Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Third Quarter 2023 Earnings Call. At this time, all lines have been placed on mute to prevent any background noise. At the end of today's presentation, we will have a question-and-answer session.

[Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead..

Thank you, Michelle. Good morning, and welcome, everyone, to our third quarter earnings call. Thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss our results of the third quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer.

Our press release, which contains MGIC's third quarter financial results was issued yesterday and is available on our website at mtg.mgic.com under Newsroom, includes additional information about our quarterly results that we will refer to during this call.

It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures. In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable.

From time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before we get started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future.

Actual results could differ materially from those contained in these forward-looking statements. Additional information about these factors that could cause actual results to differ materially from those discussed on the call today are contained in our 8-K and 10-Q that were also filed yesterday.

If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent events. No one should rely on the fact that such guidance or forward-looking statements are current at any other time in the time of this call or issuance of our 8-K and 10-Q.

With that, I now have the pleasure to turn the call over to Tim..

Thanks, Dianna, and good morning, everyone. I'm pleased to report that we had another great quarter. We continue to benefit from favorable credit trends, prudent risk management strategies, a disciplined approach to the market and the talent and dedication of our team.

We are focused and committed to creating long-term value for our stakeholders by executing our business strategies, and maintaining exceptional financial strength and flexibility. Turning our attention to our financial results. In the third quarter, we earned net income of $183 million and generated an annualized 15.1% return on equity.

We wrote $14.6 billion in new insurance written and insurance in force, the main driver of our revenue stayed strong, ended the quarter at $294 billion.

As expected, the mortgage origination and MI markets are smaller this year driven by higher mortgage rates, which has challenged affordability and led to fewer homes for sale due to the lock-in effect for borrowers with lower mortgage rates and significantly reduced refinance activity.

For our business, those headwinds are somewhat offset by the tailwinds that higher interest rates have on the persistency of our insurance in force. Annual persistency has increased each of the last 10 quarters and ended the third quarter at 86.3%, up from 78.3% a year ago.

The net result of lower volumes of new insurance and increased persistency is that our insurance in force has remained relatively flat during the year, consistent with what we expected at the start of the year.

Credit performance on our in-force book continues to be a tailwind for our financial results and our delinquency inventory remains at historic lows. In addition, the new insurance we are writing continues to have strong credit characteristics.

Home prices continue to be more resilient than expected despite affordability challenges and higher interest rates. However, the rate of home price growth has slowed in some areas, while others have seen modest declines.

I remain optimistic that home prices generally will remain relatively stable, while there is noise in the market the housing market remains resilient. The supply of homes available for sale is still tight, however, there is pent-up demand and demographic trends suggest meaningful long-term MI opportunities.

During the last few calls, I've discussed pricing actions we took in the third and fourth quarters of last year to address our views of risks and uncertainties in environment where interest rates have spiked, affordability was stretched and home prices were expected to fall from their peak.

I also discussed our views of the market's risk return began to gradually improve during the year and then we expected our market position to also improve gradually during this year, even though our pricing was still meaningfully higher than the pricing we had in the market during the second quarter of last year.

As a reminder, the timing between taking action and the resulting NIW is not immediate as pricing leads NIW by a month or two. So what you see in our third quarter NIW is primarily a reflection of our views of risk return from late second quarter of this year.

As I mentioned on the last call, we believe there's additional improvement in our market position and believe that is reflected in our third quarter NIW. During the quarter and through October, we were very active in our capital management actions.

In the third quarter, our share price reached a level where we could redeem our 9% junior convertible debentures, and we elected to do so. We settle all the debentures with cash and on September 20, they were fully retired which also eliminated 1.6 million potentially dilutive shares.

While there was only $21 million of the debentures left at the time of the election to redeem, the full retirement removed the last vestiges of the financial crisis era financing that remained on our balance sheet.

Nathan will provide additional details, but we're also very active with our reinsurance program during the quarter and continue our capital return program through both shareholder dividends and share repurchases.

In the quarter, we repurchased 3.9 million shares of common stock for $67 million and paid a quarterly $0.115 per share common stock dividend for $33 million.

In addition, through October 27, we repurchased an additional 2.2 million shares of common stock for a total of $37 million and the board authorized $0.115 per share common stock dividend to be paid November 28.

Consistent with last quarter, our recent share repurchase activity reflects continued strong mortgage credit performance and financial results and share price valuation levels that we believe are very attractive to generate long-term value for remaining shareholders.

Earlier this week, MGIC paid a $300 million dividend to the holding company, reflective of the strong capital position on MGIC and capital levels that continue to be above our target. The dividend from MGIC to the holding company enhances the liquidity position and the financial flexibility of the holding company.

With our debt-to-capital ratio and our target range as the debenture is being fully retired, we have completed our plan delevering activities.

With a strong credit performance and financial results we are experiencing, combined with a smaller origination market, which sold growth of our insurance in quarters, and the related required capital, at the current valuation levels, we expect our capital return payout will increase from the level in recent quarters, and you can begin to see that in our October repurchase activity.

With that, let me turn it over to Nathan..

Thanks, Tim, and good morning. As Tim mentioned, we had another quarter of solid financial results and earned net income of $0.64 per diluted share compared to $0.81 per diluted last year. Adjusted net operating income was $0.64 per diluted share compared to $0.86 last year.

A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release.

The results for the third quarter were reflective of the continued exceptional credit performance we have been experiencing, which again led to favorable loss reserve development and resulted in close to zero losses this quarter, compared with a negative 7% loss ratio in the second quarter.

Our review and reestimation of ultimate losses on prior delinquencies resulted in $48 million of favorable loss reserve development in the quarter.

The favorable development was broad-based again this quarter, with about half coming from delinquency notices received in 2020 and prior and half coming from delinquencies in 2021 and the first half of 2022. In the quarter, our delinquency inventory increased by 4% to 24,700 loans, which continues to be historically low.

In the quarter, we received 12,300 new delinquency notices compared to 10,600 last quarter and 11,000 in the third quarter last year. While new notices were higher year-over-year, they were 13% below the pre-pandemic levels seen in the third quarter of 2019.

We continue to expect that the level of new delinquency notices may increase due to seasonality in the large 2020 and 2021 books being in what are historically higher loss emergence years for a vintage. During the quarter, total revenues were $297 million compared to $293 million in the third quarter last year.

Net premium or net premiums earned were $242 million in the quarter, compared to $252 million last year. The decrease in net premiums earned was primarily due to an increase in ceded premium. The in-force premium yield was 38.6 basis points in the quarter flat from last quarter.

The in-force yield has continued to remain relatively flat in 2023, consistent with what we expected at the start of the year. Book value per share at the end of the third quarter was $17.37 up 14% compared to a year ago.

The increase in book value per share was due to our strong results and accretive share repurchases, offset somewhat by our quarterly shareholder dividend.

While higher interest rates continue to be a headwind for book value per share, higher interest rates are a long-term positive for the earnings potential of the investment portfolio, and that continues to come through in our results.

The book yield on the investment portfolio ended the quarter at 3.6%, up 20 basis points in the third quarter and up 70 basis points from a year ago. Net investment income was $55 million this quarter up from $43 million in the third quarter last year.

Our reinvestment rates continue to be above the current book skill and assuming a similar interest rate environment, we expect the book yield to continue to increase. Although we expect the rate of the increase to slow as the increase in book yield in the last year has narrowed the difference between our current book yield and reinvestment rates.

Operating expenses in the quarter were $53 million, down from $57 million last quarter and down from $62 million in the third quarter last year. We expect full year operating expenses will be toward the lower end of the range we have provided throughout the year of $235 million to $245 million. Turning to our capital management activities.

As Tim mentioned, we were quite active across our reinsurance program during the quarter, and I wanted to provide some additional details. Our reinsurance program includes the use of forward commitment quota share reinsurance agreements and excess of loss agreements executed in either the traditional or ILN markets.

These agreements reduce the volatility of losses in adverse macroeconomic environments and provide diversification and flexibility to our sources of capital.

In October, we completed our seventh ILN transaction, which provides $330 million of loss protection and covers nearly all of our policies written from June of 2022 through August of 2023, and we agreed to terms on a 30% quota share agreement with a panel of highly rated reinsurers that will cover most of our policies written in 2024.

We also elected to cancel the quota share treaties covering our 2020 NIW effective December 31 and participated in a tender offer for certain tranches of seasoned ILN deals.

We expect the net effect of these transactions will be modestly positive to our PMIERs excess level at year-end and all of these actions are consistent with our strategy to concentrate our reinsurance coverage on our most recent or future NIW.

At the end of the third quarter, approximately 98% of the risk in-force relating to 2020 through 2022 books and 93% of the 2023 book was covered to some extent by our reinsurance program. And with that, let me turn it back over to Tim..

Thanks, Nathan. A few additional comments before we open it up for questions. In October, FHFA announced its new uniform appraisal data set public use file. We are very supportive of the FHFA and Director Thompson's commitment to improving data transparency in the housing finance system.

We look forward to continuing to work with the FHFA, the GSEs and other industry key stakeholders to responsibly and sustainably expand access to home ownership. To wrap up, we had another successful quarter and continued to deliver solid financial results.

I want to extend my appreciation to our customers, shareholders and partners for their continued trust and confidence in MGIC.

As we look forward, we remain encouraged by the positive credit trends we are experiencing in our insurance portfolio as well as the resiliency of the housing market and we remain confident in our transformed business model and ability to execute and deliver on our business strategies.

We believe that our financial strength and capital flexibility, combined with our quality offerings and superior customer experience put us in the best position to continue to navigate a dynamic economic landscape and achieve success for all of our stakeholders. And with that, operator, let's take questions..

Thank you. [Operator Instructions] The first question comes from Bose George with KBW. Your line is open..

Hey, everyone. Good morning. I wanted to first ask just about the capital return. You noted that it should increase.

And as we kind of think about the sort of the cadence of that, should we think of the leverage kind of staying stable and the increase being free cash flow? Or could leverage increase as well as that happens?.

Bose, thanks for the question. I think the way that we think about it is we spent a good amount of our holding company resources on delevering the balance sheet. And now there's just not more raw material there to delever. So that allows us the flexibility potentially return more capital.

And I think as we alluded to, we saw some increased level in October as we retired the 63s as an example. So it just gives us additional capacity as we move forward..

Okay. So leverage probably stays roughly stable.

Is that?.

Yes..

Okay. Perfect. And then just on the expense ratio, your guidance this year, I guess, equates to kind of roughly 25%. In longer term, is that kind of a reasonable level? Or I guess this year, there was some onetime items.

So could we see that come down a little bit?.

Bose this is Nathan. We certainly did have some unique items, especially in the first quarter of this year that led to the full year expenses being a little bit higher. But we do expect that there's capacity for us to decrease the expense ratio going forward.

I think for now, we feel good that we're in the -- I think, in the lower part, toward the lower end of the range that we've guided to for this year. And we typically provided an update for the year in the Q1 -- the Q1 earnings call. So I think we'll provide guidance. Again, I expect for 2024 in January or early February..

Okay. Great. Thanks a lot. .

[Operator Instructions] The next question comes from Nate Richam with Bank of America. Your line is open..

Good morning. Thanks for taking my question. The premium yield has stayed pretty very flat with the guidance as you guided.

But can you talk about the pricing environment currently and the competitive dynamics around that?.

Yeah. Again, we saw at the beginning of the year that the net premium yield would remain relatively stable, it has. But I mentioned in the script, I think what we're really view as positive is our premium is meaningfully higher than it was just a little over a year ago.

And you can see us, we think we're probably winning sort of additional share within that sort of dimension. And so while it's a competitive marketplace, and it's hard to say what's going to happen in the future. I think we're really happy that the pricing actions that we took in the past to get to the right risk return level.

We're still able to get a good amount of volume and a good credit quality that we feel really comfortable about the ultimate returns that we can get off of that business..

And then on credit, you noted that you noticed these are up a little bit quarter-over-quarter, but still like down from pre-pandemic levels. And I'm just kind of curious if there's any like general pocket of concern you're giving a close eye on in the macro.

I mean at the back of -- still obviously strong for housing credit, but just curious if you see anything out there that you're keeping a close eye on?.

Hi, Nate, it's Nathan. I would say as we look at the new delinquency notices that we're receiving, there's really not a lot of kind of unique or unusual items that we're seeing. I think it is relatively broad-based, whether you're looking at geography, vintage, whether you're looking at other characteristics like FICO or even LTV.

So I don't think that, that calls out a pocket of concern for us, just returning to kind of more normalized levels coming off of very, very low levels that we saw, particularly in '21 and '22 here..

Got it. Thank you. .

[Operator Instructions] The next question comes from Scott Heleniak with RBC Capital Markets. Your line is open..

Yes, good morning. Just wondering if you could talk about the -- give a little more color on the sequential increase in defaults you kind of expected for Q4. I know you kind of mentioned that was seasonally. You just mentioned a little bit more on that.

But is that just kind of a modest uptick and nothing really significant, just kind of off low levels? Anything more you can add on that?.

Yes, Scott, it's Nathan. I think that is how we think about it. Historically, the third quarter back to the many years pre-COVID. The third quarter was seasonally, a harder year, a harder quarter rather, for new notices. The first half of the year, a little better just from a seasonal credit standpoint.

So I think when we look at it, the comparisons to 2021 and 2022, I think are less meaningful for us just given the unique dynamics in those years.

I think when you look at 2018-2019 for us, even though we have a much larger book now, still seeing on account basis, delinquencies that are 13% compared to 2019 and even lower compared to 2018 still feels like a very strong credit environment to us..

Okay. That's helpful.

And then just I wonder if you're able to quantify the impact from canceling the quota share and the tender from the ILN a little bit further? Is there anything more -- I think you said there was a positive, but is there anything more you can add on to that? Or is it too early to know?.

Sure no, and we did in the earnings release, we did try to put some numbers in. But just on the quota share side, we expect that we will pay a cancellation fee of approximately $5 million that will go through ceded premium in the fourth quarter. And then on the tender side of things, we paid a tender premium of approximately $8 million in October.

So that will also run through Q4 ceded premium. And those will benefit the ceded premium run rate then in 2024 and beyond..

Okay. Great. That's all I have. Thanks. .

[Operator Instructions] Next question comes from Eric Hagen with BTIG. Your line is open..

Hey thanks. Good morning. Hope you guys do well.

Hey, what's your perspective on conditions in the reinsurance market and even how those conditions drive pricing and competitiveness in the market just against the backdrop of high interest rates and how it even kind of drives your ability and your willingness or your appetite to return capital next year? Thank you..

It's Tim. I can start and Nathan could probably add a little bit. I think we feel that the reinsurance markets and I guess I sort of slipping into the traditional reinsurance markets as well as the capital markets. I think at the beginning of this year, we had said we're skeptical if we'd be able to execute ILN in the capital markets.

And again, from a planning standpoint, we don't plan on that. But when they're open and they're available at attractive sort of conditions, we like to be able to execute. So I think we feel very favorable at that aspect. From the traditional reinsurance markets, much more stability there.

I think it's fair to say that as we had concerns with increasing interest rates and what would happen with home prices a year ago, I think a lot of our reinsurance partners had similar questions. I think at this point, they feel a little bit more comfortable.

It seems like capacity is as strong, probably stronger than it was even a year ago for us to be able to execute. I think our ability to consistently execute in those markets since we started our quotas here back in 2013. It's helpful in that regard on making sure that we have capacity but the reality is, I think that feels very good.

How does it play into sort of the primary market ultimately from a pricing standpoint? There's a feedback loop there but ultimately, I think we want to price in the primary market such that we think we're getting appropriate returns and that the reinsurance is just another way for us to think about how we sort of fund the capital and think about being able to distribute losses in a stress environment.

So not trying to play too much over line upon what's happening in the reinsurance market as far as the impact on direct pricing versus feel like when we deploy capital, we want to make sure that we're getting a good return day one on that.

Nate, anything else you'd want to add?.

I think just on the traditional reinsurance market, I do think 2023 was a challenging year from a capacity standpoint as many reinsurers insured a lot of mortgage risk in '21 and '22 and persistency increased quite a bit, so it wasn't running off as fast.

But now that you see the smaller origination volumes in '23 and also what most expect for 2024, I think some of that capacity has rebounded a little bit. And you can even see that in our quota share placement.

We've already got -- we've already agreed to terms on a 30% quota share to cover our 2024 underwriting year for 2023 that was at a 25% quota share level just because of capacity challenges some reinsurers.

But now that some of their larger books are running off a little bit, and there's less kind of new risks coming in just because of a small origination market, it does feel a little bit more normalized now than maybe the first part of 2023..

Okay. That's great detail. Thank you, guys. I mean we're looking at both the GAAP book value and we're also presenting the 1x [ph] AOCI. So is there like a market yield for the securities portfolio that we can think about relative to the GAAP yield you guys present. Thank you, guys..

I'm sorry, Eric. The market yield on the investment portfolio is what you're asking about..

Yeah, exactly.

Since we're talking about the book value with and without the AOCI in there?.

Got it. I don't have that immediately in front of me, but it's about 200 basis points better than the book yield. So we can follow up and get you the exact number, but I think you're looking mid-5s and the book yields mid-3s..

Got you. That's helpful. Thank you, guys. .

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks..

Thanks, Michelle. I just wanted to thank everyone for their interest in MGIC and thanks to all of our coworkers and all of our customers for another great quarter. And look forward to the last part of 2023 and then 2024. Thanks, everyone..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..