MGIC Investment Corporation (MTG) Earnings Call Transcript & Summary

Good morning, and thank you for joining us. I'm Barclays Consumer Finance Analyst, Mark DeVries, and I'm pleased to be joined by MGIC's CEO, Tim Mattke; and Head of Investor Relations, Mike Zimmerman. We'll be doing a hybrid presentation, leading off of some introductory comments by Tim, followed by a fireside chat, but we'll break it up with some polling of the audience. And we'll also leave time for any questions that come in from the audience during this session. [Operator Instruction]. Before we start off with the prepared remarks, I'd like to lead off with the question for the audience. To participate, please click-through to the polls on the left side of your screen. After you respond, you should be able to toggle back to the video of the discussion.

Turning to that first question for the audience. What do you view as the biggest catalyst for MTG over the next 12 months? Credit metrics performing better than expected, stronger-than-expected NIW, increased pricing, driving premium, higher or other? With that first question out of the way, I'm going to hand it off to Tim for his comments. Tim, the floor is yours.

Sure. Thanks, Mark. I appreciate it. And again, I hope everyone is safe and healthy. Obviously, interesting times. And I know everybody has unique circumstances. So appreciate your interest this morning. And as Mark said, we'll have some brief comments followed by a fireside chat. And so we'll kick it off here. MGIC Investment Corp., again, forward-looking statements there. Just to keep in mind as we go through the presentation, but I'll sort of turn to the next page here and give you an overview for MGIC. We're the nation's oldest private mortgage insurer, founded in 1957 by Max Karl, we view as founding the Modern-MI Industry right here in Milwaukee, Wisconsin, where we're still headquartered. We have over $230 billion of insurance in force. And we do that with around 750 employees, which includes very experienced sales and underwriting team covering the United States. What we do, again, in a nutshell, we take first loss credit position on low down payment residential mortgages. So think of it as if you can't put 20% down when you're purchasing your home, you're likely to get private mortgage insurance. And you're likely to get that in 1 or 2 forms, either from the government, which is the FHA or VA programs or from private mortgage insurers, of which we're 1 of 6. We enabled that market to function. And we think, quite frankly, when you think about these last 6 months, I think private mortgage insurance has, once again, demonstrated their willingness to help the markets function willingness support housing markets, even in with somewhat stressful times, although as we talk a little bit more and we'll get into it, I think housing, if anything has been extremely resilient through this pandemic, it has been one of the bright spots in the economy, quite frankly. So I think that's sort of the summary on that page. Giving a little bit more specific to MGIC and our strategies. What we've done here on this page our 5 sort of core strategies are listed there in the middle of the page, prudently grow insurance in force. As I mentioned, just over $230 billion of insurance in force, which is -- are the loans that we're insuring and get a premium stream off of and pay losses regarding. The average FICO score in that insurance in force, just over 740 on the business that we're in since 2009. So extremely strong credit quality, which I would say is 1 key differentiator in the industry now versus when we went through the financial crisis. If you look at the quality of the in-force that we have as well as the rest of the industry, it's exceptional, and we think much more resilient to economic conditions. If you move left to right and go to the second column, one of our other strategies is pursue new business opportunities that improve our competitive position in the market. We've done this a few ways, I would say it's one of those things where it's not core to what we've been doing. But we've explored things like deep cover MI with the GSEs, not just us but the industry. We've been participating in the GSE mortgage insurance credit risk transfer programs, which they both have been doing for a number of years now. And again, I think we continue to make more investments in our risk-based pricing models and our analytics, which I think gives us some flexibility as different programs that GSEs might put out for different ways to take mortgage credit risk comes about, we're well positioned to do that. If you move again more to the right, preserve and expand the role of MGIC and Private MI and housing policy. Private MI has a meaningful share of the high LTV market, as I said, we, as an industry, compete against sort of FHA and VA and it's been a relatively steady sort of state over the last couple of years. Little ebbs and flows and a lot of times with Refi activity. It can move on you, but it settled in pretty good to a solid market share. And quite frankly, a part of the market that I think our industry is very happy to serve. And from MGIC's perspective, we've been approximately 19% market share within the private MI space. In the first 6-months of 2020, pretty consistent between Q1 and Q2. So getting our -- a little bit more than our fair share of the market. Very happy with the risk return, we're able to get off of the business that we're writing even in the face of everything that's going on sort of in the current environment. Again, moving to the right, and I won't belabor too much, but an important part of us the insurance company is thinking about how we deploy our capital to maximize our long-term value. The things I'd point out there is we are currently paying a dividend of $0.06 quarterly dividend to shareholders. We have continued to do that during the pandemic our book value increased per share by 13.7% year-over-year. Our PMIERs compliance, and I'll get into this a little bit more detail, continue to have an access over our PMIERs requirement. And so feel really good about our capital position. As I said earlier, feel good about us being able to deploy capital into this market and get a good risk-adjusted return. And then the last thing, and it's there just because it's sort of the bedrock of what we do. But foster an environment the best positions our people to succeed. Even though as a company, we'll continue to become more data-driven and more focused on those data analytics, the people are what sort of make us work, and it's always been the case at MGIC. So we continue to invest in our people, which is important for all cycles, and that's one of our cornerstones of our strategy. So flipping to the next, and I won't spend much time on this slide, but really just again, for high level organizational structure of MGIC. We have a holding company structure, and we have our primary flagship insurance company and mortgage guarantee insurance corporation, or MGIC, which is below it. So if the holding company, really think about that as where we have issued debt. Our shares are issued and where we're paying the shareholder dividend out of. And below that is MGIC, which is where we're writing all of our flow mortgage insurance where the PMIERs are relevant and where we've -- historically, the cash flows have been generated for us to be able to upstream to the holding company, so Holdco. We've got some other insurance entities that are listed sort of in summary there. MGIC Reinsurance Corporation of Wisconsin, which as of June 30, at about just under $250 million of statutory capital that wasn't included for PMIERs. And so we have some extra sort of, I guess, levers you can pull to create excess PMIERs at MGIC. So I'll move on to the next slide, because it gets a little more detail on the capital position. But as I mentioned, we feel like we're in a really strong position relative to PMIERs, 132% sufficiency ratio to PMIERs, in excess of $1.1 billion and that actually grew in Q2. So just think about it in the face of the current pandemic, the spike in delinquencies, we were able to actually grow our excess over PMIERs during Q2. By our actual PMIERs assets growing by about $200 million and our requirement growing by $100 million for a net $100 million increase. And again, I think, even that's what makes a little bit, I think, us a little bit unique and that we're growing based upon our cash flows, pretty strong PMIERs assets for the -- I'd expect for the rest of this year. And that helps us generate some of the capital we need, even as delinquencies have risen from where they were at the end of the year, although they've been relatively stable recently, and that's a good thing. Statutory capital, again, looking at state regulators. We have a $2.9 billion excess requirement there. And so again, when you hear us talk about capital, you'll probably hear us talk more regularly about PMIERs because that's more of a binding constraint than the state capital requirements. The other thing I want to mention, in August of this year, we did issue some debt at the holding company. $650 million of 8-year senior notes at 5.25%. From our perspective, it's really just an opportunity to take advantage of a market that we saw, effectively buy back some of the debt that we had outstanding, push out some of the maturity. We weren't quick to do it as the pandemic came onboard because we didn't think that there was anything necessary in the short term. But as the market became a little bit more favorable to us as far as the tenor and the interest rate on it, I thought it was an opportunity that was, quite frankly, a little bit too good to pass up and took advantage of that. And that's help booster our holding company cash as well and gives us some flexibility on top of us being able to push out some of the maturity of the debt at the holding company. Moving on to the next slide. Really, what this slide is telling the story of is, I mentioned earlier, that greater than 740 FICO on our insurance in course of 2009, but this chart is the required asset as a percentage of our risk written under PMIERs. And so we can see that happening as trending over time going back to December of 2015 to the most recent quarter here in 2020. Their requirement sort of bounces around but is it 7.3% of the risk written sort of at the beginning of this chart, it's down to 6.2%. And you can see that the significant drop, especially from December 2018 through now. And again, part of that is a reflection of the credit quality of what we're writing over the last year, especially when defined based upon PMIERs, which is a risk-adjusted sort of capital requirement. And so I think that should give you some comfort as to the credit quality that we've been writing, quite frankly, the 7.3% was excellent credit quality as well. But even over the last year, you could argue that the credit quality has been even better based upon the metrics of PMIERs measures. And the other part of the two, quite frankly, is when you think about us being able to deploy our capital and write business, the fact that we're able to have hold less capital against the business we're writing, allows us to write more business at that high quality. And so those two things sort of combined, I would say, are the main takeaways from this slide that would want to make sure that you understand. Moving forward, from a risk management strategy standpoint, we, like others in the industry, have really focused on not only writing the business, but how do you manage the risk that you're writing? Going back to 2013, we've been involved in a quota share reinsurance with traditional reinsurance markets. I would say, quite frankly, upfront, it was capital driven as much as anything. But whenever you have reinsurance place, it also gives you some mitigation against events that could happen that can have losses. Whether it be a tail event or whether it be something that's quite -- not quite to that sort of significance. So I think the way we've looked at it is, it's not just capital relief, although it is -- can be significant benefit of capital and increase our returns on the business we write, but also gives us a mitigation, which, again, when you go through periods like we went through back in March, April, May of this year, when people are concerned about how many delinquent notices would you get, what's going to happen with the economy? It really helps us not be worried about those tail events because we know we would see a portion of our losses. But I think the important thing to know is we are still a risk manager. And so we are focused on not just being able to bring on business and distribute it out, we're focused on taking on the risk that we think are prudent from a risk-return standpoint. And if we're able to take advantage of different structures, whether it be the capital markets and an ILN structure, which we've done. Or whether it be traditional reinsurers that we've normally used more on a forward commitment basis and been able to use quota shares on that. That's a good way for us to shed the risk, but we don't want to take on risk that we wouldn't feel comfortable holding. And so as the market on the Island, in particular, sort of seized up a little bit earlier this year with what was going on with the pandemic, we felt very comfortable retaining the risk that we had. That doesn't mean that we want to take advantage of those markets as they open up and become a little bit more favorable from a pricing standpoint to us. But again, I think it's important to note that we don't consider just taking on risk to distribute it such that if those markets aren't open, that we aren't happy with what we have on the books, it's quite the contrary. It's more that we make sure upfront that we're happy with the business we're bringing on. And if we're able to take advantage of those markets and distribute some of the risk, we're going to take advantage of that. We do have in force a 30% quota share in our 2020 business already. And looking ahead to 2021, we'd already locked up on similar financial terms, a 17.5% quota share. So again, felt really comfortable as we went through the early days of pandemic that we had enough sort of firepower to write the business that we want to write, not just this year but next year. And the quota share, quite frankly, is a big reason why we've been able to feel comfortable doing that. So moving to the summary and now I want to leave time, obviously, for the fireside chat with Mark. MGIC, we're an established market player, significant scale. Had mentioned our low expense ratio. But again, investing in this in this platform over time. We feel like we have a very efficient platform, high-quality insurance in-force portfolio. A very attractive credit risk characteristic. Strong earnings pre-COVID and even in light of COVID, obviously, Q2 a little bit more challenging. But effectively breakeven and feel pretty good about, again, housing as we move forward here, being very resilient and seeing a lot of demand, quite frankly, for housing, probably even stronger coming out of this than it was even going in, and it was quite strong at that point. Significant reinsurance coverage again, to help from our capital standpoint and reduce the tail risk. And substantial holding company liquidity, which was, I think, good, but it's exceptional now, by being bolstered by what we did in August. So with that, I'll close my comments and Mark, look forward to chat with you.

Okay. Thanks, Tim. Before we get to Q&A, I'd like to slip another question from the audience.The next question from the audience. What do you view as the biggest risk to the shares, deteriorating credit, weaker-than-expected NIW, lower-than-expected persistency, potential tax raises in 2021 or other? Now we'll move on to the fireside chat portion of it. My first question, Tim, is actually around one of the slides you just presented on that. Decline that you've seen in the required assets on the risk you've been writing? It looks like it really happened in last year. Can you give us some more insight as to kind of what actually drove that? Was it implementation of the new pricing engine and different pricing of different risk buckets? What was kind of behind that migration?

I think there's a number of factors there, Mark. I would say that the pricing engine is one aspect of it for sure. That's when we sort of came on board in the industry definitely it became, I guess, more heavily using the pricing engine. I think from our standpoint, I think the rest of the industry would say this as using that risk-based pricing engine, we always assume that you'd be able to be a little bit more selective on what we're doing, probably get a little bit sort of risk-adjusted return better. I think that's one part of it. I think the other part of it, two, is we live within a market that is very GSE centric. And I think some things that were being done at that time to GSEs at that time to sort of tightened credit box a little bit. Again, these are all relative. I mean, it's a relatively big number. But I think you saw that happen as well as the GSEs tightened the credit box a little bit. So one, the market that we're in, I think I would have brought that down a little bit, and I think that in conjunction with the risk-based pricing engine, sort of was the guidance to where we were.

Mark, just to give you a little more -- a specific example of that, for example, you'll remember last year what the debt-to-income ratio is above 45%. Where we have led the industry put in the initial overlay on those. They're about the same as Freddie and Fannie followed and then as Tim said, with the risk with the engines, it's really the better able you to analyze and measure that layered risk characteristics. So getting rid of multiple factors on loans has been a big driver over, say, the course of 18 months as well. And kind of see that in our fresh statistics as well. But just a little bit more in the weeks ahead.

Great. So MGIC had a record NIW quarter in 2Q, while maintaining share in what was a challenging environment. Any color you can provide on how NIW has trended so far in the third quarter?

Yes. Mark, I would say trends in Q3 still remain strong. Looking at sort of the volume that we're seeing in NIW in July, August and early part of September, I think, tracking a lot what you're seeing from the broader economy, whether it's what you're seeing the MBA put out. Refis have come down a little bit. They're not as much of the market as they were in late part of Q1, early Q2 for the NIW, which is generally good for the industry. And that story is still to be written with low interest rates of how much more refi activity might still be out there. But I would say looking at Q3 volume, still view it as very strong, comparable, I'd say, to Q2. And that's a good thing, especially where it's a little bit -- I think, my sense is a little bit more purchase-centric.

Okay. Got it. What does the origination environment look like for high LTV loans relative to the broader strength across the mortgage market? Do you have a sense of how many borrowers are able to refi out of PMI? Is that starting to increase a little bit more than it did, let's say, 6 to 9 months ago?

It's tough to know that exactly. I would say, we look at a couple of things. We look at not the business that we're writing, so the NIW you're talking about before, but what our persistency rate is. And then the output of those two being sort of our end force. And I was happy that we saw a tremendous amount of growth in the NIW in Q2, but you know we saw the persistency drop down pretty significantly. We still grow the book mid-single digits. And my expectation is we're probably still in that market right now of sort of mid-single-digit growth for insurance in force book, which tells me we're losing a little bit with the refi activity but not losing as much. Just I think the home prices aren't depreciating at the same rate. And so I think it's more common right now. Someone is refying. They're refing with MI back in MI versus in a lot of markets, quite frankly, when the refi happens, the refing out of MI. There just hasn't been the same type of home house appreciation in our part of the market to sort of allow that to happen on a wider scale.

Okay. Got it. How should we expect the recent price increases to flow through to the premium yield following what has been several quarters of kind of declining yields?

It's -- as you know, the premium yield being able predicted, there's a lot of factors. We just talked about persistency. The one thing I guess I would sort of caution. I think when we -- all the industry talked on their Quarter 1 earnings call about sort of seeing prices go up. And I think Q2, most people said, it's moderation. There's not probably big changes one way or the other. I think the important thing to note is we had a downward trajectory on the premium yield because of some of the old books of business running off, even with the sort of change in premium that we saw happening in Q1 those rates weren't higher than sort of the old book of business that was sort of falling off. And so I think I'm very happy that I saw prices go up in light of what was happening in the market at that point. But what I would say is I wouldn't expect it to be -- it's not going to change the, I guess, the direction of the premium yield. It obviously can change a little bit the trajectory on how quickly it goes down. But a lot of that comes down, we're just talking too about the credit quality that we're writing right now. The better the credit quality, the lower the premium, better toward pressure on it, but obviously, is good from a loss perspective and overall P&L and return perspective.

Yes. So have you guys observed any kind of noticeable shift to the FHA in recent quarters as a result of the fact that they don't really risk-based price, and the private MI industry is moving towards more granular risk-based pricing?

I would -- and Mike, feel free to chime in. I would say nothing noticeable. I think there's marginal things and in different refi environments. You can see a little bit of movement in market share between the private and the public. But I would say, based on the risk price pricing engine, I don't think the industry has lost a lot of what we want to get. Is my perception of it.

Yes, Mark, that's -- I was just going to add, too, when you look at where kind of again go back to the chart on the required assets, right? I mean those are on a relative basis, a much higher quality than the FHA. So there's -- we're getting to what we want. Most of the adjustments and see. I mean it's not that bright of a line, but if you use that analogy of bright line, 680 and higher is kind of where the adjustments are going on. But for the most part, it's in more -- a higher quality side. So there's still some reticence with the lenders over with FHA and trouble damages and things like that, that still have to be worked. And so I think it's really more a function of what the purchase market, we're still gaining a marginal share because of the incremental buyers that are coming into the market, but supply is still the biggest. But no real debt changes the dynamics FHA. Yes, is that certainly better given the population there and 100% lending.

Okay. Got it. Do you guys have any concern with the FHFA looking to increase capital requirements at Fannie and Freddie above even the kind of the initial proposal, that this could translate into more -- if the FHA doesn't move their goalposts at all that this moves share back towards them as the GSEs are inevitably required to kind of move their GSEs higher.

Yes. I would say it's a concern we have of what the GSE's footprint is. And obviously, with the enterprise capital framework that is in draft form. I think there's a lot of parties, including the GSEs on record that they might have to raise G fees and it could increase the cost of the consumer. And so the natural thought is to think about so where might consumers go other than the GSEs at that point. And again, as I mentioned earlier, a large percentage of our business is GSE market driven. So it's a concern. I don't -- I saw a lot of comments that really spoke to that of whether it was the right amount of capital. It feels more bank-like than -- and there's a lot of -- I think a lot of thought went into it, and there's a lot of sorts of calculations and risk-based sort of calculations for the capital, but then it seems like the leverage ratios end up sort of being the NLB in most cases. And so I think those are valid concerns about what that will do to the market. So it's something we're paying close attention to. I would say it's risen to the level of where, obviously, we want to see where that goes. But I guess I'd be a little bit surprised if I didn't see some tweaks coming out of that. But again, that's no inside information. It's just I think, again, I think FHFA will take all the considerations that they get in the comments and sort of digest them and figure out if there's any changes that should make to it.

Okay. Got it. Is there any update you can provide us on your delinquent loan portfolio and also what percentage of those borrowers may be in forbearance per half?

Mark, it's typical. So we actually put out the August statistics. So that's looking at borrowers that missed their July 1 and August 1 payments but when reported to us in the month of August. So kind of two payments past due. So the notice activity took another step down, which was drilling courage. I mean it's still pre-COVID, we were probably, call it 3,000 or 4,000 new notices a month. And so it's still higher, but obviously, trying to get in the right directions, pleased with that. From the forbearance side of things, it's still -- new notices coming in is probably around 60% of the new notices. But about 2/3 still of the existing the 60 some thousand delinquent notices, 2/3 of those are in forbearance. I mean it's interesting. We have -- in our trial area and loss mitigation area, servicing relationship managers. And we're in ILOG and obviously, contact with the servicers because it is somewhat interesting that you see a level of delinquencies, only 60% being in forbearance. But now keep in mind, for us, we still have some of the legacy business. And it's really the mix that's coming in. So I wouldn't say that the legacy -- I wouldn't -- don't read into that, that the legacy business is now deteriorating more. It actually outperformed. The 8 and prior outperform based on the number of notices. But the mix is shifting back to where it was pre-COVID and a little bit more weighted towards the inventory coming in is a little bit more weighted towards the 8 prior, which drives down that forbearance because they're not as eligible. But overall, that's kind of where we stand. I'm really encouraged by it, but continue to watch these data points come in, but they are so good, and it's been very favorable.