs and taxpayers from undue mortgage credit risk. In August, the GSEs issued updates to the risk-based requirements relating to the calculation of available assets, which will be implemented over a 24-month phased-in period with a fully effective date of September 30, 2026. We don't expect these updates will have a material impact on MGIC's available assets for our investment strategy. Turning more broadly to the market conditions. The housing market remains constrained by a limited supply of homes for sale and affordability challenges compounded by high mortgage rates. However, there may be signs of easing. The recent Fed interest rate cut and generally lower mortgage rates in the third quarter led to the first year-over-year increase in mortgage applications in three years. In addition, the rate of home price appreciation continues to slow from the highs we saw in 2022 and the inventory of homes for sale is increasing. Pent-up demand for homeownership and demographics suggesting that the millennial and Gen Z populations will continue to add to housing demand are reasons to be optimistic about the resiliency of our business. Lastly, I'm happy to report that in September, A.M. Best upgraded MGIC's financial strength and credit ratings to A from A- and revised the outlook on the credit ratings to stable. A.M. Best dated the ratings reflect MGIC's balance sheet strength, which A.M. Best assesses as the strongest, as well as MGIC's operating performance and robust enterprise risk management framework. With that, let me turn it over to Nathan to get into more details on financial results for the quarter.

Nathan Colson, CFO

Thanks, Tim, and good morning. As Tim mentioned, we had another quarter with excellent financial results. We had net income and adjusted net operating income of $0.77 per diluted share compared to $0.64 per diluted share last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. The strong credit performance we continue to experience again led to a negative loss ratio this quarter. Our re-estimation of ultimate losses on prior delinquencies resulted in $66 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from delinquency notices we received in 2022 and 2023. Cure rates on those delinquency notices continue to exceed our expectations; therefore, we have made favorable adjustments to our ultimate loss expectations. In the third quarter, our account-based delinquency rate increased 15 basis points to 2.24%, which is consistent with the seasonal trends we discussed last quarter and below the pre-pandemic 2.78% delinquency rate seen at the end of the third quarter of 2019. We expect that the delinquency rate will increase modestly due to seasonality in the fourth quarter before considering any impact from Hurricanes Helene and Milton. The in-force premium yield was 38.9 basis points in the quarter, compared to 38.4 basis points last quarter. The increase in the quarter was due in part to updating our method for estimating the current mortgage amount of our in-force loans, which resulted in lower insurance in force and a 0.2 basis point increase in our in-force premium yield for the quarter. We continue to expect the in-force premium yield will remain relatively flat for the year. The book yield on the investment portfolio was 3.8% at the end of the third quarter, up 40 basis points from a year ago and a marginal increase quarter-over-quarter as the yield on cash and cash equivalents declined, offsetting improvements from reinvestment. Net investment income was $62 million in the quarter, up $1 million sequentially and up $7 million from the third quarter last year. During the third quarter, the reinvestment rates in our fixed income portfolio continued to be above the book yield. We expect the book yield to continue to increase, but at a slower rate. Re-investment rates are facing downward pressure with the expectation of more rate cuts through the end of next year. In addition, the Fed's 50 basis point rate cut in September and significant declines in yields across the treasury curve caused fixed income prices to rise, resulting in the unrealized loss position on our investment portfolio improving by $163 million in the quarter. The increase in investment income has continued to benefit total revenue, which was $307 million in the quarter compared to $305 million last quarter and $297 million in the third quarter last year. We remain focused on operational efficiency and expense management. Operating expenses in the quarter were $53 million, down from $55 million last quarter and flat with the third quarter last year. We expect the full year operating expenses will be in the range we provided throughout the year of $215 million to $225 million. Our operating results, together with our strong balance sheet, enabled us to grow book value per share to $20.66, up 19% compared to a year ago, while returning $625 million of capital to shareholders through dividends and share repurchases and reducing outstanding shares by 8%. As Tim discussed, our well-established reinsurance program, which includes the use of forward commitment quota share agreements and excess of loss agreements executed in either the traditional or ILN market is a key component of our capital management strategy. These agreements reduce the volatility of losses in adverse macroeconomic environments and provide diversification and flexibility to our sources of capital. Our overall reinsurance strategy is to prioritize coverage on the most recent book year vintages and future NIW and to recapture risk on seasoned book year vintages if the reinsurance no longer offers enough tail risk protection in stress scenarios. Quota share reinsurance is the foundation of our program as we value the forward commitment and certainty of coverage and have been consistent quota share buyers for more than a decade. In October, we further bolstered our reinsurance program with a multiyear 40% quota share agreement with a panel of highly rated reinsurers that will cover most of our policies written in 2025 and 2026. We also elected to cancel the quota share treaties covering our 2021 NIW effective December 31, 2024. Both of these actions are consistent with our reinsurance strategy and followed the same approach we have taken in recent years to managing our overall risk and capital positions. One further comment before turning it back over to Tim. At quarter end, MGIC's available assets exceeded PMIERs required assets by $2.5 billion. PMIER's excess level will fluctuate with the timing of dividend payments and reinsurance transactions, and we expect the $400 million dividend from MGIC to the holding company and the cancellation of the 2021 quota share will result in a decrease in our PMIER’s excess level at year-end. And with that, let me turn it back over to Tim.

Tim Mattke, CEO

Thanks, Nathan. In closing, we continue to successfully execute our business strategies and deliver meaningful return on equity, as demonstrated by our third quarter results. While some uncertainties persist, housing fundamentals and underwriting standards remain solid; the near-term economic outlook is generally positive. We are confident in our leadership and position in the market and remain committed to delivering best-in-class solutions and service to our customers while creating long-term value for our stakeholders. With that, Gerald, let's take questions.

Operator, Operator

Thank you. At this time we will conduct a question-and-answer session. Our first question comes from Terry Ma from Barclays. The floor is yours.

Terry Ma, Analyst

Thank you. Good morning. I have a housekeeping question to start with. Was there a change in how you report static pool delinquency curves? If I look at slide 12 in your presentation, the vintage curves you provided this quarter seem different from those you shared last quarter.

Nathan Colson, CFO

Hey Terry, it's Nathan. We did update just how frequently the data point as curves are. So previously, we were really reporting it on a full-year, like an annual basis, and now we're doing each of the data points on the curve each quarter. So the full-year amounts are the same, but there's more data points to the curves might look a little bit different there.

Terry Ma, Analyst

Got it. Okay. And then maybe any color you're seeing on just the performance of the 2022 and 2023 vintages? You already kind of mentioned that the cure rates are coming in better than your expectations. Maybe you can just talk about entry into default? It looks like the '22 and '23 curves are kind of performing worse than '21. So as we kind of look forward and those season more, should we kind of expect the total default rate to start exceeding the kind of pre-pandemic levels? Thank you.

Nathan Colson, CFO

Hey, Terry, it's Nathan again. I certainly think over time, that's possible. Excluding any potential impacts from the hurricanes, I don't think that's likely to happen in the near term. Like we said in the prepared remarks, seasonally, our business has typically seen increases in the delinquency rate in the back half of the year and then decreases in that rate, certainly in the first quarter and oftentimes in the first-half of the year. We saw in the last year the delinquency rate increased by 16 or 17 basis points in the first half of the year, and then decreased in the second half of the year. We observed the same decrease in the first half of this year. The increase in Q3 was 15 basis points versus, I think it was 10 basis points in the third quarter last year. It was in line with what we expect. As you can see on those delinquency curves, I do think the 2022 vintage looks like it is performing marginally worse from a new delinquency perspective than the other books around it, either ‘21 or ‘23. But these are still very good levels. The other thing that we track is looking at how different cohorts are curing. What are the cumulative cure rates at various points in time? If we look at that by vintage, we really don't see much difference right now. While it's something that we'll continue to monitor. If there is something of note to report, we certainly will. I think right now, all the vintage books are performing well, both from a new delinquency perspective. Once loans are delinquent, how are they curing? The cumulative cure rates continue to be strong this quarter.

Terry Ma, Analyst

Got it. Thank you.

Operator, Operator

Thank you for your question. Our next question comes from the line of Bose George from KBW. The floor is yours.

Bose George, Analyst

Hey, good morning. Your new insurance written grew far more meaningfully than a couple of the other companies that have reported so far. Was that really just noise or anything different in terms of how you're positioning this quarter?

Tim Mattke, CEO

Yes, Bose, we think that the market overall probably grew a little bit, but I think it's also fair to say that we think we probably grew some market share this quarter. Last quarter, I alluded to with our broad customer base, which we think is the broadest in the industry, that we're price neutral with the market. In the risk-based pricing world, we're going to end up with higher market share overall. Ultimately, we're focused more on the long-term versus quarter-over-quarter market share. We're more on what sort of returns we can get for the capital we deploy. But I think it's fair to say we probably grew some market share this quarter, probably more in line on pricing the risk base around that we were, especially in the first quarter of this year.

Bose George, Analyst

Okay. Thanks. And then going back to credit. What was the mark-to-market loan-to-value on the '22, '23 vintage delinquencies, compared to some of the older stuff?

Nathan Colson, CFO

Yes, Bose, this is Nathan. We haven't talked as much about the mark-to-market on various cohorts, especially on delinquent loans just because our view is while we see similar numbers to what you'll see more broadly reported. The situations that we're most concerned about are those that aren't experiencing average home price appreciation. Certainly, the 2021 and prior vintages have experienced a tremendous amount of home price appreciation, a little bit less so for the '22 vintage, and then for '23 and '24, partly due to home price appreciation being more modest, but maybe most importantly, just those are such recent vintages, not as much on those. We still see losses and claim events even in rising home price environments where the average mark-to-market is quite low. I think it matters for stress testing and our overall book position. How we feel about capital but we try to emphasize it a little bit less on delinquent loans.

Bose George, Analyst

Okay, great. Thank you.

Nathan Colson, CFO

Thank you.

Operator, Operator

Thank you for your question. Our next question comes from Mihir Bhatia from Bank of America. The floor is yours.

Mihir Bhatia, Analyst

Hey, good morning and thank you for taking my question. Maybe I'll just start with the premium rate and like in your market share gain this quarter. It looks like the premium rates stabilized here. I think the direct premium rate actually ticked up. Can you just comment on what drove that? Was the pricing actions you took, just more a function of portfolio turnover? Also maybe just take the opportunity to comment on pricing and the competitive environment. What are you seeing right now?

Tim Mattke, CEO

Yes, I can start here, and if Nathan wants to chime in. I think when you look at the average premium rate on the portfolio, right, it's not just what you're bringing on. It's also what's falling off. We're happy that it moved up a little bit this quarter. As Nathan said in the prepared remarks, we view that as relatively stable, which we thought it would be over the course of the year. From a competitive dynamic standpoint, again, it's a competitive market. I think it is good that the average premium rate is staying stable. As I alluded to in my last response, for Bose, when we're priced more on par with the market and the risk-base, we're probably going to get a little bit of outsized share. That's not a goal we have by itself; it's more of an output. Early this year, we probably were a little bit off. The reality is pricing goes up and down in different spots. We make adjustments on a regular basis depending upon different risk factors. So it's tough to say if pricing is up or down specifically because we're making adjustments that are sometimes up, sometimes down, which can mean the difference between winning business or not in some regards. For other customers, that doesn't make as much of a difference. We've been comfortable with the capital we've been able to deploy. We're getting solid returns on that business, and that's been true for a long time now.

Mihir Bhatia, Analyst

Okay. Maybe just turning to persistency, can you just talk about your expectations around persistency? I was particularly curious if you saw any change intra-quarter; we had a little bit of a blip with rates coming down. Did you see persistency tick lower when that happened? Just any comments on persistency, maybe talk about the LTV on your portfolio? Any additional stats you can give us? Thank you.

Nathan Colson, CFO

Yes, Mihir, it's Nathan. I think persistency for us in this cycle has probably peaked close to 86%. But the declines we're seeing are more of tenths of a percentage point, down into the low-85s now. If rates do decline, as we saw for maybe 30 or 45 days there, that will certainly pressure persistency; but more in the order of a couple of percentage points, not the level we saw in 2021 through '22. A lot of that has to do with the nature of the book we have now, with a significant portion of the book being 4% note rates and below. Really, it's only the business we've written over the last 18 to 24 months that would be in the money or even close if rates were down 50 or 75 or 100 basis points from here. Unfortunately, I don't think we have no rate by vintage in our supplemental materials, but that's something we can provide additional information on. Our largest books continue to be the 2020, 2021, and 2022 vintages, written at very low note rates. We expect those to have high persistency for some time, even if rates were to come down significantly from current levels.

Mihir Bhatia, Analyst

Got it. And then just my last question, just the expense outlook for the year. Any update there? It looks like you're coming in below; I guess there's some additional expense related to the reinsurance deal you mentioned just the early termination. But just anything you can comment on the expense outlook? Thank you.

Nathan Colson, CFO

Yes, Mihir, it's Nathan again. Just to clarify, on the reinsurance, the termination fee will run through the ceded premium line, not the expense line for Q4. We said in the prepared remarks that we expected expenses to still be in the range that we initially gave in January, which has been consistently throughout the year of $215 million to $225 million. We feel good about the actions we've taken to be in a good spot going into 2025 and beyond. We'll update guidance for 2025 expenses at our Q4 call. Directionally expect expenses to be lower in 2025 than they were in 2024.

Mihir Bhatia, Analyst

Thank you.

Operator, Operator

Thank you for your question. Our next question comes from the line of Geoffrey Dunn from Dowling and Partners. The floor is yours.

Geoffrey Dunn, Analyst

Thank you. Good morning. Can you comment on the profit commission threshold for the new QSR?

Nathan Colson, CFO

Yes, Geoff, one of the book years is 63%, and the other is 62%.

Geoffrey Dunn, Analyst

What was the process of going 40% out of the gate? In the past, you guys have typically come out at 20% and then added 20% a year later or something like that. Why the change in process here?

Nathan Colson, CFO

Yes. It's really a reaction to the market. Our approach has always been to consider what the reinsurance market is telling us they want, where is the capacity, where is the right execution for us? Our preference has always been to do longer forward term commitments. Our first quota share deal covered almost three years, the one we did in 2013. Over time, the capacity to go out more than one year has narrowed. Therefore, we shifted to doing some on a two-year basis and some on a one-year basis. The demand and capacity in the reinsurance space right now is quite attractive to us. Hence, the upsizing a little bit from what we've done recently at the 30% quota share level to the 40% level is based on very attractive pricing and good capital costs for us. Most importantly, having that capital commitment and risk management overlay for the next two years of NIW in our business is something we value. If the market doesn't have enough capacity for multiyear, we found other ways to transact. We're very happy with the execution we have here right now. It's a testament to the reinsurance market getting broader. Performance in this space has been quite good for some time. Similar to the primary market, it's not growing as much as it was. The reinsurance market for mortgage credit risk isn't growing as much as it was a couple of years ago, which is helping with demand as well. Our preference remains to place on a forward basis, multiyear.

Geoffrey Dunn, Analyst

That sounds good. I appreciate the comments.

Nathan Colson, CFO

Thanks, Geoff.

Operator, Operator

Thank you for your question. Our last question comes from Scott Heleniak from RBC Capital Markets. The floor is yours.

Scott Heleniak, Analyst

Yes, thanks. Good morning. I was wondering if you could discuss any potential impact the hurricanes might have on delinquencies in the fourth quarter and possibly the first quarter of next year. Are you noticing any effects yet? Do you expect to see high cure rates similar to those we experienced in previous storms? Anything you can share about your thoughts on this at the moment?

Tim Mattke, CEO

Yes, it's Tim, and I'll start off. I appreciate the question, Scott. It is too early, again, for us. Normally, for us, it's got to be two months delinquent before we'd see it come through, so I really haven't seen anything yet. We would expect some activity in the fourth quarter though. As you alluded to, we've had these severe events like hurricanes historically; they've had higher cure rates than our average delinquency, significantly higher cure rates. If we do get delinquencies coming into the fourth quarter, it's something we'll have to look at from a reserving standpoint of how do we reserve for those that we believe are related to hurricanes that have a higher propensity to cure over time based on federal funds coming in for release. It’s a life event, but it's hopefully a temporary one. They ultimately can get back on their feet versus our average delinquency that might be more related to a life event that could be more permanent in nature with job loss, matters that still has a high propensity to cure, but just not at the rate we’ve seen for financial disasters like hurricanes.

Scott Heleniak, Analyst

Yes, that makes sense and is helpful. My other question is about your new money yield compared to the expiring yield, as well as any exposure to floating rate debt that you can identify. I am trying to understand the sensitivity to interest rates as they are likely to decrease.

Nathan Colson, CFO

Scott, listen, new money rates recently were low-5%s, maybe to mid-5% range against the close to 4% book yield on the loan portfolio. We have a little bit of floating rate exposure. We have a mid-single-digit sized CLO portfolio that's floating rate and some other things. Generally, the duration on our portfolio is around four years. Our greatest exposure to shorter-term rates would be in the cash and cash equivalents portfolio, where we've benefited from having 5%-plus rates there. If the Fed continues to cut rates, that will be a headwind. But in terms of exposure in the longer investment portfolio, it's relatively modest.

Scott Heleniak, Analyst

You got it. Appreciate the answers.

Nathan Colson, CFO

Thanks, Scott.

Operator, Operator

Thank you for your question. Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn it back to management for closing remarks.

Tim Mattke, CEO

Thank you, Gerald. I want to thank everyone for your interest in MGIC. Today's election day, and I hope everyone finds time to get out and vote if you haven't done so already. Have a great rest of your week.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.