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Good day, and thank you for standing by. Welcome to the MGIC Investment Corporation First Quarter 2022 Earnings Call. [Operator Instructions]
Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Michael Zimmerman, Head of Investor Relations. Please go ahead, sir.
Thanks, Alexander. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the first quarter of 2022, our Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson.
I want to remind all participants that our earnings release of last evening which may be accessed on MGIC's website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and include the reconciliation of non-GAAP financial measures to their most comparable GAAP measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force new insurance written, reinsurance transactions and other information which we think you will find valuable. I also want to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and other interested parties may also find valuable. During the course of this call, we may make comments about our expectations of the future.
Actual results could differ materially from those contained in those forward-looking statements. Additional information about those factors, including COVID-19, that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K and Form 10-Q that were filed last night. If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K or Form 10-Q. This time, I'd like to turn the call over to our CEO, Tim Mattke.
Thanks, Mike, and good morning, everyone. I'm pleased to report another quarter of strong financial results that reflect the size and credit performance of our insurance in force and the continued resilience of the housing market. I am proud to be part of the team of coworkers that continues to deliver on our business strategies with the goal of creating long-term value for all of our constituents, including shareholders, customers and coworkers. Over the last 65 years, we have continually adapted to the changing needs of lenders and borrowers, but the goal has always been to help overcome the largest obstacle achieving homeownership, the down payment. After my opening remarks, Nathan will provide more detail about our quarterly financial results and capital management activities. Then before we open the line for questions, I will wrap up by discussing the current operating environment, including activities related to housing finance policy. During the quarter, we earned GAAP net income of $175 million, nearly 17% more than in the same period last year.
These strong quarterly financial results continue to reflect the improved cure rates on previously reported delinquent loans as well as the very low levels of losses incurred on new delinquent loans that we have been doing for the last several quarters. Although higher inflation and interest rates as well as various geopolitical events, including the Russian invasion of Ukraine have increased the risk to the economy. To date, we have not seen a material change in the credit performance of our portfolio. I am optimistic that the favorable credit environment we have been experiencing will continue.
Our insurance in force at the end of the first quarter stood at more than $277 million, a 10% increase over a year ago and a 1% 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. Consensus mortgage origination forecasts are being revised lower to reflect the increase in mortgage rates we have seen in the last month or so. The revisions primarily reflect refinance transactions to continue to be low for the remainder of 2022. We with only modest impact to purchase activity in 2022. And primarily as a result of this, we expect overall market opportunity for new private mortgage insurance will be smaller in 2022 than 2021. For some context, refis accounted for 20% of our total NIW in 2021 and accounted for under 6% in the first quarter of 2022 and in our current pipeline. With the current and expected level of interest rates putting the majority of loans out of the money from a pure rate perspective, we expect refinances to remain on the low end of the spectrum in 2022. So while new business opportunity will be lower in 2022 we expect the new business we write, combined with increasing annual persistency will result in our insurance in force portfolio continuing to grow but at a slower pace than last year. Taking a look at the performance of our in-force portfolio.
Our loss ratio was a negative 8% in the quarter. This result reflects two things. First, our reestimation of loss reserves on prior delinquencies resulted in favorable loss reserve development. Primarily to reflect better-than-expected cure rates, our loans that became delinquent in the second and third quarters of 2020. Second, the number of new delinquencies in the first quarter was low, reflecting the strong credit performance of our insurance in force. I continue to be encouraged by the current business environment, the quality of new business rights and the low level of new delinquency notices, which has continued through April. We have deliberately constructed a strong and durable capital base to increase our company's long-term value to shareholders while maintaining financial strength and flexibility. We believe that our capital management strategy should provide us the flexibility to deliver on our business strategies regardless of where we are in any given housing cycle. Reflecting on the strength of our capital base in the first quarter, we not only deployed capital to support new business. We also returned a significant amount of capital to our shareholders through the repurchase of 8.5 million shares of common stock for $128 million and the repayment of quarterly stock -- common stock dividend of $26 million.
Our Board also declared an $0.08 per share dividend payable on May 26, 2022. We've also repurchased $57 million of our 9% junior convertible debentures due in 2063. And which eliminates approximately 4.4 million potentially dilutive shares. Nathan will go into more detail on these actions in a minute. To wrap up, while the tragic geopolitical events at [indiscernible] and Ukraine have added increased risk to the domestic economy, that was already contending with higher inflation and interest rates. We believe that our financial strength and capital flexibility, combined with the quality offerings and superior customer service put us in the best position to achieve success. We believe that the risk/reward equations that the current business conditions offer continues to be attractive, and we are excited about the future. With that, let me turn it over to Nathan.
Thanks, Tim, and good morning.
As Tim mentioned, we started 2022 with another quarter of exceptional financial results. In the first quarter, we earned $175 million of net income or $0.54 per diluted share. During the quarter, we generated an annualized return of 14.4% on beginning shareholders' equity. On an adjusted net operating income basis, in the first quarter, we earned $0.60 per diluted share a 43% increase from the $0.42 per diluted share in the first quarter last year.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release, but the primary difference in the first quarter of 2022 and was the loss on debt extinguishment that I will discuss in a minute. We routinely disclosed the amount of book value per share that results from the unrealized gain or loss position of the investment portfolio. While higher interest rates are a long-term positive for the earnings potential of the investment portfolio and for book value growth. In the short term, as a result of the rapid move higher in interest rates over the last several months, Book value reflects a negative contribution of $0.39 per share at March 31, 2022, down from a positive contribution of $0.47 per share at December 31, 2021, and $0.53 per share at March 31, 2021.
Book value ended the quarter at $14.75, 6% higher than a year ago. During the quarter, total revenues were $295 million, relatively flat with the $298 million last year. Net premiums earned were $255 million in the quarter, the same as last year.
The in-force premium yield was 40.0 basis points in the quarter, down from 40.7 basis points last quarter. We expect the in-force premium yield to continue to decline throughout 2022 at approximately the same pace as we saw in the first quarter as the older policies continue to run off and are replaced with policies that generally have lower premium rates. The net premium yield for the first quarter was 36.9 basis points down 0.4 of a basis point in the quarter.
On the reinsurance front, as we discussed last quarter, we placed both an additional 15% quota share on our 2022 NIW, bringing the total quota share to 30% and a 15% quota share on our 2023 NIW. In April, we also completed another ILN transaction, which covers nearly all of our policies written from June through December of 2021. The is expected to result in approximately $470 million of capital relief under PMIERs. During the quarter, operating expenses were $57 million compared to $51 million for the same period last year. As we discussed last quarter, the majority of the year-over-year increase was a result of investments we are making in our technology and data and analytics infrastructures, which are already paying dividends.
We still expect full year expenses will be in the same $225 million to $230 million range we indicated last quarter. Shifting over to credit. Net losses incurred were negative $19 million in the first quarter compared to $40 million in the first quarter last year. New delinquency activity remains very low, continuing to account for fewer than 1% of the loans insured at the start of the quarter. In the quarter, we received approximately 10,700 new delinquency notices, which is essentially flat to the number received last quarter and is 18% fewer than the number of notices received in the first quarter of 2021.
We are encouraged by the continued resilience of the housing market, favorable employment trends and the positive credit trends we are experiencing, including the low level of early payment defaults and believe they are good indicators of near-term credit performance. In the quarter, the estimated claim rate on new delinquency notices was approximately 7.5% as it has been for the last several quarters. In the quarter, our reestimation of loss reserves on prior delinquencies resulted in $56 million of favorable loss reserve development compared to immaterial development in the first quarter of last year.
The reestimation of loss reserves was primarily related to the cure activity on delinquencies received in the second and third quarters of 2020, what we call the peak COVID period. The cure activity has exceeded our expectations, and as a result, we have adjusted our ultimate loss expectations down. We are hearing from servicers that foreclosure activity is beginning to increase as COVID-related moratoriums come to an end. And as a result, we expect claim activity to increase over the next several quarters from the $9 million we reported this quarter.
Next, I want to spend a couple of minutes talking about the capital actions we took during the quarter. 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 the strategy we previously discussed, we repurchased 8.5 million shares, about 3% of the beginning shares outstanding were $128 million, and we paid an $0.08 per share dividend for a total of $26 million.
During the quarter, we also repurchased an additional $57 million in principal amount of our 9% junior convertible debentures due in 2063, which eliminated approximately 4.4 million potentially dilutive shares and reduced our annualized interest expense by $5 million.
We also repaid MGIC's $155 million Federal Home Loan Bank advance during the quarter. Combine these debt repayments reduced our debt-to-capital ratio to approximately 17% at quarter end. We expect to continue to delever over time and to approach a longer-term debt-to-capital ratio in the low to mid-teens. At quarter end, our holding company had $409 million of liquidity, and we continued our share repurchase program in April, repurchasing 3 million shares for $40 million, and we repurchased an additional $10 million in principal amount of the debentures. The Board also recently declared an $0.08 per share dividend payable on May 26. At quarter end MGIC had $2.4 billion of available assets in excess of the PMIERs minimum requirements or its efficiency ratio of 167%. MGIC's level of PMIERs excess increased during the quarter due to the strong cash flows from operations, partially offset by the increase in minimum required assets due to its growth of risk in force and the runoff of the PMIERs benefit on existing ILN deals.
As we discussed in past quarters, we expect MGIC to continue to pay dividends to our holding company but not on the quarterly cadence at which they were paid pre-COVID. And we did not pay a dividend from MGIC to our holding company in the first quarter. At the end of the first quarter, MGIC's capital level exceeded our target level and was further bolstered by the ILN transaction that closed in April. Reflecting this robust capital position, we have received approval to pay a $400 million dividend from MGIC, which will enhance the holding company's liquidity position as we continue to execute on our capital management strategy. We continue to believe that our balanced approach to maintaining a strong capital position, including using forward commitment reinsurance treaties, and accessing the capital markets for excess of loss reinsurance via ILN transactions, provides flexibility to maximize the long-term value of both the writing company and holding company. This value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock. And with that, let me turn it back to Tim.
Thanks, Nathan. Before moving to questions, let me address a few additional topics. The federal government through various agencies, including the FHFA, CFPB and the FHA continues to focus on tilting policy efforts on promoting equitable access to sustainable and affordable housing mitigating for closure and addiction risk for homeowners impacted by COVID-19 and ensuring a successful economic recovery as opposed to making large-scale changes to the housing finance infrastructure. We will continue to advocate for the increased use of private mortgage insurance and the housing finance industry in order to reduce taxpayer exposure to housing, while still maintaining a resilient housing finance system.
At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income first-time homebuyers. We had a very successful quarter $19 billion of new business through our in-force book generated $175 million of net income, delivered a 14% return on equity, reduced our leverage ratio and continue to reduce the number of potentially dilutive shares outstanding. I'm encouraged about the future role that our company and industry can play in housing finance as we are organized solely to provide credit enhancement solutions to lenders, borrowers GSEs and all economic cycles.
Our industry offers many solutions and a great value proposition for lenders and consumers to overcome the #1 barrier to homeownership, the down payment. In summary, while there is some potential for increased risk to the economy, the current housing and employment markets remains sound, and we have a book of business that is generating a low level of loses and supported by a strong and durable capital base with a low debt-to-capital ratio, investment portfolio of nearly $7 billion contractual premium flow and a robust reinsurance program.
I am confident in our positioning in this market, and we like the risk-reward equation that the current conditions offer. We have the right team in place and our commitment and ability to help borrowers achieve their dream of homeownership is as strong as ever. This is our commitment and ability to deliver competitive offerings and best-in-class service to our customers and to generate strong returns for our shareholders. With that, operator, let's take questions.
[Operator Instructions] We have your first question from Mark Dwelle with RBC Capital Markets.
First, I wanted to clarify, Nathan, your commentary on the average premium expectation that it would decline about the same amount as for the rest of the year did in 1Q. Are you referencing the in-force yield, which was down 70 bps, the total direct premium, which was down more like $140 million or the net premium yield, which is down only 40 bps?
Mark, it's Nathan. I was referencing the direct yield. So the number that went from 40.7 basis points down to 40.
Okay. Okay. That -- I guess a follow-up on that. It seems a little bit more favorable than your commentary on the last call. I think you ended we might expect to see more like roughly 100 basis points of pressure a quarter for the full year? Is the outlook improving a little bit relative to kind of what you're seeing last quarter?
I think that there's a couple of things at play. I mean, one, there's less refinance business in the market right now that's happened more quickly than we would have expected. So the in-force book is just turning over a little slower. Persistency has come up faster. We did expect persistency to increase, but it's just come up a little bit faster. And I would also say that 70 basis point versus 1 basis point is probably within a range that would have been included in what I would have thought about, we guided to before. So I think whether that ends up being down 3 basis points for the full year or something between 3% and 4%, I think it's probably within the range of outcomes that we expect.
Okay. Fair enough. And then just a question on your claims severity. It looks like you've been getting the benefits of the significant HPA, the average claim is down to fair amount year-over-year. And you referenced that there was a favorable development around reserves, I think, related more to the claims rate. But can you just discuss kind of the implications for reserve levels here if we continue to see kind of just the average claim size trend lower?
Sure. I think – what we’re seeing right now is the delinquent loans that are being resolved that are resulting in claims are those that are going generally through a non-foreclosure path. So we’ve kind of always seen better mitigation rates on those, things like deed in lieu of foreclosure or short sales. We do expect that foreclosure activity will pick up, and we will start paying more of the percentage option, which has a severity closer to that 100% level over time. But – so I think we’re – don’t think that the most recent activity is reflective of what we expect for the full inventory of delinquent loans.
But HPA, I think, has certainly been a benefit to the industry and to our reserve levels as evidenced by the reserve releases that we’ve had in the last couple of quarters. So if we continue to see favorable cure equity and home price appreciation, that’s something that will reflect when we’re reestablishing our estimates in future quarters.
We have your next question from Bose George with KBW.
Actually, what was your ultimate loss expectation that you're using now for those peak COVID delinquencies?
Bose, this is Nathan. I think initially, we would have been somewhere around 7%, if you go back to the initial estimates we would have set in the second and third quarters of 2020. I think combined with the development that we had in the fourth quarter of 2021 and now in the first quarter of 2022, I think you're in the maybe 4% to 5% range for ultimate losses.
Okay. Great. And then just the profit commission benefit that comes from the reserve release. Can you break that out?
You may have to follow up on that. I think it does vary by treaty, too. But I think the benefit there is really as we see less losses it comes through as increased profit commission. But on a net P&L basis, there's really not any impact because we no longer get the benefit of those ceded losses.
Okay. Great. And then actually one more for me. The normal -- what's kind of the normalized PMIERs cushion that you're going to target?
Yes. Bose, we’ve talked about kind of targeting a PMIERs excess for a number of reasons that I think pretty dynamic. So we ended the quarter with an excess level that was above our targets, which supported the dividend activity, and that’s something that we’ll continue to reassess in future periods.
We have your next question from Geoffrey Dunn with Dowling & Partners.
Nathan, and Tim, I'm curious how you're thinking about your '23 notes and bigger picture, how you think about debt leverage in the MI model considering the significant increased use of the leverage offered by reinsurance and ILNs. Do you think you want to look to retire the '23s or is it still a business model where you maintain a mid-teens debt to cap?
I’ll take that to start, Geoff, Nathan is kind enough to let me speak on this one a little bit, but he can fill in the details. I think your question alludes to something that we’ve been thinking about for a while is with some of the leverage you can get from reinsurance question is what should we have from a debt leverage standpoint. But I think it’s fair to say that we’ve been aiming lower. At least one of the rating agencies has guided sort of sub-15 debt-to-cap ratio, and that’s something that we’ve been focused on. So when it comes to the ‘23 specifically, that gives us some options to think about either refinancing rolling some part but paying back a chunk of it. And obviously, as interest rates have moved, we've started to look more closely at that as the time horizon doing those come due, it’s coming closer. But we’re thinking about that along with the 63, which obviously takes out dilutive shares as well, but that’s part of the deleverage to paying back the Federal Home Loan Bank.
I think that’s all our view of generally being lower on a debt leverage basis, recognizing that the reinsurance in our mind is cheaper, cheaper, than the debt leverage and it’s at the right level, being at the insurance company that we can pay the premiums from. It also gives us [indiscernible] protection, especially in downside sort of stress scenarios.
We have your next question from Doug Harter with Credit Suisse.
Can you talk about your expectations for investment income?
How long the rise in rates we saw in the first quarter kind of takes to meaningfully flow through the portfolio?
Sure, Doug. It's Nathan. I think in the same way that the kind of decrease in rates didn't come through the portfolio immediately. We're not going to see the increase in rates come through immediately as well. I think reinvestment rates for us have been north of 4% recently, which is, I think, is great long term. But we've got a portfolio with a duration of about 4 to 5 years. So that's not going to turn over overnight, certainly. But we do generate a lot of positive cash flow and also a lot of investment income and paydowns and maturities.
So I think we're excited about the opportunity to get to reinvest at these market rates.
And then can you talk about kind of how your targeted returns for the MI business has factored in investment yields and whether this environment potentially provides upside to that?
Yes, this is Tim. I think when we try to think about our returns, we try to think about them of not having sort of risk associated with investment yield. And so we try to strip out sort of investment income, if you will, from that equation overall and just try to look at the risk we’re taking associated with the mortgage itself. Not to say that from an overall GAAP basis, it doesn’t help us. But I think when we think about how we price the risk, higher interest rates generally don’t sort of dictate sort of investment rates don’t really dictate the change in pricing philosophy for us on the actual mortgage loans.
I'm showing no further questions at this time. I would now like to turn it back to the management for any closing remarks.
Sure. Thanks, Alexander. Just wanted to take this moment, as we previously announced, Mike Zimmerman plans to retire after 27 impactful years at MGIC. Mike mentioned this morning, this is the 77th earnings call. And while it will still be with us for a little while, I want to take something to you to recognize that before we welcome Diana Higgins on our Q2 earnings call. I think I speak for a lot of people at MGIC both now and those that have proceeded me I express my gratitude for Mike, first calls contributions to MGIC over that time.
Mike's been trusted confident for me and for those who came before me, Mike pretty much saw everything during his time at MGIC and handle the situation with a professionalism that's second to none. And he also found a way to have fun in the process of doing it. So I thank them for that. It's truly been a pleasure for me. And while I miss his camaraderie at work, I know the memories and friendship will ask pass this time at MGIC. So thank you, Mike.
Thanks, Dan. Appreciate that.
And with that, Everyone, have a great day and appreciate your interest in the company.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.