MGIC Investment Corporation (MTG) on Q2 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Second Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today's call is being recorded. I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead. Dianna Higgins: Thank you, Roel. Good morning, and welcome, everyone. Thank you for your interest in MGIC Investment Corporation. I am very excited to be here today as this is officially my first earnings call in the seat. Joining me on the call today to discuss our results for the second quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC's second quarter financial results was issued yesterday and is available on our website at mtg.mgic.com under Newsroom, includes additional information about our quarterly results that we will refer to during the call. 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, new insurance written, reinsurance transactions, 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 that were 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 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. With that, I now have the pleasure to turn the call over to Tim. Tim Mattke: Good morning, everyone. And before I start with my prepared remarks, I want to welcome you Dianna to new role in our quarterly calls. I know that you and Michael Zimmerman spent a lot of time to make the transition as seamless as possible. I know you do great in the new role, and I look forward to the investors getting a chance to know you better through your interactions. With that, I'm pleased to report that we had another great quarter for that matter, first half of the year as we delivered exceptional financial results while continuing to return capital to our shareholders. We will get into details throughout this call. But in summary, this quarter, we grew our insurance in force, repurchase stock, paid a common stock dividend, decrease our leverage ratio and increase our financial strength and flexibility, all while earning an annualized 21.6% return on equity. We are encouraged by the positive credit trends we are experiencing, including the low level of early payment default, which we believe are good indicators of near-term credit performance and the continued favorable employment trends. The risk-reward equation that current business conditions offer continues to be attractive, and we are excited about the future. In the second quarter, we earned $249 million of GAAP net income. Insurance in force at the end of the quarter stood at more than $287 billion, a 9.5% increase from a year ago and 3.4% increase during the quarter. The quarterly growth in insurance in-force reflects the increased persistency rate in the quarter, offset by lower volumes of new insurance written. Taking a look at the credit performance of our insurance in force portfolio, our loss ratio was a negative 38.7% in the quarter. This reflects the loss reserves established on a low number of new delinquencies reported to us in the quarter, more than offset by a re-estimation of ultimate losses and delinquencies in prior quarters. In order to achieve our objectives in varying business environment, we need a capital management position that maintains the financial strength and flexibility of the holding company, deploys capital and growth for MGIC, the writing company, to both are positioned to succeed in the future and can return excess capital to shareholders in a variety of forms. We believe that our current strategy does just that. As a result of the strength and flexibility of our capital position, during the 12 months ending June 30, we deployed capital to support our new business while we return a significant amount of capital to our shareholders through the repurchase of common stock and payment of common stock dividends. We reduced our leverage ratio and interest expense by repurchasing a significant portion of our convertible junior debentures due in 2063 and by repaying MGIC's Federal Home Loan Bank advance. Additionally, in July of this year, we redeemed our outstanding senior notes due in 2023, we purchased additional common stock, and our Board authorized a $0.10 per share common stock dividend to be paid on August 25, a 25% increase in the quarterly dividend amount. Before turning it over to Nathan to provide more detail on our financial results and capital management activities, I would like to share 3 thoughts on the current environment. First, consensus mortgage origination forecast have been trending lower due to the increase in interest rates and the decrease in refinance activity. We expect refinance activity to remain low for the remainder of the year and purchase activity continue to be strong although lower than we expected at the beginning of the year. Overall, the market opportunity for new private mortgage insurance is smaller this year than last. While we anticipate our new insurance written will be below record volumes for the last 2 years, we continue to expect new insurance written to remain strong. As we look forward, demographic trends suggest meaningful long-term MI opportunities. Next, we believe the MI business is well hedged to changes in interest rates. The increase in mortgage interest rates has materially reduced the incentive of many borrowers to refinance their first mortgages, whether to tap into built in equity or lower their monthly payments. So although our new insurance written is slowing, persistency in our insurance in force is increasing, extending the existing revenue stream. In the second quarter, the result was that our insurance in force portfolio continue to grow, but at a slower pace. Persistency, along with insurance in-force, are 2 long-term drivers of future revenue. Also, while the current rising interest rate environment has increased unrealized losses in our investment portfolio, it has reversed the long-term trend of low reinvestment interest rates, which is resulting in increases in our investment yield. Additionally, while there is potential for losses to increase, if there's an increase in unemployment or a decrease in home values, the presence of reinsurance will help mitigate those losses. Lastly, we've seen significant home price appreciation over the last several years, primarily due to the combination of historically low mortgage rates and strong housing demand. The significant home price appreciation over the last 2 years has created equity for many homeowners. This equity should reduce the incidence of claims on the related mortgages. That being said, there are signs that national home price appreciation may finally be slowing down and some markets may even see some declines. We believe that gradual normalization of home price depreciation is healthy for the market. With that, let me turn it over to Nathan. Nathan Colson: Thanks, Tim, and good morning. As Tim mentioned, we had a strong second quarter and solid financial results for the first half of the year. In the quarter, we earned $249 million of net income or $0.80 per diluted share compared to $153 million in net income or $0.44 per diluted share during the same period last year. On an adjusted net operating income basis, we earned $0.81 per diluted share an 84% increase from the $0.44 per diluted share in the second quarter of 2021. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. Despite the strong net income in the quarter and year-to-date, our book value per common share outstanding has decreased from $15.18 as of December 31 to $14.97 as of June 30. This decrease was primarily the result of increases in interest rates, which caused unrealized losses on our investment portfolio to increase. Those unrealized losses are not reflected in net income, but are reflected in shareholders' equity and therefore also reflected in book value per share. We regularly disclosed the amount of book value per share that is attributable to unrealized gains and losses in our investment portfolio. As Tim mentioned, higher interest rates are a long-term positive for the earnings potential of the investment portfolio. However, the rapid increase in interest rates over the last several months resulted in unrealized losses that reduced book value per share by $0.97 at the end of the quarter. While at December 31, unrealized gains increased book value per share by $0.47. During the quarter, total revenues were $293 million compared to $298 million for the same period last year. Net premiums earned were $256 million in the quarter compared to $252 million for the same period last year. The increase in net premiums earned was due to an increase in insurance in force and a decrease in ceded premiums from our quota share reinsurance transactions, partially offset by a decrease in our premium yield. The net premium yield for the second quarter was 36.2 basis points, down seven tens of a basis point from the first quarter and down 2.9 basis points compared to the second quarter last year. The in force premium yield was 39.4 basis points in the quarter, down six tens of a basis point from 40.0% last quarter and 42.6% in the second quarter last year. The decline in the quarter was consistent with trends that we have previously discussed. Turning to credit. Net losses incurred were negative $99 million in the second quarter compared to negative $19 million last quarter and $29 million for the same period last year. Our review and re-estimation of ultimate losses on prior delinquencies resulted in $131 million of favorable loss reserve development compared to $56 million of favorable loss reserve development in the first quarter and insignificant loss reserve development in the second quarter last year. The favorable development in the quarter was primarily related to pre-COVID and peak COVID delinquencies as cure rates on those delinquencies continue to exceed our expectations, we have adjusted our ultimate loss expectations. In the quarter, our delinquency inventory decreased by 12.4% to 26,900 loans, marking the eighth straight quarter of decrease from the pandemic peak of 69,300 in the second quarter of 2020. New delinquency notices received in the quarter decreased by 12.2% as compared to the first quarter and cures continued to outpace the new notices during the quarter. The number of claims paid remained relatively flat for the quarter; however, we continue to expect paid claims to gradually grow as COVID-related foreclosure and eviction moratoriums come to an end and foreclosure activity increases. Shifting to our capital management activities. As Tim highlighted, our priorities include maintaining the financial strength and flexibility of the holding company and deploying capital for growth to the writing company. For the holding company, this means maintaining a target level of liquidity in excess of near-term needs. The operating company, it means maintaining a robust level of PMIERs excess that we expect will enable growth in all operating environments. These target levels are dynamic and change as the operating environment changes. As part of our capital management activities in the quarter, we executed an excess of loss reinsurance transaction with a panel of reinsurers in the traditional reinsurance market, which will cover most of the policies written in 2022. This is an additional layer of credit protection beyond the quota share treaty we have in place for 2022 NIW. Also, as we discussed last quarter, in April, we completed another ILN transaction, which covers most of our policies written from June through December of 2021. These transactions provide capital relief under PMIERs in addition to loss protection. More information on the excess of loss transaction can be found in our quarterly supplement for the second quarter. Approximately 94% of our primary risk in force was covered to some extent by reinsurance transactions at the end of the quarter. At quarter end, we had $690 million of liquidity at the holding company and MGIC had a $2.6 billion excess to the PMIERs minimum requirements compared to a $2.3 billion excess last year. MGIC's growth in PMIERs excess was primarily driven by our reinsurance strategy and strong cash flow from operations, partially offset by the increase in minimum required assets due to the growth of our risk in force, the runoff of the PMIERs benefit on existing risk-sharing transactions and the payment of dividends to the holding company. As Tim highlighted, during the 12 months ending June 30, we had a robust capital position and the capital levels at MGIC and the liquidity levels at the holding company were consistently above our targets. As a result and consistent with our capital strategy, MGIC paid a total of $800 million in dividends to the holding company. At the holding company level, we repurchased 35 million shares of common stock for a total cost of $513 million and paid $104 million in common stock dividends to our shareholders. We also used $237 million to repurchase $173 million in principal amount of our convertible debentures due in 2063. This eliminated 13 million potentially dilutive shares and reduced our annualized interest expense by $16 million. Combined, since June 30, 2021, we've reduced dilutive shares by $48 million or 13% and reduced our debt-to-capital ratio from approximately 20% to approximately 17%. In July, Moody's upgraded our senior debt rating to Baa3 and upgraded MGIC's insurance financial strength rating to A3 with a stable outlook. Moody's stated that the ratings reflect continued improvement in the U.S. mortgage insurance sector, our strong position in the market and underwriting discipline, our reduced financial leverage and debt maturity profile and extensive reinsurance program. With that, let me turn it back over to Tim. Tim Mattke: Thanks, Nathan. A few additional comments before we open it up for questions. The federal government through various agencies continues to focus the housing policy efforts on promoting equitable access to sustainable and affordable housing. To further these efforts in June, the GSEs released flexible housing finance plans and the FHFA simultaneously announced a new pilot transparency framework for the GSEs to accompany these plans. This framework requires each GSE to publish and maintain a list of pilots and test and learn activities on its public website. At this point, we are uncertain what impact, if any, of these plans will have on the MI industry. We welcome the opportunity to engage with the GSEs or other agencies on the topic of equitable access to housing. And as always, we will continue to advocate for the increased use of private mortgage insurance and housing finance. I remain encouraged about the future role that our company and the industry can play in the housing market as we continue to provide credit enhancement solutions to lenders, borrowers and the GSEs. In closing, we had another successful quarter and a strong first half of the year. As we look forward, there are increased risks and uncertainties about rising inflation and interest rates and the possibilities of a recession. However, housing fundamentals and employment trends remain sound. We like our positioning in this market and the risk-reward equation that the current conditions offer and believe that the strength and flexibility of our business model will contribute to our continued success. Throughout our 65 years, our people have been the cornerstone of our accomplishments. Together, we remain focused on executing our business strategies, providing critical uninterrupted support to the housing market and helping individuals and families achieve affordable and sustainable homeownership in all economic cycles. Our commitment and ability to help ours -- achieve the dream of home ownership is as strong as ever. With that, operator, let's take questions. Operator: [Operator Instructions] Our first question comes from Mark DeVries of Barclays. Operator: Our next question comes from Doug Harter, Credit Suisse. Q – Unidentified Analyst: This is [John Kochalski] on for Doug. First question is around premium yields. We saw net premium yields were down about 0.7 bps this quarter, while other names were flat to up on the quarter. I'm just kind of curious about your thoughts about what might have influenced the move. And then also what your outlook is for the rest of 2022? Q – Unidentified Analyst: Okay. Great. And then second question. Reserve activity kind of going forward, it was better than expected with positive COVID-related cures and HPA, but also given the macro environment. Just curious about your thoughts for kind of the rest of the year as far as reserve activity is concerned? Operator: Our next question comes from Bose George of KBW. Operator: Our final question comes from Mihir Bhatia of Bank of America. Operator: And it seems there are no further questions. I will now turn the call back over to management for closing remarks. Tim Mattke: Thanks, Roel, and I want to thank everyone for their interest in MGIC. It was another exceptional quarter and look forward to talking with each of you in the future. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.MTG Ratings Summary
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MGIC Investment Corporation Upgraded to Outperform, Shares Up 6%
RBC Capital upgraded MGIC Investment Corporation (NYSE:MTG) to outperform from sector perform, increasing their price target to $16 from $15. Shares closed more than 6% higher on Thursday.
According to the analysts, the company is well positioned and attractively valued despite a challenging housing market. The upgrade balances the sentiment headwind of owning "mortgage" stocks in a market fearful of recession and slowing housing market, with the sizable discount to book value where the company’s shares currently trade. The analysts expect shares to rebound towards book value and perhaps higher over time.
According to the analysts, the company and its peers have meaningfully strengthened their balance sheets and insulated their portfolios to withstand even a severe recession.
