Earnings Call Transcript - MTG Q4 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation Fourth Quarter 2021 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. I would now like to hand the conference over to Mike Zimmerman. Please go ahead.

Mike Zimmerman, President

Thanks, Jay. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the fourth quarter of 2021, our Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. I want to remind all participants that our earnings release of last evening which may be accessed on MGIC's website, includes additional information about the company's quarterly results that we will refer to during the call and includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force, new insurance written reinsurance transactions and other information which we think you'll find valuable. I also wanted to remind listeners that from time-to-time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and other interested parties may find valuable. 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 those factors, including COVID-19, that could cause actual results to differ materially from those discussed in the call are contained in the Form 8-K that was filed last night. If the company makes any forward-looking statements, we're not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested party 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 the 8-K. With that, I'd like to turn the call over to Tim Mattke.

Tim Mattke, CEO

Thanks, Mike and good morning, everyone. I'm pleased to report that we achieved very strong financial results in the fourth quarter and for that matter, the full year of 2021. These results reflect the solid credit quality of our growing insurance in force, a strong housing market, the decreasing delinquency rate and our market presence as well as the current favorable economic conditions. After my opening remarks, Nathan will provide more detail on our financial results and review the progress we have made executing on our capital management strategy. Then before we open the line for questions, I will wrap up by discussing the current operating environment, including activities related to housing finance policy. During the quarter, we earned GAAP net income of $174 million, nearly 15% more than the same period last year. For the full year of 2021, GAAP net income increased 42% to $635 million compared to $446 million in 2020. These strong quarterly and annual financial results improved primarily because losses incurred were materially lower when compared to the same periods of 2020. The improved credit performance reflects the lower level of new delinquency notices received throughout 2021 compared to 2020 and the improved cure rates on policies previously reported delinquent. I am optimistic that the favorable delinquency trends that we have been experiencing will continue throughout 2022. In addition to our improvement in losses incurred, in 2021, we capitalized on one of the largest mortgage insurance markets in the company's 65-year history by writing a record $120 billion of new insurance, including $27 billion in the fourth quarter. This level of new business writings combined with a higher annual persistency resulted in our insurance in force increasing to $274 billion, 11% higher than the same period last year. Going into 2022, single-family housing demand remained strong and interest rates despite rising off recent lows, are still attractive by historical standards. The FHFA and the GSEs are increasing their focus on improving access to mortgages, especially for first-time and low and moderate income borrowers. The combination of these factors leads us to expect that the robust purchase market conditions will persist. That said, we do expect the overall market opportunity for private mortgage insurance will be smaller in 2022, ranking just below the last two years of record volume. This reduction will be driven primarily by a decline in the number of refinanced transactions compared to 2021. For some context, refinances accounted for 20% of our total NIW in 2021, ranging from 40% in the first quarter to less than 10% in the fourth quarter. Based on the expected path of interest rates, we expect refinances to remain on the low end of the spectrum in 2022. The composition of our current application pipeline with more than 90% purchase transaction supports that expectation. We currently expect that the new business write, combined with increasing annual persistency will result in our insurance in force portfolio growing at a modestly slower pace than what we have recently experienced. Taking a look at the performance of our in-force portfolio, our loss ratio was a negative 10% in the quarter. This result reflects two things. First, our reestimation of loss reserves on prior delinquencies resulted in favorable loss reserve development, primarily to reflect better-than-expected cure rates on loans that were delinquent in the third quarter of 2020 and prior. Second, the number of new delinquencies in the fourth quarter was low, reflecting the high quality of our insurance in-force. I continue to be encouraged by the current business environment and the strength of our new business writings and the low level of new delinquent notices which has persisted throughout January. Last quarter, we discussed that our capital management strategy centers on maintaining financial flexibility of both the holding company and the writing company to protect our policyholders and to create long-term value for shareholders. We believe this value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock. During the quarter, reflecting our liquidity position, the strength of our balance sheet and our expectations for continued favorable financial results, we executed on several of these options to increase the long-term value to shareholders of our company while maintaining exceptional financial strength. Specifically, MGIC paid a $250 million dividend to the holding company. We also returned a significant amount of capital to our shareholders through the repurchase of 9 million shares of common stock for $141 million, the repurchase of $99 million of par value of the 9% junior convertible debentures due in 2063, eliminating approximately 7.5 million potentially diluted shares and the payment of our quarterly common stock dividends of $26 million. Finally, the Board also recently declared an $0.08 per share dividend payable on March 2, 2022. In the last two years, despite navigating through all the COVID-related challenges, we reduced the number of fully diluted shares outstanding by 10%, increasing the common stock dividend by 33% and increased book value per share by more than 22% after distributing $172 million in common stock dividends. Nathan will go over more detail on these actions in a minute. We believe that our capital management strategy will allow us to take advantage of near-term opportunities to write significant amounts of new business that meet our return objectives while continuing to create long-term value for shareholders and remaining a well-capitalized insurance counterparty. In summary, we have a strong and dynamic balance sheet. We're confident in our positioning in this market and we like the risk-reward equation that the current business conditions offers and are excited about the future. So with that, let me turn it over to Nathan.

Nathan Colson, CFO

Thanks, Tim and good morning. As Tim mentioned, we ended 2021 with another quarter of strong financial results. In the fourth quarter, we earned $174 million of net income or $0.52 per diluted share and generated an annualized 16.6% return on beginning shareholders' equity. For the full year, net income was $635 million or $1.85 per diluted share compared to $446 million or $1.29 per diluted share in 2020. The return on beginning shareholders' equity was 13.5% in 2021 compared to 10.4% last year. On adjusted net operating income basis, in the fourth quarter, we earned $0.61 per diluted share versus $0.43 per diluted share in 2020. For the full year, we earned $1.91 per diluted share versus $1.32 in 2020. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release. During the quarter, total revenues were $294 million compared to $302 million last year. The net premium yield for the fourth quarter was 37.3 basis points which was down 1.1 basis points compared to last quarter and down 5.6 basis points from the fourth quarter of 2020. The decrease in the net premium yield continues to be primarily the result of a decline in the in-force premium yield as the older policies continue to run off and be replaced with policies which generally have lower premium rates. The low level of refinance activity decreased the amount of accelerated premiums earned from single premium policy cancellations. During the quarter, they were $18 million which was flat to last quarter but down from $32 million earned in the fourth quarter of 2020. We expect that as the older vintages continue to run off, the in-force premium yield will continue to decline throughout 2022 at a similar pace that it did in 2021. On the reinsurance front, we have agreed to terms to place both an additional 15% quota share on our 2022 NIW, bringing the total quota share to 30% and a 15% quota share on our 2023 NIW. During the quarter, operating expenses were $46 million compared to $48 million for the same period last year. For the full year, operating expenses were $211 million versus $189 million in 2020. The majority of the year-over-year increase was the result of investments we are making in our technology and data and analytics infrastructures which are already paying dividends in how we approach the market. The lower level of expenses in the fourth quarter was largely due to timing and certain one-time items that we do not expect to recur. For the full year 2022, we expect that operating expenses will be in the $225 million to $230 million range as we continue investing in our platform. Over time, we continue to expect the level of incremental spending to decline as some of these transformational initiatives are completed and we realize the full value from these investments. Shifting over to credit; net losses incurred were negative $25 million in the fourth quarter compared to $20 million last quarter and $46 million in the fourth quarter last year. In the quarter, we received approximately 10,500 new delinquency notices which represents less than 1% of the loans insured at the start of the quarter. While up from the 9,900 new notices received in the third quarter, the number received is 31% less than the number of notices received in the fourth quarter of 2020 and 22% less than we received in the fourth quarter of 2019. We are encouraged by the strength of the housing market and the credit trends we are experiencing, including the low level of early payment defaults and believe they are good indicators of near-term credit performance. The estimated claim rate on new notices received in the fourth quarter of 2021 was approximately 7.5%. The claim rate on new notices has been at this level since the fourth quarter of 2020. In the quarter, our reestimation of loss reserves on prior delinquencies resulted in $52 million of favorable loss reserve development net of reinsurance compared to $8 million of favorable development last quarter and immaterial unfavorable development in the fourth quarter last year. Favorable development in the quarter was primarily related to delinquency notices received in the third quarter of 2020 and prior. Secure activity to date on those delinquencies has exceeded our expectations and as a result, we've adjusted our ultimate loss expectations down. For all of 2021, incurred losses totaled $65 million compared to $365 million in 2020. The lower level of incurred losses was primarily a result of the 60% fewer new notices we received in 2021 compared to 2020, stable claim rate on those new notices and $60 million of favorable loss reserve development. Of the approximately 33,000 loans in our delinquency inventory at December 31, approximately 1/3 or 11,000 loans were reported to us to be in forbearance and we estimate that the majority of those loans in forbearance will reach the end of their forbearance period by the middle of 2022. The number of claims received in the quarter remained very low. We continue to expect claim payments to remain low for the next few quarters, given the timelines for foreclosure and evictions associated with GSE loans and the additional procedural safeguards imposed by the CFPB. Primary paid claims in the quarter were $16 million compared to $18 million last quarter and $12 million in the fourth quarter of 2020. Next, I want to spend a couple of minutes talking about our capital management strategy and the capital actions we have recently taken. I mentioned last quarter that both our capital levels at MGIC and liquidity levels at the holding company were above our targets. As a result, in the fourth quarter, we received OCI approval and paid a $250 million dividend from MGIC to the holding company. And the holding company executed on several capital management actions in the quarter. As Tim mentioned, in the fourth quarter, we paid an $0.08 per share dividend for a total of $26 million and repurchased 9 million shares of common stock for $141 million. For the full year of 2021, we paid $94 million in common stock dividends and repurchased 19 million shares of common stock for $291 million. The 19 million shares repurchase was approximately 5.6% of the number of shares outstanding at the beginning of the year. During the quarter, we also repurchased $99 million of par value of our 9% junior convertible debentures due in 2063. I mentioned last quarter that retiring the debentures was a priority for us and the repurchases in December eliminated 7.5 million potentially diluted shares, reduced our annualized interest expense by $9 million and reduced our year-end debt-to-capital ratio by 130 basis points on a pro forma basis to a level below 20% at year-end. We expect to continue to delever over time and to approach a longer-term debt-to-capital ratio in the low to mid-teens. At year-end, our holding company's $663 million of liquidity exceeded our target. And we continued our share repurchase program in 2022, repurchasing 3.9 million shares for $60 million in January. The Board also recently declared an $0.08 per share dividend payable on March 2. Circling back to the debentures. As a reminder, we can redeem the remaining debentures for principal plus accrued interest when our share price closes above a certain level for 20 of 30 consecutive trading days. For 2022, that share price level is $16.98. We currently expect to provide a redemption notice for the debentures when that requirement is met with the redemption date at least 30 days later. If we were to provide the redemption notice, we would expect virtually all of the holders of the debentures would elect to convert their debentures into common stock before the redemption date. Under the terms of the debentures, we may pay cash in lieu of issuing shares and we would expect to do so. At year-end, our writing company had $2.2 billion of available assets in excess of the PMIERs minimum requirements or a sufficiency ratio of 160% which exceeded our current target level. MGIC's PMIERs available assets were relatively flat during the quarter as the $250 million dividend to the holding company was largely offset by strong cash flow from operations. MGIC's level of PMIERs access decreased during the quarter as its minimum required assets increased due to the growth of its risk in-force, the cancellation of two quota share reinsurance agreements and the runoff of the PMIERs benefit on existing ILN deals. The current macroeconomic environment persists, we expect MGIC will continue to increase the amount of its capital in excess of its target level. We will continue to assess MGIC's capital position and we'll continue discussions with our regulator, the OCI, to provide additional dividends to our holding company as appropriate. As I mentioned last quarter, we expect any dividends to occur less frequently than the quarterly cadence we had pre-COVID. We continue to believe that our balanced approach to maintaining a strong capital position including using forward commitment quota share treaties and accessing the capital markets for excess of loss reinsurance via ILN transactions provides flexibility to maximize the long-term value of both the writing company and holding company. This value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock. And with that, let me turn it back to Tim.

Tim Mattke, CEO

Thanks, Nathan. Before moving to questions, let me address a few additional topics. The federal government through various agencies, including the FHFA, CFPB and the FHA, continues to focus its housing policy efforts on promoting equitable access to sustainable and affordable housing, mitigating foreclosure and eviction risk for homeowners impacted by COVID-19 and ensuring a successful economic recovery as opposed to making large-scale changes to the housing finance infrastructure. We will continue to advocate for the increased use of private mortgage insurance in the housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system. At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first-time homebuyers. We had a very successful year. We wrote a record $120 billion of new business through our insurance in-force book by 11%, generated $635 million of net income, delivered a 13.5% return on equity, improved book value per share by 9.3% and reduced the number of shares outstanding by 5.4%. Longer term, I remain encouraged about the future role that our company and industry can play in housing finance and believe that many regulators and policymakers share a similar view as our company and the industry are organized solely to provide credit enhancement solutions to lenders, borrowers and the GSEs in all economic cycles. Not only does private mortgage insurance offer dedicated capital day in and day out to the housing industry but also offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership, the down payment. In summary, we are currently writing high levels of quality new insurance and are experiencing low levels of delinquencies. The housing market remains robust and we have a book of business that has strong underlying credit characteristics which is supported by a strong and dynamic balance sheet with a low debt-to-capital ratio, an investment portfolio of nearly $7 billion, contractual premium flow and a robust reinsurance program. I'm confident in our positioning in this market and we like the risk-reward equation that the current conditions offer. We have the right team in place to build up our solid foundation to continue to deliver competitive offerings and our best-in-class service to our customers and generate strong returns for our shareholders through the core business as well as capital returns. With that, operator, let's take questions.

Operator, Operator

Thank you. Our first question comes from the line of Doug Harter of Credit Suisse. Your line is open.

Douglas Harter, Analyst

Thanks. In your prepared remarks, you mentioned that you expect the in-force yield to continue to decline. Is there any sense you can give us as to maybe over the course of '21 where the yield is on new insurance written versus the in-force yield, just to get a sense of magnitude as to where that ultimately might level out?

Nathan Colson, CFO

Hey, Doug, it's Nathan. Thanks for the question. We haven't shared the current rate on new business yet. However, we observed that the in-force yield decreased by about a basis point each quarter throughout 2021. We believe this is the most likely scenario for 2022.

Douglas Harter, Analyst

Great. Regarding single premium cancellations, since rates have already increased, have they stabilized? Or is there still pressure to reduce that number as persistency continues to improve?

Nathan Colson, CFO

Yes. It's Nathan again. I think that even in environments with flat or even rising rates, we will see some level of accelerated single cancellation just as we see some level of normal fall off. But the level that we're seeing now reflects an environment where we had less than 10% refinance transactions. So could it go lower from here? Certainly. But I don't think it's going to go to 0 just because rates are rising.

Cullen Johnson, Analyst

Hey, good morning, thanks for taking my questions. When you look at the percentage of risk in force, it's concentrated in the policy years 2020 and 2021, had about 70% that it kind of appears high for any two policy years just by historical levels. So I'm curious how do you think about maybe that level of concentration risk, so to speak, in those two policy years going forward?

Tim Mattke, CEO

Hey Cullen, it's Tim. It's a good question. I think it's something we're cognizant of. And two of the biggest sort of markets in our history. I think we also look at 2022. As we said, we think that's going to be another large market. So we think about sort of temporal diversification that you'll have with that. I think ultimately, we also look at the underlying credit quality of those books of business and have a great amount of confidence in what that credit quality is absent what’s happened with home price appreciation. But obviously, with the home price appreciation that's happened over the last couple of years, we feel good, especially about the 2020 book of business that would have been originated sort of prior to a lot of that appreciation happening. So while it's something we do keep an eye on, it's something I would say that we're not concerned about based upon all those qualities that I discussed.

Cullen Johnson, Analyst

Got it. That's helpful. And then the release kind of mentioned that you terminated the 2017 and 2018 QSR transactions in the quarter. I'm just curious maybe what drove that decision? Or maybe just more broadly, what are the advantages of ending a QSR policy early?

Nathan Colson, CFO

Yes, Nathan here. We noted in our last quarter's call that we chose to cancel those transactions and needed to provide a notice period. The main reason is that due to significant runoff from those book years, those deals have become relatively small. Each was yielding less than $50 million in PMIERs benefit for us. We feel comfortable taking on risk from loans written in 2017 and 2018, and given our strong capital position, we are in a good place to absorb that additional risk.

Mark DeVries, Analyst

Yes, thanks. Actually, I have a couple of follow-ups on topics already addressed. On the average premium, Nathan, my understanding is that one of the headwinds has been the accelerated kind of runoff of higher premium business written in the past. Wouldn't you expect that headwind to at least fade some as we go into 2022, as refinance release falls off?

Nathan Colson, CFO

Yes. No, Mark, it's a good question. I do think we expect that 2022 is going to be a large market as well. Some of that may start to fall off a little bit but current new business is being written below the average in-force yield. So we do think that just naturally, it's going to continue to come down. Certainly have a lot more conviction in that over the next quarter or two than beyond that just because market dynamics evolve and the size of the market and runoff, etc. But I think continuing to guide to about a basis point a quarter for us on the in-force yield coming down through 2022.

Mark DeVries, Analyst

Okay, got it. And then, could you discuss what impact high HPA we've seen as having on the quality of the borrowers you're ensuring? Are higher prices pushing out lower-income borrowers and maybe pushing some higher-income borrowers into needing loans with MI who might have otherwise had enough money to kind of put down to buy a home?

Mike Zimmerman, President

Hey Mark, it's Mike. Regarding margins, I agree with that. You can observe this in any purchase market, but particularly due to the home price appreciation over the past couple of years, it has likely tightened things a bit more. There is a slight increase in the percentage of debt-to-income ratios above 45%, which for us still remains quite low, around 14% to 15% above that threshold, with a slightly lower loan-to-value ratio. So, while that's the case on the margin, we haven't noticed significant alterations when analyzing the FICO distributions and similar metrics; there haven't been any material changes, but there is certainly a slight trend on the margin.

Mark DeVries, Analyst

Yes. And then just a related question on that; how do you think about the impact of that HPA on risk? I mean, obviously, it's an unmitigated positive for your existing risk. But when you think about writing new business on prices which are up 20% year-over-year, how do you think about kind of the risk of a correction and what that could do for credit on new business?

Tim Mattke, CEO

Yes, Mark, it's Tim. We need to consider the implications of increased depreciation just like any other asset. We evaluate potential stress scenarios and the peaks and troughs that may occur. Overall, we have confidence in our ability to factor these scenarios into our pricing strategies, maintaining a solid risk-return balance. You are right that home price appreciation can enhance the value of our existing business. However, our focus remains on how this impacts our current pricing. We feel assured about our pricing strategies and our ability to achieve the desired returns, even as we acknowledge that more severe stress scenarios could be envisioned. Nevertheless, given the credit quality of our business portfolio, it's challenging to predict extremely negative stress scenarios, particularly when we factor in the reinsurance backing our business.

Bose George, Analyst

Hi, guys. Can you hear me?

Mike Zimmerman, President

Yes.

Tim Mattke, CEO

Yes.

Bose George, Analyst

Great. First, can you just talk about how we could think about the size of potential dividends up to the holding company this year relative to what you've paid in 2021?

Nathan Colson, CFO

Bose, it's Nathan. I'll take that one. I think like we've said for some time, it's really going to be dependent on the capital situation that we are throughout the year. So if we're in a favorable macroeconomic environment, we do think that we're going to continue to generate capital above our target levels. That will be supportive of dividends. And we've shown in the last half of this year that we can pay dividends at a fairly high rate. But I think first order condition there is that the environment is attractive for us and that we think we have excess capital. So that's an evaluation that we'll continue to make. And if appropriate and if we can get the approvals from our regulators, we'll look to continue to pay dividends.

Bose George, Analyst

And just a follow-up on that. I mean the dividends in the back half of '21, should we think of that as a bit of a catch-up in the sense of that maybe that's more of an annualized level of payout that you did, effectively $400 million for the year?

Nathan Colson, CFO

Yes. Again, I would just point to, given our capital position at both kind of the end of the second quarter and the end of the third quarter, I feel comfortable with the $150 million dividend and then the $250 million dividend. We'll continue to reassess. And if we think that our capital position and the environment supports dividends at that level, or higher or lower, then that's kind of the path that we'll follow going forward.

Tim Mattke, CEO

I don't think there's much to focus on in the bulk market regarding share removal. It's challenging to determine our position in market share since we are only at the second release. However, we feel confident about the capital we managed to deploy this quarter and believe the market is in a good place. We have a solid understanding of the market dynamics and pricing. Additionally, we are providing the customer service our clients desire, which is resulting in a substantial amount of high-quality business. We'll wait to see how others report, but we are pleased with our accomplishments in the fourth quarter.

Ryan Gilbert, Analyst

Hi, good morning everyone. First question on purchase NIW. The year-over-year growth looked particularly strong, better than I expected. And I'm wondering if you can add any details into what was driving the growth. Is that just how you think the volume looked in the fourth quarter? Or do you think that there were some differences in your competitive positioning relative to peers that drove that growth? Any details would help.

Tim Mattke, CEO

It's Tim. I don't think there was anything specific we did in that regard. It's primarily influenced by our customers and their production locations. I don't have any significant insights into why that performed better than anticipated. However, it wasn't driven by our positioning; we were just focused on deploying capital in a strong purchase market in the fourth quarter. Thanks, Jay. I appreciate everyone's interest in MGIC and hope everyone has a great day.

Operator, Operator

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