MGIC Investment Corporation (MTG) Q1 2024 Earnings Call Transcript
MGIC Investment Corporation (NYSE:MTG) Q1 2024 Earnings Conference Call May 2, 2024 10:00 AM ET
Company Participants
Dianna Higgins – Head, Investor Relations
Tim Mattke – Chief Executive Officer
Nathan Colson – Chief Financial Officer & Chief Risk Officer
Conference Call Participants
Bose George – KBW
Terry Ma – Barclays
Soham Bhonsle – BTIG
Mihir Bhatia – Bank of America
Douglas Harter – UBS
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the MGIC Investment Corporation First Quarter 2024 Earnings Call. (Operator Instructions) I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.
Dianna Higgins
Thank you, Nadia. Good morning. Welcome, everyone. Thank you for your interest in MGIC. Joining me on the call to discuss our results for the fourth quarter are Tim Mattke, Chief Executive Officer and Nathan Colson, Chief Financial Officer and Chief Risk Officer. Our press release, which contains MGIC’s fourth 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 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 everybody 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 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.
Now, with that, I now have the pleasure to turn the call over to Tim.
Tim Mattke
Thank you, Dianna, and good morning, everyone. The company reported net income of $174 million in the first, 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 reflects a balanced approach to the market. Reinsurance programs 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. In insurance, of course, the main driver of our revenue was $291 billion down 0.5% from a year ago. There has been very little change recently in underwriting standards and the new insurance we write continues to have strong credit characteristics. We are pleased with the overall credit quality and performance of our insurance portfolio.
The mortgage origination industry continues to experience the headwinds of the smaller origination market as we transition away from record volumes of the recent past years, 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 has 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 MAW 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 population stone 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 purchased 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. And 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 were above our targets to 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 and stress scenarios, our reinsurance agreements provide diversification of flexibility to our sources of capital at attractive costs and reduced our PMIERs required assets by $2.2 billion at the end of the first quarter.
We continually monitor level of capital of both MGIC and the holding company considering the level of capital retained versus return to shareholders. As part of this, we assess current and expected future operating environments and we continually evaluate the best options to deploy capital to maximize long-term shareholder value.
With a strong credit performance, financial results and capital generation we are 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 to remain our primary means of returning capital to shareholders. With that, let me turn it over to Nathan to get into more details on our financial results.
Nathan Colson
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 have 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 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 have 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 peers 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 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. And we do not expect the decline in the delinquency inventory we had in the first quarter will 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 yields 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. While higher interest rates continue to be a headwind for book value per share, higher interest rates 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 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. With that, let me turn it back over to Tim.
Tim Mattke
Thanks, Nathan. Few last comments. We are 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, but there are still some uncertainties in the economic landscape, the housing market remains resilient and the outlook for this generally positive. We have an unwavering commitment to delivering value to our shareholders, customers and stakeholders. Our ability to continuously adapt and evolve has been instrumental in 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.
Question-and-Answer Session
Operator
(Operator Instructions). Now we’re going to take our first question and it comes from the line of Bose George from KBW. Your line is open. Please ask your question.
Bose George
Hey, guys. Good morning. Actually, first 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?
Nathan Colson
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 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.
Bose George
Okay, great. Thanks. 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?
Tim Mattke
I think Bose and Nathan can add if he wants to. But I think ultimately, we’ve demonstrated over the last couple of years a willingness to return capital when we have viewed that we have access at MGIC and ultimately the holding company, both through increasing the dividends, shareholders as well as the share repurchase. And as we’ve talked the last couple of quarters with fewer of that cash at the holding company needed to service debt or repurchase debt, it’s allowed us to have more share repurchase activity. So, I think the last couple of quarters are pretty representative of that sort of flexibility we have there and sort of the willingness to repurchase when we think it’s a good value.
Operator
Now we’re going to take our next question. And the next question comes from the line of Douglas Harter from UBS. Your line is open. Please ask your question.
Operator
Just a moment please. Yes, speakers, I will just proceed with the next question. And the next question comes from the line of Terry Ma from Barclays. Your line is open. Please ask your question.
Terry Ma
Hi, thanks. Good morning. 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 three payments or less bucket. Is that purely attributable to seasonality or is there something else in there?
Nathan Colson
Terry, it’s Nathan. Thanks for the question. Yeah, I think the seasonality had existed in credit performance and by that I really mean kind of new notices and cure activity and the ratio between those two. The months that I called out February, March April were historically months where cures would outpace new notices even in a relatively flat overall delinquency environment. Because of the timing of the pandemic and then the subsequent government response and then the timing of when forbearance plans ended, really for 2020, 2021 and into 2022, there really wasn’t a lot of seasonality as these other factors kind of dwarfed, any seasonal impact that may have happened. But I think starting in 2023, we saw this in retrospect a little bit more. I think we feel like we’re seeing it again. And we certainly observed the same thing about the early cure activity out of loans that were three months or less bucket and we also disclosed the cures that happened intra quarter. So those are loans that are both new notices and cures within the same quarter. That rate was elevated this quarter. Again, I think we attribute that more to more to seasonality than to maybe like a resurgence of the delinquency rate coming down a lot from this level.
Terry Ma
Got it. That’s helpful. And on the reserve release in the quarter, you mentioned, mainly from 2022 and first quarter 2023 notices. Any more color you can provide on, I guess, kind of like what vintage of origination they came from?
Nathan Colson
The delinquencies in those for those years, the delinquencies that we would have received in 2022, we’ve had 30% to 40% of our delinquencies for some time have come from our 2008 and prior book. We also disclosed some statistics about that, but I think interestingly, this quarter about 98% of those loans have been previously delinquent. So, we have a lot of loans that I think are kind of coming in and out of the delinquency inventory out of that bucket. But other than that, I don’t think there was a lot that was notable just a cross section of our book otherwise. And as we think about cure activity and look at the details of where it’s coming from, it doesn’t appear to be concentrated in any major cohort. It seems like it’s coming from across the LTV spectrum, across the FICO spectrum, across the DTI spectrum, across geographies. So, I think it feels very broad based for us and ultimately the initial loss expectations that we had particularly on claim rate basis of 7.5% for those notice quarters. The actual at this point, our estimates in many cases are less than half of that just based on actual cure activity and some of those notice quarters are 96%, 97%, 70% to 98% developed at this point. So we’re kind of zeroing in on ultimate losses for some of those and they’re just going to be a lot lower than we expected.
Operator
Now we’re going to take our next question. Just give us a moment. And the next question comes from the line of Soham Bhonsle from BTIG. Your line is open. Please ask your question.
Soham Bhonsle
Hey, guys. Good morning. Hope you’re doing well. Tim, I guess first one on the decision to introduce the $750 million buyback. I was just wondering if you could provide some color into how you and the board sort of arrived at that particular figure, right? I’m particularly curious on sort of any assumptions around the macro or the book of business that you maybe all considered as you build out your plan to what looks like the end of 2026 here?
Tim Mattke
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 have a little bit more capacity now, but ultimately wanted to be something that we believe we will be able to execute over that period of time under a range of different scenarios. And that’s been one of the sort of principles we’ve had when we’ve declared sort of a 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’re able to execute on our repurchase plan. And 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.
Soham Bhonsle
Okay, great. And then I’m looking at Slide 6, maybe I’m not reading this correctly, but if I look at so the percentage of development related to the other sort of line how you break it out, it seems like a lot of the improvement did not come from claim this quarter, claim rate sorry and it was other something like severity or things like that. Am I reading that wrong? Like what should we read into that?
Nathan Colson
Yes. It’s Nathan. I’ll take that. I mean, I think the severity in Q4, it was a little bit less just because we had I think a little bit more claim rate improvement. So that drove the ratio between those two a little bit. But the 16%, I think, is reflective of another quarter where our actual severity on claims was, I think in the low 60s versus our reserving assumptions are typically above 100%. So, a lot of that is as we have not only realized actual claims that are at lower severities than what we would have expected, but also as loans are curing, those severities are also I think are also being adjusted.
So, the go forward on that, I think it’s probably not going to look like what we showed here in the first quarter of last year where it’s 100% and 0. I think a split between both claim rating and severity in the current environment. If we have a continuation of this current environment, I think we’ll see improvement both claim rate and severity, just because actual severities right now are running so much lower than what we have in the reserve assumptions.
Soham Bhonsle
Got it. And 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?
Nathan Colson
Yes, I would maybe call out two things. I mean, what we said was we do think that the book yield will continue to increase, but probably at a slower pace. And we’ve already seen that a little bit. We had increases of approximately 20 basis points a quarter for some time, this quarter it was like 10 basis points so, it is still increasing but at a slower rate. So that will slow the growth in net investment income all sequel as well. The other factor is the amount of kind of balance sheet assets that we have invested. As we over the last couple of years that has grown as well as well as the yield increasing. Depending on what our kind of capital return levels are, we hold the balance sheet capital closer to flat that will also limit the growth of net investment income. But I think from a what we’re thinking about managing to is what we’re invested in, really no changes there in terms of what the strategy is, just reinvestment rates continue to be somewhere around 150 basis points higher than the current book yield. So as that rolls over, and as new money comes in, that will provide an opportunity for incremental increase in the book yield.
Operator
Now we’re going to take our next question. And the question comes from the line of Mihir Bhatia from Bank of America. Your line is open. Please ask your question.
Mihir Bhatia
Hi. I appreciate my question. 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 like delinquency to kind of normalize over time, but where you think that settles out like on a steady state relative to pre pandemic levels?
Nathan Colson
It’s Nathan, I’ll take the embedded equity and I missed the last part of the question. So, I may ask you to repeat that, when you have to recover the embedded equity. But we’ve gotten this question a lot and I mean, we certainly have it’s something that we have the statistics on. But I think for us, those are based on typically CBSA level average home prices. And the delinquent inventory is for us right now about 2%. You’re not dealing with the average situation in that case. You’re dealing with kind of the tail of a distribution of home prices and economic situations. And that’s we’re not really holding capital. The business isn’t really geared around the average. It’s really geared around these kind of tail scenarios. So for us, we could look at that, but I think get less maybe comfort in that, from a resolution of delinquent loans just because I think it’s more likely for those loans that they haven’t experienced the average home price appreciation.
Mihir Bhatia
Got it. That’s helpful. And then my follow-up to that was just like where you think delinquencies like normalized 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 don’t realize? And if I can ask my follow-up now to, just curious what you’re hearing from like origination partners as we enter like peak housing season and has the recent move up in like interest rates changed, any impact there?
Nathan Colson
I’m sorry, it’s probably the audio RN, but were you asking about delinquency rates normalizing or something else?
Mihir Bhatia
Yes. So, on the first part, sorry, like delinquency is like rates going higher, just like curious if we think that normalizes out on like a steady state level. And then just my follow-up would be on like what you’re hearing from origination partners as we enter peak housing season? And like has the higher interest rate environment as that kind of ticked back up, have those conversations changed over the last couple of months?
Nathan Colson
Got it. Just on the I’ll let Tim cover the origination question, but on the delinquency rates, I mean, we’re in kind of the low 2% right now for us on account basis delinquency rate. We’ve said that we think we notice this may take a little bit higher, but in a kind of a typical or the type of economic environment that we’ve been experiencing recently, I think that’s probably stays in the 2% to 3% range. Really what we were trying to call out is that the movement down this quarter, we don’t think is indicative of an expectation that a move down will continue. But, obviously delinquency rates for us are and for mortgages in general are very tied to unemployment. So, if unemployment rate remains very low like it is right now, that will be beneficial for delinquencies. But if unemployment or the macroeconomic condition worsens, then I think delinquency rates will react to that as well.
Tim Mattke
And it’s Tim. Just I guess to answer your question on what we’re hearing from originators and the origination market, I think it’s safe to say that we thought this year for them could be a little bit of a challenge, just not a ton of volume and not meaningfully higher than what last year. Obviously, there was some hope, I think from some corners coming into the year that, interest rate reduction over the course of the year might spur a little bit more activity. I think it’s safe to say there’s a little bit more pessimism around that at this point. From our standpoint though, I think we still feel like from an MI origination standpoint, pretty similar position that we were at the beginning of the year, because we weren’t going to see a lot of refi volume. I do think there is I’m a believer in that people do get somewhat accustomed to interest rates and feel more comfortable transacting there.
I do think this is an interesting dilemma that we have though as far as supply of housing coming on the market where you have this lock in effect that we talked about that there’s just not a lot of supply coming and there’s not a lot of incentive for people to put their homes on the market. And so, I think that that’s creating a pretty strong tension as far as where home prices are, bringing supply to the market to actually create enough origination volume. But it is as we’ve said in our opening comments, it’s sort of surprising a lot of support for home prices, which is good from our standpoint on an overall basis.
Operator
Now we’re going to take our next question. And the question comes from the line of Douglas Harter from UBS. Your line is open. Please ask a question.
Douglas Harter
Thanks, and good morning. 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?
Nathan Colson
Thanks for the question. It’s Nathan. That is something that we’ve built into a lot of our reinsurance agreements, especially in the traditional reinsurance market. We have exercised a lot of those options. So, we’ve recaptured the risk, I think really up through 2020, have some options upcoming on 2021 related deals. The ILN market is a little bit different. There’s no kind of natural ways to cancel outside of the kind of five or six or seven-year calls depending on the deals. We have done a tender offer for some older tranches of deals that we wanted to recapture there. But it is something that we continuously evaluate, something that as we think about not only what is our retained risk profile look like with and without reinsurance, what is our kind of target PMIERs kind of excess capital position and how would that be impacted? And then I think more than anything, our strategy is really to focus reinsurance buying on the most recent vintages, where we think there’s the most kind of economic risk, the most volatility of financial results, modeled results.
So, when you look at our reinsurance program today, it’s really concentrated in the last three or four years and we’ve effectively captured we captured everything from 2020 and prior and are kind of holding all of that risk ourselves at this point. So, I’ve been very happy with how the reinsurance program is situated today. Obviously, you have to keep doing new deals and keep managing deals as they get older to keep maintaining the position that we have today. So, I’d expect that that we’ll continue to evaluate those things and like we have in the past and we think that they make sense for us to do, feel comfortable recapturing that season risk.
Operator
Dear speakers, there are no further questions. I will now turn the call back over to the management for closing remarks.
Tim Mattke
Thank you, Nadia. I want to thank everyone for your interest in MGIC. We will 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.
Operator
Thank you very much. This concludes today’s call. (Operator Closing Remarks).
