MTG - NYSE

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q4 2024 MGIC Investment Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Dianna Higgins, Head of Investor Relations. Ma'am, please begin.

Thank you, Howard. Good morning, and welcome, everyone. Thank you for your interest in MGIC. Joining me on the call today to discuss our results for the fourth quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer and Chief Risk Officer. Our press release, which contains MGIC's fourth quarter financial results was issued yesterday and is available on our Web site 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 Web site a quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable. As a reminder, from time to time we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our Web site. 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 all the factors that could cause actual results to differ materially from those discussed on the call today are contained in our Form 8-K that was 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 8-K. With that, I now have the pleasure to turn the call over to Tim.

Thank you, Dianna. And good morning, everyone. We ended the year on a high note with solid fourth quarter financial results, capping another successful year. We consistently generated mid-teen returns on equity while returning meaningful capital to our shareholders. Our business strategies and the strength of our business model allows us to be successful in varying economic environments. Consistent with the last few years, our 2024 financial results benefited from favorable credit trends and a disciplined approach to risk and capital management. Now a few financial highlights. In the quarter, we earned net income of $185 million and produced an annualized 14% return on equity. For the full year, we earned net income of $763 million compared to $730 million in the prior year. Insurance in force at the end of the quarter stood at more than $295 billion, up slightly from the prior quarter. The overall credit quality of our insurance portfolio remains solid with an average FICO of 747 at origination. Annual persistency ended the quarter at 85% remaining relatively flat during the year consistent with what we had expected at the start of the year. We wrote $16 billion in new insurance in the fourth quarter and $56 billion of new insurance for the full year, up 21% from the prior year. We remain focused on maintaining a strong and balanced insurance portfolio. To date, we have not seen a material change in the credit performance of our portfolio and early payment defaults remain at very low level, which we believe is a good indicator of near term credit performance. The strength and flexibility of our capital position during the year supported $750 million in dividends from MGIC to the holding company. We also returned meaningful capital to our shareholders through a combination of repurchasing common stock and paying common stock dividends for a total of approximately $700 million. This represents a 92% payout ratio of this year's net income. We expect share repurchases will remain our primary means of returning capital to shareholders while at the same time continue to pay a quarterly common stock dividend. As discussed through the year, our approach to capital management remains dynamic with financial strength and flexibility as the cornerstones of our strategy. As part of our capital management, we regularly assess capital levels at both the operating company and holding company considering the current and expected environment to position ourselves for success across bearing scenarios, an approach that has consistently served our stakeholders well. While we prioritize prudent growth over capital return, opportunities for growing our insurance in force over the last two years has been constrained due to the size of the market. During that same time, operating results and credit performance have been strong leading to higher payout ratios. If credit performance remained strong and our risk profile stable or improving, I would expect capital levels at MGIC and the holding company to remain above target and payout ratios to remain elevated. Our well established reinsurance program, which includes the use of forward commitment quota share agreements in excess of loss agreements executed in either the traditional or ILN market remained a key component of our risk and capital management strategies. In addition to reducing the volatility of losses in stress scenarios, our reinsurance agreements provide capital diversification and flexibility at attractive costs and reduced our PMIERs required assets by $2.2 million or approximately 40% at the end of the fourth quarter. Shifting more broadly to the housing market. Despite some lingering uncertainty, it remains resilient, supported by favorable supply demand dynamics with a generally positive economic outlook. Consensus forecast projected PMI market in 2025 will be relatively similar in size to 2024 and mortgage rates remaining elevated, which leads us to expect another year of high persistency. Additionally, recent forecasts indicate moderating growth in home prices, improving housing inventory and continued pent-up demand along with favorable demographics, which we believe points to the continued resiliency of the housing market and the MI industry. With that, let me turn it over to Nathan to get into more details on our financial results and capital management activities for the quarter.

Thanks, Tim. And good morning. As Tim mentioned, we had another quarter of solid financial results. We earned net income of $0.72 per diluted share compared to $0.66 during the fourth quarter last year. For the full year, we earned net income of $2.89 per diluted share compared to $2.49 per diluted share last year. Our reestimation of ultimate losses on prior delinquencies resulted in $54 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from delinquency notices we received in 2023 and early 2024. Cure rates on those delinquency notices continues to exceed our expectations and therefore, we have made favorable adjustments to our ultimate loss expectations. It is still too early to determine the full impact of Hurricane Helene and Milton will have on our new notices and our delinquency rate, to date, we estimate the impact has been modest with approximately 700 new notices received in the fourth quarter that are likely a result of the hurricanes. We adjusted our initial claim rate for new notices received in the fourth quarter from 7.5% in prior quarters to 7.3% this quarter to reflect the expected increased cure rates from the hurricane related delinquencies. In the fourth quarter, our account based delinquency rate increased 16 basis points to 2.4%, which is consistent with the seasonal trends we have been discussing and includes a 6 basis point impact from the hurricane related delinquencies I just mentioned. While the level of new notices and our delinquency rate have increased relative to recent years they remain low by historical standards. We continue to expect that the level of new delinquency notices may increase modestly due to the large 2020 through 2022 book years being in what are historically higher loss emergence years. The in force premium yield was 38.6 basis points in the quarter and remained relatively flat during the year consistent with what we expected at the start of the year. Given expectations of another year with high persistency and a similar MI market to 2024, we expect the in force premium yield to remain relatively flat again in 2025. Our solid operating results, together with our strong balance sheet, enabled us to grow book value per share to $20.82, up 12% compared to a year ago while returning $700 million of capital to shareholders through dividends and share repurchases and reducing the outstanding shares by approximately 9%. The book yield on the investment portfolio was 3.8% at the end of the fourth quarter, up 20 basis points from a year ago and flat quarter-over-quarter as the yield on cash and cash equivalents declined offsetting improvements from reinvestment. Net investment income was $61 million in the quarter, down $1 million sequentially and up $3 million from the fourth quarter last year. During the fourth quarter, increases in yields across the treasury curve caused fixed income prices to decline, resulting in the unrealized loss position on our investment portfolio increasing by $129 million. Our ongoing focus on expense management and operational efficiency continues to pay off. Operating expenses in the quarter were $49 million, down from $55 million in the fourth quarter last year. For the full year, expenses were $218 million, down $19 million from 2023 and towards the lower end of the $215 million to $225 million range we shared throughout the year. For 2025, we expect operating expenses will be lower again to a range of $195 million to $205 million. Turning to our capital management activities in the fourth quarter. We continue to allocate excess capital to share repurchases totaling 7.8 million shares of common stock for $193 million and paid a quarterly common stock dividend of $33 million. And as previously announced, in the quarter, we paid a $400 million dividend from MGIC to the holding company. The dividend from MGIC of the holding company reflected capital levels at MGIC that continue to be above our target. We continued our share repurchase program into 2025 and in January, we repurchased an additional 3.5 million shares of common stock for a total of $85 million. Our share repurchase activity continues to reflect our capital strength, financial results and share price levels that we believe are attractive to generate long term value for our shareholders. As of January 31st, we had $372 million remaining on our current share repurchase authorization. Also in January, the Board authorized a $0.13 per share common stock dividend to be paid on March 5th. Consistent with our overall reinsurance strategy to prioritize coverage on the most recent book year vintages and future NIW, as previously announced in the fourth quarter, we further bolstered our reinsurance program with a multiyear 40% quota share transaction with a panel of highly rated reinsurers that will cover most of our policies written in 2025 and 2026. Also, rather than canceling the quota share treaties covering our 2021 NIW, we amended terms with certain participants from the existing reinsurance panel that effectively reduces the quota share seed rate from 30% to 26%, achieving approximately a 50% reduction in the ongoing costs. With that let me turn it back over to Tim.

Thanks, Nathan. A few extra comments before we open up to questions. We [indiscernible] with mortgage insurance plays in the housing finance system. We look forward to working with Bill Pulte who President Trump has recently nominated to be the next director work of FHFA. We continue to work with FHFA, the GSEs and other industry key stakeholders responsibly serve low down payment borrowers while advocating for the increased use of private MI in order to protect the taxpayer for mortgage credit risk and to help shape the future of the housing finance system. In closing, we had a great year successfully executing our business strategies and returning meaningful capital to our shareholders. I am confident in our leadership and our position in the market, and believe that our capital strength and flexibility position us to continue to execute and deliver on our business strategies in 2025 and beyond to create value to benefit all of our stakeholders. With that, operator, let's take questions.

[Operator Instructions] Our first question or comment comes from the line of Terry Ma from Barclays.

So you touched on the new notice claim rate coming down and that was hurricane related, but your new notice severity also ticked up a little bit. Can you maybe just talk about that and what's kind of driving that?

It's really a function of just higher exposures on the new delinquencies that we're receiving compared to what we would have seen in prior quarters. And some of that as a result of receiving more -- relatively more new notices from the 2022 through 2024 vintages compared to prior quarters, which have higher loan amounts and higher exposures. But we're still targeting the same severity to exposure ratio that we have in the past just it's ticking up due to actual exposures increasing largely due to the mix of the new notices we're receiving.

And then maybe just on the OpEx guide. Can you, I guess, talk about the drivers of that OpEx kind of going lower and then maybe just any more color on how much lower OpEx and go longer term?

I think the results in the fourth quarter were really reflective of the kind of cumulative impact of all of the changes that we've made over the last couple of years especially. So as we talk about the guidance range for next year kind of centered around $200 million, we're largely operating there in the fourth quarter. So that's really been a result of things that we've talked about pretty consistently over time, which is trying to continue to align our resources to where they add value given what customers want and demand. So that's something that we've always done that we'll continue to do. I'm not -- I don't think we're going to provide anything beyond 2025 in terms of formal guidance but I would just say I don't believe that the 2025 level is the lowest level that we can achieve either.

Our next question or comment comes from the line of Mihir Bhatia from Bank of America.

Maybe to start, I just wanted to touch on GSE reform privatization, it's been in the news lately. Maybe just talk about some of the puts and takes for MTG in particular that was to happen and GSEs were to be released?

Mihir, it's a question that's top of mind, obviously, and there's a lot of different paths that can take, right? I think when we sit back and look at it, there's a lot of things that can happen as they think about trying to release the GSEs out of conservatorship if you could think about them wanting to shrink that footprint to make it easier, which could have an impact, obviously, on the amount of volume that can flow to us. You could also think of it in terms of trying to think about the amount of volume that they can do versus FHA and probably a lot of dialog that will be had there. And we think there's a really good case to be made that it makes more sense from a taxpayer perspective for volume to flow through the GSEs as opposed to FHA, which would benefit us. So there's -- they're lot on the table. I think the one thing that we think is important when you talk about GSEs and coming out of conservatorship, privatization whatever you want to call it, is that there's the right guard rails in place and that you think about how the market will function in the long run. And I think it's safe to say that we're always want to be thoughtful about the role that private credit and mortgage insurance can play in sort of providing that safety valve to the taxpayers as far as not having the GSEs to have to take that credit risk and we think that's been true for decades and we think that will be true in the future as well. So I think we'll have a seat at the table in those discussions. But I don't think we're rooting one way or the other as much as making sure that the right sort of thought process is going into this process and that the right guard rails are in place no matter sort of where it sort of ends up.

And then maybe just on the claim rate, I appreciate you said it ticked lower this quarter just because of the hurricane delinquencies. I guess we've had an extended period of reserve releases. So maybe just talk a little bit about what do you need to see happening for you to be convinced that the claim rate -- the initial claim rate should be a lower number than the 7-ish 7.5% that you've been at the last few quarters?

I think the way that we look at it is new delinquencies that we received in the quarter, there's a wide range of possible outcomes that those will experience in the future given kind of future economic environment. It is true that the actual economic environment for mortgage credit has been very good over the last few years. So the notices that we have received have been on a very favorable path and have resolved more favorably than we initially expected, which has led to continued reserve releases on prior delinquencies. I think if you take that thought process and kind of think about what would it take to meaningfully reduce the new notice claim rate in the future, I think we would have to be fairly convinced that the future economic environment was going to be as favorable as the recent past economic environment for unemployment, for home prices and for other things. And so I think the future economic environment is always a lot more uncertain than what's happened in the past. So I think we're really comfortable with where we sit and that it represents historically a relatively low new notice claim rate. Prior to the last five or six years, we would have said that anything below 10% would have been kind of exceptional credit performance. We've been operating well below that for some time now. But I think with the thought of the range of possible outcomes for new notices being quite wide still, I think we feel really comfortable with where we are on the new notice claim rate at least in the near term.

And then just my last question is, what is the normalized delinquency rate? Like I guess what we're trying to understand is like you said, we've been in a very favorable environment but presumably, you don't underwrite to this favorable environment. And there's some kind of more normalized delinquency or claim rate -- all the way like claims payments that you're underwriting to? What is that? Is there something that you can help us with there? Like what should be like -- I'm trying to think of what's the normal credit costs for MI, what would that be?

I would think about it maybe less in terms of what that turns into a delinquency rate. When -- that's -- becomes largely a function of persistency and how long books are lasting and on your in force book, what's the relative concentration of recent writings versus older writings. But I think what we've said pretty consistently over time is that we think that kind of more through the cycle underwriting type loss ratios would be in that, say 20 to 40 range over time and we've been operating in zero or negative loss territory for the last several years. So the kind of underwriting expectations are quite a bit worse than what we've been experiencing over the last five years or so.

Our next question or comment comes from the line of Bose George from KBW.

Actually, I was looking at the debt to income trend. In 2024, it looks like it's been higher than it's been for quite a while and higher than pre-COVID levels. Is that a reflection of affordability? Can you just talk about that and other underwriting offsets to that?

Bose, you just -- clarify you're talking sort of about debt-to-income ratios.

Yes, just the debt-to-income ratios. I was looking at the [Multiple Speakers]…

I do think it's really just a matter of affordability, right? And when you think about sort of how much home prices went up but on top of that the interest rates have risen that when you look at sort of the ability of someone to qualify having to stretch those debt-to-income ratios has been something that has been very true for the last couple of years, especially once interest rates rose. So I think it's safe to say that the other sort of credit characteristics have been relatively stable and favorable such as that's having one additional risk characteristic that we keep a close eye on and -- but generally, we felt comfortable with that we can think about you can get premium related to that risk as well. So I feel pretty comfortable about sort of the risk return relative to that profile. But it is something, I think, that we need to be thoughtful about that the people have the other good credit characteristics to go along with that credit profile. They have a good FICO, they have good employment history. Those types of things are important to make sure that someone can be successful when they actually purchase the home and be able to stay in the home.

Just to maybe add on, Bose. I mean, I think if you look at the recent history, the third quarter of 2022, the fourth quarter of 2022, we saw larger increases in the higher DTI segment and that's the same period that mortgage rates were going up, it's been relatively flat over the last couple of years. And in the supplemental materials that we published, we also talk about required capital on new business and that's actually ticked down a little bit. Now DTI below 50 is not a variable in PMIERs but I think risk based pricing and the ability to price layered risk pretty discretely in a way that we couldn't with rate cards has also been a way that we've been able to address this kind of new risk factor in the market by kind of offsetting it with kind of better quality, other factors. So I think it is kind of a function of higher interest rates. We would expect if rates were to go back to 3% or 4% that, that level of high DTI would also come down. But it feels like something that we can kind of directly address in our credit policy and pricing approach as well.

And then next, just going back to the claim rate question. the books that you mentioned, the '23 and '24, they've cured. I mean what was sort of the ultimate claim rate on some of that stuff?

Well -- and just to be clear, when it's less the book years and more when we receive the new notices. So we received new notices from many different book years in 2023, we think about them then as kind of a group of notices that are then kind of tracked over time and ultimate claim rates established and the like. But those are not fully developed so there's not a new kind of finalized answer, I guess, on what the ultimate claim rate is. But on a lot of those new notice quarters today, if I look at it, our kind of new ultimate claim rate expectations are somewhere in the 3% to 5% range for those compared to 7.5% initially. Some of our more fully developed notice quarters back into 2021 or 2022 have seen ultimate claim rates in kind of the 1% to 3% range. So it's been kind of exceptionally favorable environment for mortgage credit coming out of the kind of peak COVID dislocation in the second quarter of 2020. But early results for new -- recent notices are showing similar resolution patterns as we track them on a -- after three months, after six months after nine months. So it does still feel like that new notices are experiencing a kind of pretty favorable environment and that's leading to the continued favorable reserve development.

Our next question or comment comes from the line of Douglas Harter from UBS.

I was hoping you could talk about the pricing environment for NIW, in the quarter we saw in the competitive dynamics?

Again, we don't talk a lot about sort of pricing dynamics, just I think it gets too close to sort of something we feel is more proprietary on it. I think it's fair to say that it feels like the risk return continues to be very favorable and I probably would have said that for better part of the last year quite frankly. So when we look at deploying capital and what resulted in our Q4 NIW, I think our use and return expectations were very similar to what we've been experiencing most recently and that's a good environment for us to be able to deploy that capital into.

Our next question or comment comes from the line of Scott Heleniak from RBC Capital Markets.

Just wondering if you could just expand on the last comment about the NIW growth, which was pretty significant. It sounds like you're pretty optimistic about the return potential in that business. But is there any particular geography or any other detail you can share on why you're feeling so good about just the business you're putting on the books in Q4 versus the past year?

And I'd say, I guess, just for clarity, I think I feel good about all the business we've put on for the last year. And I think if you start to think about different geographies or risk factors, I don't think we've really taken a significantly different approach to how we've addressed the market and approach sort of the returns and pricing in that regard. I think it's more of a continuation. It feels like the fourth quarter is more of a continuation of what we'd seen earlier in the year. I think the one thing, I guess, to call out is there's probably a little bit more refi volume in our Q4 volume. When you think about when there's just that little bit of blip when interest rates came down, which is really Q3 of last year but it doesn't turn into NIW for us until Q4 that probably helped us a little bit. So that was probably the only thing that I'd say felt a little bit different about the Q4 volume is probably a little bit more refi volume in there. But again, from a deploying capital and sort of the return profile feel like it would look consistent with it but that would probably be the one variable that I could call out that might have been more present in Q4 NIW than it would have been earlier in the year.

And then the only other question I just had was on the -- you gave the operating expense guidance for 2025. But the fourth quarter expense ratio, was there any onetime, any kind of benefits in there that it ticked down about 400 basis points or so, was there any -- is there anything that you wouldn't expect to repeat in that number there for the fourth quarter?

I mean there are just -- there's some natural variability just in the expenses that we have on a quarterly basis. So I think if you look at it on like a rolling 12 month basis, it's a lot smoother over time. So I think the -- and then there's a little bit of just the seasonal -- first quarter is typically higher expenses, some year end comp related items and payroll taxes and other things. So I don't think that -- we've never really experienced for every quarter is the same number but I think in general we're kind of operating at that level today that we've given as guidance for 2025. But there are a couple of smaller things but nothing that I would really call out in terms of the fourth quarter that that was kind of significant and nonrecurring but more just a reflection of the cumulative impact of all the changes that we've made.

Our next question or comment comes from the line of Geoffrey Dunn from Dowling & Partners.

I wanted to understand the 7.3% claim assumption a bit better. Is the way to think of it that the hurricane notices were provisioned at a lower rate and the non-hurricane notices were still at 7.5% with the implication being when the hurricane notices go away we're back to 7.5 again?

I think that's how we thought about it. I think that's the right way to think about it.

And then with respect to expenses, can you talk a little bit about what levers you're pulling to achieve the guidance? It looks like if you strip out the ceding commissions, you're close to 10% reduction year-over-year. What type of things are you doing to achieve that result and potentially getting an even better result beyond '25?

I think its changes really that we started making in 2022, our kind of use of outside services, broadly speaking, is down quite a bit. The kind of number of coworkers that we have is down about 10%, 12% in the year. We've had a lot of retirements over the last three years. We've been able to reposition the way that we kind of do our work in certain departments, whether that's how we call on customers and sales, how we underwrite loans, how we approach IT, how we approach even more of the back office functions like finance and risk management and other things that we have. So I don't know that there's one or two major things that we've done. I think this has been something that the whole company is pulling towards and we have achieved these results. But I think we all still look at where the rest of the industry is expense wise and know that we still have room to go.

And if I think back several years with respect to tech spend, I think you ramped it up trying to accelerate what you're achieving. How do we think about your tech spend these days relative to what it was maybe three years ago?

Geoeff, I think -- the way I think of it is we're continuing to invest in the platform. But I think it's fair to say that some of the investments that we were making sort of in '21 into '22 have sort of started to pay dividends such that we've been able to bring down run rate external to that. So as Nathan said, we probably had a little bit more outside services to help with some of the tech spend back in that time period and not quite as much reliance right now. But I think it's fair to say that those -- that spending that we hope to turn into savings has started to happen. But I think it almost reinforces that we needed to be thoughtful about continuing to invest in that, in the platform and with the additional savings, whether it can be through our technology enablement we want to do, it's really us focusing on the claims values and making sure that we're delivering there. And if it's not something that ultimately is something that is something that really necessarily more it doesn't help us from a risk management standpoint. So really a question about how we go about it and we've done a lot of that the last couple of years. As Nathan said, it's probably not one specific thing, it's a lot of little things other than I think it's fair to say that we spent more heavily on tech coming out of COVID starting in COVID that's paid some dividends now. And I think the question is how much additional dividends can it ultimately pay.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Sure. Thank you, Howard. I want to thank everyone for your interest in MGIC. We will be participating in the UBS and Bank of America Financial Services Conferences next week. Have a great rest of your week. Thanks, everyone.