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spk08: Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation third quarter 2022 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. To ask a question during the session, you will need to press star 11 on your telephone You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I will now turn the conference over to Diana Higgins, Head of Investor Relations. Please go ahead.
spk00: Thank you, Kurt. Good morning and welcome, everyone. Thank you for your interest in MGIC Investment Corporation. Joining me on the call today to discuss our results for the third quarter are Tim Mackey, 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, 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 and 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 8K and 10Q 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 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 8K and 10Q. With that, I now have the pleasure to turn the call over to Tim.
spk04: Thanks, Diana. Good morning, everyone. I'm pleased to report that we had another strong quarter and continued the solid financial results we delivered in the first half of the year. During the quarter, we remained focused on executing our business strategies, including providing critical support to the housing market by making it easier for individuals and families to achieve affordable and sustainable home ownership. We'll get into more details on the financial results throughout this call, but in summary, we once again demonstrated the strength of our capital position by continuing to grow our insurance in force, paying a common stock dividend, decreasing our leverage ratio, repurchasing stock, and producing an annualized 21.8% return on equity. In the quarter, we earned $250 million of GAAP net income. Insurance and force at the end of the quarter stood at more than $293 billion, a 9.4% increase from a year ago and a 2.4% increase from the end of the second quarter. The growth in insurance and force during the third quarter reflects an increased persistency rate. Taking a look at the performance of our enforced portfolio, our loss ratio was a negative 41.7% in the quarter. This reflects the loss reserves established on the number of new delinquencies reported to us in the quarter, more than offset by a re-estimation of ultimate losses on delinquencies in prior quarters. In addition, approximately 60% of our insurance enforced is from the 2020 and 2021 book years, and the credit quality of those books remains strong. To date, we have not seen a material change in the credit performance of our portfolio overall. We remain encouraged by the positive credit trends we are experiencing on our existing portfolio. In the quarter, we not only deployed capital to support new business and grow our insurance in force, we used our holding company's strong liquidity position to redeem our senior notes due in 2023, reducing our leverage ratio and future interest expense. We also paid a quarterly common stock dividend, and we purchased 6.1 million shares for $84 million. Additionally, in October, our board authorized a $0.10 per share common stock dividend payable on November 23rd, and we repurchased an additional 2.5 million shares for $33 million. Earlier this week, the operating company paid a $400 million dividend to the holding company. The dividend enhances liquidity position of the holding company and the financial flexibility of the company overall. Retiring debt and delevering has been a significant use of holding company cash in the past year. but with our debt-to-capital ratio near our target and with the expectations of a challenging economic environment in the near term, we expect to retain higher levels of liquidity at the holding company. In light of the current environment, let me take a few minutes to further discuss our capital management strategy. First, our capital management strategy is dynamic, and we strive to be prudent and thoughtful in our capital allocation decision-making. This is particularly important as we navigate changing economic environments. We routinely consider the level of capital of both the operating company and holding company including the level of capital that we retain for future deployment versus return to shareholders and other capital providers. Our balanced approach for maintaining a strong and flexible capital position involves the use of several types of reinsurance, including forward commitment quarter share transactions and excess to loss transactions in both the traditional reinsurance market and the capital market through our ILN transactions. This approach is designed to maximize the long-term value of both the operating company and the holding company. We began entering into quota share reinsurance agreements in 2013 and have entered into ILN transactions covering most of our 2016 through 2021 books of business. And as mentioned during last quarter's call, in April we completed our first excess of loss transaction in the traditional reinsurance market, which will cover most of the policies written in 2022, in addition to the 30% quota share we had in place to cover 2022 NIW at the start of the year. In addition to diversifying our sources of capital, These transactions reduce the volatility of losses in weaker economic environments and have the potential to enhance our returns. Before turning it over to Nate to provide more details on our financial results and our capital management activities, I would like to share a few additional thoughts on the current environment. First, the volume of mortgage originations has continued to decline due to the rapid increase in interest rates over the past few months. As I mentioned last quarter, the overall market opportunity for new private mortgage insurance is smaller than the record volumes of the last two years. We expect new insurance written volume to remain high by historical standards, but this year's volume will be behind the record set during the last two years. While our new insurance written is slowing, persistency on our insurance and force continues to increase, extending the existing revenue stream. Persistency increased to approximately 76% at the end of the quarter, up from approximately 72% at June 30th. As a result, our insurance and force portfolio continues to grow, albeit at a slower pace. As many of you are aware, persistency, along with the insurance in force, are two long-term drivers of future revenue. Lastly, affordability challenges and the significant increase in interest rates have put downward pressure on home prices. Annual home price growth remains at historically high rates, but the rate of growth is softening in some areas and declining in others. While decreases in home values have the potential to increase our losses, the strong credit quality of the 2020 and 2021 book years and the equity created for many homeowners due to the significant home price growth over the last couple of years should help reduce the incidence of claims on the related mortgages on much of our risk and force. Our reinsurance agreements will also help mitigate our losses. We continue to believe that a gradual normalization of home prices is healthy for the housing market and overall economy, and we are encouraged as we look forward that demographic trends suggest meaningful long-term MI opportunities. With that, let me turn it over to Nathan.
spk07: Thanks, Tim, and good morning. As Tim mentioned, we had another strong quarter. We earned $250 million of net income, or $0.81 per diluted share, compared to $158 million in net income, or $0.46 per diluted share, during the same period last year. On an adjusted net operating income basis, we earned $0.86 per diluted share, an 87% increase from the $0.46 per diluted share in the third quarter of 2021. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release, but the primary difference in the quarter was due to the loss on debt extinguishment from redeeming the senior notes due in 2023 and continued repurchase of our convertible debentures due in 2063. Book value per share decreased modestly to $15.16 as of September 30th from $15.18 as of December 31st. an increase from $14.81 last year. The modest decrease compared to December 31st was primarily the result of unrealized losses on our investment portfolio due to increases in market interest rates offset by net income. The unrealized losses are not reflected in net income but are reflected in shareholders' equity and therefore also reflected in book value per share. As mentioned last quarter, 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 $1.50 at the end of the quarter, while at December 31st, unrealized gains increased book value per share by 47 cents and by 59 cents a year ago. During the quarter, total revenues were $293 million compared to $296 million for the same period last year. Net premiums earned were $252 million in the quarter compared to $255 million last year. The decrease in net premium earned was primarily due to an increase in seeded premiums and a decrease in our premium yield, offset somewhat by growth in our insurance and force. The enforced premium yield was 39.0 basis points in the quarter, down four-tenths of a basis point during the quarter. The enforced portfolio yield reflects the premium rates in effect on our insurance in force. As we previously discussed, we expected the enforced premium yield to decline throughout 2022 as the older policies with higher premium rates continued to run off. Turning to credit. Net losses incurred were negative $105 million in the third quarter compared to negative $99 million last quarter and $21 million for the same period last year. Our review and re-estimation of ultimate losses on prior delinquencies resulted in $141 million of favorable loss reserve development in the quarter compared to $131 million of favorable loss reserve development last quarter and $18 million of favorable loss reserve development in the third quarter of last year. The favorable development in the quarter was primarily related to delinquencies from 2020 and prior. 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 3.6% to 25,900 loans. marking the ninth straight quarter of decrease from the pandemic peak of 69,300 loans in the second quarter of 2020. The number of loans in our delinquency inventory remains at historical lows and cures continue to outpace new notices during the quarter. Going forward, the level of new delinquency notices may increase due to the seasoning of the large 2020 and 2021 vintages into what are historically the peak loss emergence years. The number of claims paid remained generally flat again for the quarter. As foreclosure moratoriums and forbearance plans end, we expect to see an increase in claims received and claims paid, but at exposure levels similar to those experienced prior to the pandemic. Approximately 94% of our primary risk and force was covered to some extent by reinsurance transactions at the end of the quarter. Drilling down even further, 98% of the primary risk and force related to the 2020 and later books was covered to some extent by reinsurance transactions at the end of the quarter. The 2020 and later books represent 78% of our total primary risk and force. These transactions provide capital relief under PMIRES in addition to loss protection. For more information on our reinsurance transactions, you can find that in our 10-Q for the third quarter. Turning to our capital management activities, 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. At the operating company, it means maintaining a robust level of PMIRES access that we expect will enable growth in changing operating environments. During the quarter, the capital levels at MGIC and liquidity levels at the holding company were above our targets. As a result, and consistent with our capital strategy, we repurchased 6.1 million outstanding shares of common stock for a total cost of $84 million, and we paid a 10 cent per share dividend to our shareholders for a total of $31 million. In addition to shareholder capital return, we redeemed our outstanding senior notes due in 2023 and repurchased $14 million in aggregate principal amount of our convertible debentures due in 2063. These actions reduced our annualized interest expense by $15.2 million and reduced dilutive shares by $1.1 million and reduced our debt-to-capital ratio from approximately 17% to approximately 12%, which is in line with our target debt-to-capital level. As Tim mentioned earlier, as we navigate through the current economic cycle, We continue to remain prudent and thoughtful in our capital allocation and strategy decisions with an eye toward the long-term success of the company. At quarter end, MGIC had $2.6 billion of available assets in excess of the PMIR's minimum requirements, and MGIC's capital level was above our target. As a result of our strong capital position at the operating company and consistent with our capital strategy, We received OCI approval and paid a $400 million dividend from MGIC to the holding company, enhancing the holding company's liquidity position and the financial flexibility of the company overall. Future dividends from MGIC to the holding company will also require OCI approval. As Tim mentioned, in the near term, we expect to retain higher levels of liquidity at the holding company. Part of the reason for maintaining higher levels of liquidity at the holding company is the outlook for large future dividends from the operating company is more uncertain than in the past 18 months. We will evaluate future dividends to the holding company using a consistent framework, but if we experience a more challenged economic environment for mortgage credit, that will impact our target capital levels, which could extend the time between dividends, reduce the amount of future dividends, or retaining capital in the operating company may be preferred. With that, let me turn it back over to Tim.
spk04: Thanks, Nathan. A few additional comments before we open it up for questions. In October, the FHFA announced it will be eliminating upfront fees for certain first-time homebuyers and affordable mortgage products. Overall, we think the pricing changes are directionally positive for low- and moderate-income borrowers. At this point, we are uncertain what impact these changes will have on our business overall. However, we are supportive of the efforts to facilitate access to low-down payment lending for first-time and low- to moderate-income homebuyers. We look forward to continuing to work with FHFA and the GSEs to responsibly and sustainably expand access to home ownership. In closing, we had another successful quarter and continued the solid financial results we have been delivering. We believe that our financial strength and capital flexibility, combined with our quality offerings and superior customer service, put us in the best position to achieve success for all of our stakeholders. We have the right team in place to remain focused on executing our business objectives for the long-term success of the company. We have successfully navigated many different economic cycles throughout our 65-year history and will continue to adapt to the changing needs of our customers so that we may help borrowers overcome the largest obstacle to homeownership, the down payment. With that, operator, let's take questions.
spk08: Thank you. At this time, we will now conduct a question and answer session. As a reminder, we ask that you will need to press star 11 on your telephone and wait for your name to be announced. At this time, we now have Mark DeVries from Barclays on the line. Your line is open. Please go ahead.
spk03: Okay, thank you. Tim, I know you don't like to talk about pricing, but Could you just talk, you know, kind of directionally how you're thinking about pricing here, just given, you know, some of the macro uncertainties and also some of the pressure we're seeing on home prices here, and also kind of any observations, you know, you've made about what competitors are doing?
spk04: Yeah, Mark, I appreciate the acknowledgement that we don't like to talk about pricing. And I answered your questions in the way that I think is hopefully responsive for you. You know, I think about... Deploying capital and the returns we're required to get off of that in an environment where there's more uncertainty and more potential expectation for losses, you need to make sure that you can price accordingly to do that. I think we continue to remain focused on return expectations, and the environment that we're operating in obviously influences that. They'll feel really good about the business we wrote this quarter. As we look forward, we'll continue to adapt to what the environment is, but would rather not comment on what we're seeing from competitors.
spk03: Okay, fair enough. And then, you know, circling back to the comments you made around capital and liquidity at the holding company, should we expect the pace of capital returns that we saw this quarter to slow, or were those capital returns kind of consistent with the slightly more conservative view you seem to be taking here around liquidity and capital?
spk04: I think there's a couple things in there. One, we've been using a lot of liquidity at the holding company to repurchase debt at the same time. We got another large dividend up to the holding company. We want to make sure that the expectations aren't that all of that will roll into share repurchase. We do anticipate to still execute on share repurchase, but don't want, I guess, you to think that we're going to put all of that right into share repurchase and increase the level of that versus maintain what we think is a good level and a prudent level.
spk03: Okay, great. That's helpful. Thank you very much. Sure.
spk08: Thank you for your question, Mark. We will now bring our next person. And that next person is George Bose with KBW. Your line is now open. Go ahead.
spk02: Hey, guys. This is Bose. I just wanted to follow up on the buybacks. Are you done in terms of capital actions to reduce your debt, given where things stand now? And then just when you think about buybacks going forward, should we really think about it coming out of earnings and your leverage kind of remains stable?
spk07: I think relative to the first part of the question about debt, we are kind of at our debt to capital target, so there's no intention at this point to deliver further with the exception of the approximately $20 million of the junior convertible to ventures that are still outstanding. If we had the opportunity to retire those, we would certainly consider that. As Tim mentioned, relative to go forward capital return, we've obviously got the quarterly to shareholders in place, and then we have consistently executed on share repurchase. I think in this environment, you know, we'll be thoughtful about the pacing of share repurchase, but with the $400 million dividends of the holding company, we've got on a pro forma basis from where we were at year end, we've got about $750 million at the holding company. That gives us a lot of flexibility over the next, you know, several quarters and year.
spk02: Okay, great. Thanks. And then actually touching on persistency, you know, can you just give us any updated thoughts about where you think, you know, that could go, you know, assume that rates kind of remain at this whatever 7% plus rate, you know, for a while. What could that do to persistency?
spk04: Yeah, both. This is Tim. I think, you know, I always ground to 80% in environments where you expect maybe higher persistency. You can see that tracking up. Historically, again, I don't think we've seen persistency go above 90. I view it as easier to refinance now than probably we've ever seen historically. And then also you have to think about sort of the mix that you have within your in-force potentially impacting sort of persistency as well and things that cancel from Homeowner Protection Act, all those different types of things. So, you know, I think, you know, 80% going in that direction obviously is As we move to the end of the year, I think quarterly run rate most recently was 82%. So that seems to imply something that is in the low to mid-80s, but don't really anticipate anything much higher than that.
spk08: Okay, great.
spk02: Thanks.
spk08: Thank you so much for your question. And our next question. participant is Douglas Harder from Credit Suisse. Your line is now open. Go ahead.
spk05: Sticking with the persistency question, are you seeing any change in consumer behavior around getting appraisals to maybe look to have an early cancellation of policies?
spk04: I'd say nothing that I would do as material that's normally a very small amount of what actually causes persistency to go down or cancellations to happen, I should say. And so I'd say we haven't noticed any meaningful change in consumer behavior at this point. But the longer that interest rates stay at higher levels, you know, it's something that we keep an eye on, but I wouldn't expect that to become a meaningful portion of any of our cancellations.
spk06: Great. Thank you.
spk08: Thank you so much. As a reminder, if you would like to ask a question, please press star 1-1 on your telephone and wait to be called upon. And our next question is from Mihir Bahati of Bank of America. Your line is open. Go ahead.
spk01: Hi. Thanks for taking my question. I wanted to start with maybe just going back to your comment about, you know, reduced costs. potential for dividends from the holding company. Is that just based on the macro or is that something you're hearing from the regulators as you had these discussions with them about the current quarter or whatever?
spk07: Yeah, I'm here. It's Nathan. I think it's more of a reflection on just the more uncertain outlook at this point. The approach that we'll take is to evaluate our capital position in the future relative to what we think the needs of the business are and our target levels. I think we've been very successful when we've had capital above our target levels at getting dividends out of the operating company, but in an environment that could be more challenged, our target levels will also change as a result of that, and there just may not be as much, from our view, capital that's appropriate to dividend out in the future. It was more just calling that out, but that's a decision that we'll make in the future based on what our capital position looks like at that point and the outlook from there going forward.
spk01: And then can you just remind us, what are your target levels for capital? It sounds like the current level is the right level we should be thinking about.
spk07: We've talked about the framework that we think about is really stated in an access to PMIRES. We're thinking about a wide range of reasons why we might want to hold an access to PMIRES. So we haven't gotten into the details of exactly what that level is, but the $2.6 billion at the end of the quarter was above our targets, and that's really what prompted the discussion with the OCI and internally and ultimately the approval and payment of the $400 million dividend.
spk01: Okay. And then just my last question on expenses. Any update to your expense outlook for the year and – How should we think about next year, too, if you could just talk about that a little bit?
spk07: So, you know, full year in January, we talked about a full year, you know, $225 to $230 million range. I think owing to a couple factors, we're likely to end up, you know, at the high end or maybe just above the high end of that range. The biggest drivers so far this year are performance-based compensation due to ROE being so much higher than we would have expected are higher. And then within the 10Q, there's also some additional information, but we did have in the third quarter a settlement accounting charge related to our pension plan that generated about $6 million of expense. So, you know, those things are impacting 2022. Relative to 2023, I do expect that on our Q4 earnings call, we'll be able to provide some better guidance, put a finer point on it. But at this point, I think we're thinking something in line to slightly less than where we are in 2022. Thank you so much.
spk08: Thank you. And our next question comes from Jeffrey Dunn of Dowling. Your line is open. Go ahead.
spk06: Thanks. Good morning. Nathan, I think we have to look back to the mid-2000s for the last time we saw MIs with investment yields above 4%. Given where new money is today and the turnover of your portfolio, if conditions are sustained, could we be seeing that again within the next two years?
spk07: I think right now... reinvestment rates are actually even quite a bit higher than 4%. If you assume that those rates, the rate environment and the spread environment don't change for the next two years, I do think you would start to see the all-in book yields approaching 4% in two years. But some of that will have to do with what we want to do with the operating cash. Do we want to retain it to invest or like we've done, pay down debt or other uses of cash? But The reinvestment opportunity for kind of the strong positive cash flows that we continue to generate on a quarterly basis, we really haven't seen an opportunity like this, as you mentioned.
spk06: Okay. And then just trying to put a point on the hold code cash, have you changed your multiple target in terms of a coverage ratio formally at all, or is it still the three years of interest plus a year of divs?
spk07: Yeah, we really haven't gotten into all the details of how we think about the liquidity targets, but I think certainly with the actions that we've taken, the continued share repurchases, that's because our levels of liquidity are above our targets at the holding company. The $400 million dividend that we just paid does give us additional flexibility, but the As we've talked about more in the last year, we don't expect to pay quarterly dividends going forward. We expect them to be more ad hoc. So we need to think about the money at the holding company as being something not just for the next quarter, but for a longer period of time.
spk06: Okay. Thanks.
spk08: Thanks, Jeff. Thank you very much. There are no further questions, so I will now turn it back over to management for closing remarks.
spk04: Thanks, Kurt. Appreciate everyone's interest in MGIC. Another phenomenal quarter, and I look forward to talking to all of you in the near future.
spk08: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. We will now disconnect.
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