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Text: Joining me on the call today to discuss the results for the second quarter of 2021 are Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson.
mgic.com, under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and includes the reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
I'm pleased to report that we produced another quarter of very strong financial results.
During the quarter, we earned GAAP net income of $153.1 million.
Our quarterly financial results reflect the solid credit quality of our insurance in force, a strong housing market, a decreasing delinquency rate and improving economic conditions as many local economies return to pre-pandemic levels of activity.
We had another busy quarter as we wrote a record $33.6 billion of new business, which more than offset the pressure of lower annual persistency on our existing book of business and resulted in our insurance in force growing to $262 billion, nearly 14% higher than the same period last year.
An increasing percentage of our new insurance written is from purchase transactions, accounting for 79% of our NIW in the second quarter compared to 60% last quarter.
Our application pipeline, a leading indicator of NIW indicates this trend has continued with purchase transactions continuing to account for more than 85% of the applications received in recent months.
While NIW in the first half of the year was strong, we expect that NIW will slow in the second half of the year, primarily due to the reduction of refinance activity.
While the current supply of housing inventory available for purchase remains low, we still expect robust purchase market condition to persist.
Consumer demand for many reasons remains strong and interest rates are attractive especially by historical standards.
Home prices have been increasing rapidly given the low housing inventory and the strong demand.
We believe that home prices may be increasing for more sound reasons than in 2005-2007 cycle.
So while we do not expect broad declines in home prices we do expect that the rate of increase will slow.
These conditions along with increasing annual persistency should allow our insurance in force to continue to grow, although perhaps at a slower annual rate than we have been enjoying in recent quarters.
Taking a look at our insurance and force portfolio our loss ratio was a low 11.6% in the quarter.
This result primarily reflects the improving economic conditions, the quality of our existing book of business and the low number of new delinquency notices received.
I continue to be encouraged by the positive trends we are seeing in credit performance, which continued through July.
At quarter end, we maintained a $2.3 billion excess over PMIERs minimum required assets and our PMIERs efficiency ratio was 167% at the end of the second quarter.
Reflecting our capital position and long-term confidence in our transformed business model, a $150 million dividend from MGIC to our holding company was declared, and paid after the end of the second quarter, and the holding company Board authorized a 33% increase in the quarterly common stock dividend.
Our capital management strategy centers on maintaining financial flexibility at both the holding company and the writing company to protect our policyholders and to create long-term value for shareholders.
This value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock.
In summary, we continually look for ways to maximize near-term business opportunities, while remaining focused on the long-term success of the company.
I believe the actions we have taken prior to and during the COVID pandemic support the statement.
We have a strong and dynamic balance sheet.
We are confident in our positioning in this market and we like the risk/reward equation that the current conditions offer.
As Tim mentioned, we had another strong quarter of financial results.
In the second quarter, we earned $153 million of net income or $0.44 per diluted share and generated an annualized 13% return on beginning shareholders' equity.
This compares to $14 million of net income or $0.04 per diluted share in the same period last year.
Of course, the second quarter of last year was impacted by the material increase in delinquencies, related to COVID-19 and the associated increase in net losses incurred.
During the quarter, total revenues were $298 million compared to $294 million last year, with the increase primarily due to higher net premiums earned.
The main driver of the increase in net premiums earned, the higher profit commission earned through our quota share reinsurance transactions in the current quarter compared to the second quarter of last year, mainly due to the lower level of losses ceded in the current period compared to last year.
The net premium yield for the second quarter was 39.1 basis points, which was down 1.8 basis points compared to last quarter.
The decrease was primarily a result in the decline in in-force premium yield with the runoff through attrition of the older policies, which generally have higher premium rates.
As refinance activity decreased, we also realized less benefit from accelerated premiums earned from single premium policy cancellations.
During the quarter, they totaled $20 million compared to $28 million last quarter and $33 million in the second quarter of 2020.
Shifting over to credit.
Net losses incurred were $29 million in the second quarter compared to $217 million in the same period last year and $40 million last quarter.
In the second quarter, we received approximately 9,000 new delinquency notices, which represents less than 1% of the number of loans insured as of the start of the quarter and is 30% less than the number of notices received last quarter.
We are encouraged by the credit trends we are experiencing, including the low level of early payment defaults and believe they are good indicators of near-term credit performance.
The estimated claim rate on new notices received in the second quarter of 2021 was approximately 7.5%, compared to approximately 7% in the second quarter of 2020.
The reserve for incurred but not reported or IBNR increased by $4 million to approximately $24 million compared to an increase of $30 million in the second quarter of 2020.
The increase this quarter is primarily due to the recording of a small loss related to some lingering litigation associated with policy disputes from several years ago.
A review of loss reserves on previously received delinquent notices, determined that there was immaterial loss reserve development in the quarter compared to $10 million of unfavorable development in the second quarter of last year.
Barring any material economic shocks, it appears that the second quarter of 2020 was the exception rather than the rule, regarding the credit losses related to the pandemic.
While we have seen cure activity from the large cohort of delinquency notices received in the second quarter of 2020, we have not yet seen enough evidence to make any reserve adjustments on these COVID-related delinquencies.
Of the approximately 43,000 loans in our delinquency inventory at June 30, approximately 55% or 23,600 loans were reported to us to be in forbearance and we estimate that the substantial majority of those loans in forbearance will reach the end of their forbearance period in the second half of 2021.
The number of claims received in the quarter, remained very low and were down 35% from the same period last year, due to the various foreclosure and eviction moratoriums and primary paid claims in the quarter remained low at $11 million.
Since foreclosure and eviction moratoriums for GSE loans have been extended and the CFPB has introduced additional procedural safeguards, we expect claim payments to remain modest for the next few quarters.
Next, I wanted to spend a couple of minutes talking about our balance sheet and capital position and our approach to capital management.
We continue to believe that our balanced approach to maintaining a strong capital position, including the use of forward commitment, quota share treaties by accessing the capital markets for excess of loss reinsurance via ILN transactions, provides the most flexibility to maximize the long-term value of both the writing company and the holding company.
As Tim mentioned, this value can be created by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends or repurchasing stock.
Our goal is to maintain financial flexibility at both the holding company and the writing company.
At the holding company, this means maintaining a target level of liquidity well in excess of our near-term needs.
At the operating company, it means maintaining a robust level of access to PMIERs, significant enough to enable growth even in times of stress and to be well positioned for any changes to our operating environment.
These target levels are dynamic and changes the operating environment changes.
At the end of the second quarter, we had approximately $772 million of holding company liquidity and a $2.3 billion access to the PMIERs minimum requirements at the writing company.
There were two transactions subsequent to quarter end that directly support our goal of having financial flexibility at both the holding company and writing company.
First, we completed our fifth excess of loss reinsurance transaction executed through an ILN, the third such transaction in the last 10 months.
This most recent transaction provides $400 million of loss protection and increases our PMIERs' excess.
Second, we paid a $150 million dividend from MGIC to our holding company.
Taking a deeper dive on the holding company, we have said for some time that we have a target level of liquidity that is designed to maintain funds for multiple years of interest payments on outstanding debt, near-term maturing debt principal, strategic growth opportunities and our quarterly common stock dividend.
The holding company liquidity is above our current target levels, which supported the 33% increase in the common stock dividend.
Additionally, in the third quarter we intend to resume our share repurchase program and we expect that we will fully use the remaining $291 million repurchase authorization prior to its expiration at year-end 2021.
Taking a closer look at the writing company.
It is a $2.3 billion excess to the PMIERs requirement as of June 30, or 167% PMIERs sufficiency ratio, which was above our current target level and supported the $150 million dividend from MGIC to our holding company.
Going forward, we will continue to assess MGIC's capital position and we'll continue discussions with the OCI about additional dividends to our holding company, as appropriate.
As Tim mentioned we feel we are well positioned to capitalize on the market opportunities that a robust housing market should make available to us.
Given our strong market presence, a growing in-force book of business that is currently generating a low level of delinquencies, a comprehensive reinsurance program and the quality of the new business being written, we believe that our holding company and writing company capital management strategy will create long-term value for shareholders, while allowing us to continue to be a well-capitalized counterparty for our customers.
Before moving to questions, let me address a few additional topics.
The early indications from the Biden administration that it is going to focus its housing policy efforts on access to sustainable and affordable housing for closure and eviction mitigation for homeowners impacted by COVID-19 and ensuring a successful economic recovery, opposed to large-scale changes to the housing finance infrastructure.
Although, it's early in the 10 years of new FHFA acting Director Sandra Thompson, at this time we are not aware of any policy initiatives that will provide new challenges to our company or industry.
I'd expect we will see a more coordinated effort from the various housing agencies of the U.S. government over the next several years.
We will continue to advocate for the increased use of private mortgage insurance in the housing finance industry, in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system.
Long term, I remain encouraged about the future role that our company and industry can play in housing finance and believe that other regulators and policymakers share a similar view.
The COVID-19 pandemic provided all housing finance participants with some options to credit enhancement for high LTV loans can be scarce or unavailable at various points of the economic cycle.
However, our company and industry were organized solely to provide credit enhancement solutions to lenders, borrowers and the GSEs in all economic cycles.
Not only does private mortgage insurance offer dedicated capital day in and day out to the housing industry, it offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.
At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first-time home buyers.
In summary, we are currently writing high levels of new insurance and are experiencing decreasing levels of delinquencies both newly reported and those already in our delinquency inventory.
We have a book of business that has strong underlying credit characteristics, which is supported by a strong and dynamic balance sheet with a low debt-to-capital ratio, an investment portfolio of nearly $7 billion contractual premium flow and a robust reinsurance program.
I am confident in our positioning in the market and we like the risk/reward equation that the current conditions offer.
We have the right team in place to build off our solid foundation to continue to deliver competitive offerings and best-in-class service to our customers and generate strong returns for our shareholders.
With that, operator, let's take questions.

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q2 earnings per share $0.44.
q2 adjusted non-gaap operating earnings per share $0.44.

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