Ladies and gentlemen, thank you for standing by. Welcome to the MGIC Investment Corporation Third Quarter 2024 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 hand the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead..

Thank you, Gerald. Good morning, and welcome, everyone. Thank you for your interest in MGIC. Joining me on the call today to discuss our results for 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 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 website 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 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 the 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, 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 and 10-Q.

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

Thank you, Dianna, and good morning, everyone. We are very pleased with our third quarter financial results, which continue to demonstrate the strength of our business model in response to changing market conditions.

Our disciplined approach to risk management and prudent capital management strategies, together with our leadership in the market and focus on serving our customers with quality offerings and best-in-class service continue to drive value for our stakeholders. Let's get started with a few financial highlights.

In the quarter, we earned net income of $200 million and generated an annualized return on equity of 15.6%. Insurance in force ended the quarter at $293 billion, up slightly quarter-over-quarter, with annual persistency ending the quarter at 85%, flat compared to the last quarter.

We wrote $17.2 billion of new insurance in the quarter, up 27% from the prior quarter. Underwriting standards remain high, and we are focused on maintaining a strong and balanced insurance portfolio.

We continue to be pleased with the overall credit quality and performance of our portfolio and our financial results have benefited from the favorable credit performance we have been experiencing. Turning to our capital activities.

The strength and flexibility of our capital position in the quarter supported the repurchase of 5.2 million shares of common stock for $123 million and the payment of a quarterly common stock dividend of $34 million. Combined, these represent a 79% payout ratio of the quarter's net income.

In addition, in October, we repurchased an additional 2.9 million shares of common stock for a total of $72 million. When determining our repurchase activity, we consider and evaluate a variety of internal and external factors and metrics, including share price.

The repurchase activity I just discussed was reflective of continued strong credit performance and financial results and also higher market valuation levels than we have experienced in recent years. We expect share repurchases will remain our primary means of returning capital to shareholders.

As previously announced, the Board authorized a $0.13 per share quarterly common stock dividend payable on November 21. And last week, MGIC paid a $400 million dividend to the holding company. The dividend from MGIC to the holding company reflected capital levels at MGIC that continue to be above our target.

Our approach to capital management continues to be dynamic and maintaining both financial strength and flexibility for the cornerstones of our strategy. This approach enables us to position ourselves to achieve our objectives in varying macroeconomic environments and it serves our stakeholders well.

MGIC's capital structure includes $6 billion of PMIERs available assets. Our well-established reinsurance program remains integral to our risk and capital management strategies.

In addition to reducing the volatility of losses in stress scenarios, our reinsurance agreements provide diversification and flexibility to our sources of capital at attractive costs and reduced our PMIERs required assets by $2.2 billion or 40% at the end of the third quarter.

PMIERs operational and risk-based capital requirements provide a strong foundation to serve low down payment borrowers, while protecting the GSEs and taxpayers from undue mortgage credit risk.

In August, the GSEs issued updates to the risk-based requirements relating to the calculation of available assets, which will be implemented over a 24-month phased-in period with a fully effective date of September 30, 2026. We don't expect these updates will have a material impact on MGIC's available assets for our investment strategy.

Turning more broadly to the market conditions. The housing market remains constrained by a limited supply of homes for sale and affordability challenges compounded by high mortgage rates. However, there may be signs of easing.

The recent Fed interest rate cut and generally lower mortgage rates in the third quarter led to the first year-over-year increase in mortgage applications in three years. In addition, the rate of home price appreciation continues to slow from the highs we saw in 2022 and the inventory of homes for sale is increasing.

Pent-up demand for homeownership and demographics suggesting that the millennial and Gen Z populations will continue to add to housing demand are reasons to be optimistic about the resiliency of our business. Lastly, I'm happy to report that in September, A.M.

Best upgraded MGIC's financial strength and credit ratings to A from A- and revised the outlook to the credit ratings to stable. A.M. Best dated the ratings reflect MGIC's balance sheet strength, which A.M. Best assesses the strongest as well as MGIC's operating performance and robust enterprise risk management framework.

With that, let me turn it over to Nathan to get into more details on financial results for the quarter..

Thanks, Tim, and good morning. As Tim mentioned, we had another quarter with excellent financial results. We are net income and adjusted net operating income of $0.77 per diluted share compared to $0.64 per diluted share last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release.

The strong credit performance we continue to experience again led into a negative loss ratio this quarter. Our re-estimation of ultimate losses on prior delinquencies resulted in $66 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from delinquency notices we received in 2022 and 2023.

Curates on those delinquency notices continue to exceed our expectations and therefore, we have made favorable adjustments to our ultimate loss expectations.

In the third quarter, our account-based delinquency rate increased 15 basis points to 2.24%, which is consistent with the seasonal trends we discussed last quarter and below the pre-pandemic 2.78% delinquency rate seen at the end of the third quarter of 2019.

We expect that the delinquency rate will increase modestly due to seasonality in the fourth quarter before considering any impact from hurricanes Helene and Milton. The in-force premium yield was 38.9 basis points in the quarter, compared to 38.4 basis points last quarter.

The increase in the quarter was due in part to updating our method for estimating the current mortgage amount of our in-force loans, which resulted in lower insurance in force and a 0.2 basis point increase in our in-force premium yield for the quarter. We continue to expect the in-force premium yield will remain relatively flat for the year.

The book yield on the investment portfolio was 3.8% at the end of the third quarter, up 40 basis points from a year ago and a marginal increase quarter-over-quarter as the yield on cash and cash equivalents declined, offsetting improvements from reinvestment.

Net investment income was $62 million in the quarter, up $1 million sequentially and up $7 million from the third quarter last year. During the third quarter, the reinvestment rates in our fixed income portfolio continued to be above the book yield. We expect the book yield to continue to increase, but at a slower rate.

Re-investment rates are facing downward pressure with the expectation of more rate cuts through the end of next year.

In addition, the Fed's 50 basis point rate cut in September and significant declines in yields across the treasury curve caused fixed income prices to rise, resulting in the unrealized loss position on our investment portfolio, improving by $163 million in the quarter.

The increase in investment income has continued to benefit total revenue, which was $307 million in the quarter compared to $305 million last quarter and $297 million in the third quarter last year. We remain focused on operational efficiency and expense management.

Operating expenses in the quarter were $53 million, down from $55 million last quarter and flat with the third quarter last year. We expect the full year operating expenses will be in the range we provided throughout the year of $215 million to $225 million.

Our operating results, together with our strong balance sheet, enabled us to grow book value per share to $20.66, up 19% compared to a year ago while returning $625 million of capital to shareholders through dividends and share repurchases and reducing outstanding shares by 8%.

As Tim discussed, our well-established reinsurance program, which includes the use of forward commitment quota share agreements and excess of loss agreements executed in either the traditional or ILN market is a key component of our capital management strategy.

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

Our overall reinsurance strategy is to prioritize coverage on the most recent book year vintages and future NIW and to recapture risk on seasoned book year vintages if the reinsurance no longer offers enough tail risk protection in stress scenarios.

Quota share reinsurance is the foundation of our program as we value the forward commitment and certainty of coverage and have been consistent quota share buyers for more than a decade.

In October, we further bolstered our reinsurance program with a multiyear 40% quota share agreement with a panel of highly rated reinsurers that will cover most of our policies written in 2025 and 2026.

We also elected to cancel the quota share treaties covering our 2021 NIW effective December 31, 2024, both of these actions are consistent with our reinsurance strategy and followed the same approach we have taken in recent years to managing our overall risk and capital positions. One further comment before turning it back over to Tim.

At quarter end, MGIC's available assets exceeded PMIERs required assets by $2.5 billion.

PMIER's excess level will fluctuate with the timing of dividend payments and reinsurance transactions, and we expect the $400 million dividend from MGIC to the holding company and the cancellation of the 2021 quota share will result in a decrease in our PMIERs excess level at year-end. And with that, let me turn it back over to Tim..

Thanks, Nathan. In closing, we continue to successfully execute our business strategies and deliver meaningful return on equity and as demonstrated by our third quarter results. While some uncertainties persist, housing fundamentals and underwriting standards remain solid, in the near-term economic outlook is generally positive.

We are confident in our leadership and position in the market and remain committed to delivering best-in-class solutions and service to our customers in creating long-term value for our stakeholders. With that, Gerald, let's take questions..

Thank you. At this time we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Terry Ma from Barclays. The floor is yours..

Hey, thank you. Good morning. Maybe just a housekeeping question to start off with. Was there a change to how you guys kind of report static pool delinquency curves? If I look at slide 12 in your deck, the curves you put out -- the vintage curves you put out this quarter look kind of different than the ones you put out in the slide last quarter..

Hey Terry, it's Nathan. We did update just how frequently the data point as curves are. So previously, we were really reporting it on a full-year, like an annual basis, and now we're doing at each of the data points on the curve as each quarter.

So the full-year amounts are the same, but there's more data points to the curves might look a little bit different there..

Got it. Okay. And then maybe any color you're seeing on just performance of the 2022 and 2023 vintages? You already kind of mentioned that the cure rates are coming in better than your expectations. Maybe you can just talk about entry into default? It looks like the '22 and '23 curves are kind of performing worse than '21.

So as we kind of look forward and those season more, should we kind of expect the total default rate to kind of start exceeding the kind of pre-pandemic levels? Thank you..

Hey, Terry, it's Nathan again. I mean I certainly think over time, that's possible. I mean, excluding potentially any impact from the Hurricanes, I don't think that's likely to happen in the near term.

I mean, like we said in the prepared remarks, seasonally, our business has typically -- we've seen increases in the delinquency rate in the back half of the year and then decreases in that rate, certainly in the first quarter and oftentimes in the first-half of the year.

And we saw that last year the delinquency rate increased 16 or 17 basis points in the first-half of the year -- I'm sorry, that's right. And then decreased in the -- or sorry, rather increased in the second-half of the year. We saw the same decrease in the first-half of this year.

The increase in Q3 or 15 basis points versus, I think, it was 10 basis points in the third quarter last year. It was in line with what we expect.

As you can see on those delinquency curves, I do think the 2022 vintage looks like it is performing kind of marginally worse from a new delinquency perspective than the other books around it, either ‘21 or ‘23. But these are still very, very good levels.

And the other thing that we track is looking at how different cohorts are curing, what is the cumulative cure rates at various points in time. And if we look at that by vintage, we really don't see much difference right now. So while it's something that we'll continue to monitor. And if there is something of notes to report, we certainly will.

I think right now, think that all the books vintages are performing quite well, both from a new delinquency perspective. And once loans are delinquent, how are they curing, I think the kind of cumulative cure rates continue to be quite strong which again has led to significant favorable development for us this quarter..

Got it. Thank you..

Thank you for your question. [Operator Instructions] Our next question comes from the line of Bose George from KBW. The floor is yours..

Hey, good morning. Your new insurance written grew far more meaningfully than the couple of the other companies that have reported so far.

Was that really just noise or anything different in terms of how you're positioning this quarter?.

Yes, Bose, I think we think that the market overall probably grew a little bit, but I think it's also fair to say that we think we probably grew some market share this quarter.

Last quarter, I alluded to with our broad customer base, which we think is sort of the broadest in the industry that we're price neutral with the market and the risk-based pricing world, we're going to end up with sort of higher market share overall.

Ultimately, we're focused more on the long-term versus quarter-over-quarter market share more on what sort of returns can we get for the capital we deploy.

But I think it's fair to say we probably grew some market share this quarter, probably more in line with us being probably more in line on pricing the risk base around that we were, especially, say, first quarter this year..

Okay. Thanks. And then going back to credit.

What was the mark-to-market loan-to-value on the '22, '23 vintage delinquencies, compared to some of the older stuff?.

Yes, Bose, this is Nathan. We haven't talked as much about the mark-to-market on various cohorts, especially on delinquent loans just because our view is while we see similar numbers to what you'll see more broadly reported. The situations that we're most concerned about are the situations that aren't experiencing average home price appreciation.

So certainly, the 2021 and prior vintages have experienced on a kind of a pro forma basis, a tremendous amount of home price appreciation, a little bit less for the '22 vintage and then for '23 and '24, partly due to home price appreciation being more modest, but maybe most importantly, just those are such recent vintages, not as much on those.

But even in rising home price environments where the average mark-to-market is quite low, we still see losses. We still see claim events. So I think it matters from a maybe stress testing and overall book position, how we feel about capital. But I think try to emphasize it a little bit less on delinquent loans..

Okay, great. Thank you..

Thank you..

Thank you for your question. Our next question comes from Mihir Bhatia from Bank of America. The floor is yours..

Hey, good morning and thank you for taking my question. Maybe I'll just start with the premium rate and like in your market share gain this quarter. It looks like the premium rates stabilized here. I think the direct premium rate actually ticked up.

Can you just comment on what drove that? Was the pricing actions you took, just more a function of portfolio turnover. Also maybe just take the opportunity to comment on pricing and the competitive environment.

What are you seeing right now?.

Yes, I can start here, and if Nathan wants to chime anything. I think when you look at the average premium rate on the portfolio, right, it's not just what you're bringing on. It's also what's falling off. And so I think it's while we're happy that it moved up a little bit this quarter.

I think, as Nathan said in the prepared remarks, we view that as relatively stable, which we thought it would be over the course of the year. From a competitive dynamic standpoint, again, it's a competitive market. I think it is good that the average premium rate is staying relatively stable.

I think as I alluded to in my last response, for Bose, when we're priced sort of more on par with the market and the risk-based, we're probably going to get a little bit of outsized share. That's not a goal we have by itself, but it is something that's sort of more of an output. And I think early this year, we probably were a little bit off.

But the reality is pricing sort of goes up and goes down in different spots, right? We make adjustments on a regular basis depending upon different risk factors.

And so it's tough to say if pricing is up or down specifically because we're making adjustments that are sometimes up, sometimes down, and that can mean the difference between sort of winning business or not in some regards. And for other customers, that doesn't make as much of a difference.

So again, I think it's been something that we've been very comfortable with sort of the capital we've been able to deploy. We're getting really solid returns on that business, and that's been true for a long time now..

Okay. Maybe just turning to persistency, can you just talk about your expectations around persistency. And I was particularly curious if you saw any change intra-quarter, we had a little bit of a blip with rates coming down.

Did you see persistency tick lower when that happened? Just any comments on persistency, maybe talk about the LTV on your -- maybe the note rate on your portfolio? Any additional stats you can give us? Thank you..

Yes, Mihir, it's Nathan. I think persistency for us in this cycle has -- we think has probably peaked did close to 86%. But the declines that we're seeing are more tenth of a percentage point. So I mean down into the kind of low-85s now. If rates do decline like we saw for maybe 30 or 45 days there, that will certainly pressure persistency.

But I think on the order of or tens of percentage points or a couple of percentage points, not the level that we saw in -- certainly in 2021 through '22. And a lot of that has to do with like you're calling out the nature of the book that we have now is still a significant portion of the book is 4% note rates and below.

And really, it's only the business that we've written over the last, say, 18 to 24 months. That would be kind of in the money or even close to it if rates were down 50 or 75 or 100 basis points from here.

So I don't know that in any of our supplemental materials we have no rate by vintage or things like that, but that's certainly, I think, would add and something that we can provide additional information on. But our largest books continue to be was 2020, 2021, 2022 vintages and written at very low note rates.

So we expect those to have high persistency for some time even if rates were to come down pretty significantly from current levels..

Got it. And then just my last question, just the expense outlook for the year. Any update there? It looks like you're coming in below, I guess there's some additional expense related to the reinsurance deal you mentioned just the early termination. But just anything you can comment on expense outlook? Thank you..

Yes. Mihir, it's Nathan again. I think just to clarify, on the reinsurance, the termination fee will run through the ceded premium line, not at the expense line for Q4.

We said in the prepared remarks that we expected expenses to still be in the range that we initially gave in January and have kind of given consistently now throughout the year of $215 million to $225 million. So I think feel good about the actions that we've taken to be in a good spot going into 2025 and beyond.

We'll have the expectations that we'll update guidance for 2025 expenses at our Q4 call, but directionally expect expenses to be lower in 2025 than they were in 2024..

Thank you..

Thank you for your question. Our next question comes from the line of Geoffrey Dunn from Dowling and Partners. The floor is yours..

Thank you. Good morning.

Can you comment on the profit commission threshold for the new QSR?.

Yes, Geoff, it's -- one of the book years is 63%, and the other is 62%. So -- I'm sorry, go ahead..

I was going to say what was the process of going 40% out of the gate. In the past, you guys are typically come out at 20% and then added 20% a year later or something like that.

Why the change in process here?.

Yes. It's really a reaction to the market. Our approach has always been what is the reinsurance market kind of telling us they want, where is the capacity? Where is the right execution for us? Our preference has always been to do longer forward term commitments. Our first quota share deal covered almost three years, the one that we did in 2013.

Over time, the capacity to go out more than one year got narrower. So we shifted to doing some on a two-year basis, some on a one year basis. I would say the kind of demand and capacity in the space right now in the reinsurance market is quite attractive from our perspective.

So that's, hence, the upsizing a little bit from what we've done recently at the 30% quota share level to the 40% level and then felt like we got what is very, very attractive pricing, good cost of capital for us.

And most importantly, just now having that capital commitment and kind of risk management overlay for the next two years of NIW in our business is something that we always value. But if the market doesn't have enough capacity for that multiyear, we found other ways to transact.

But I think very, very happy with the execution that we have here right now. And I think it's a testament to the reinsurance market in the space getting broader. But also performance in this space has been quite good for some time.

And similar to the primary market here, it's not growing as much as it was the reinsurance market for mortgage credit risk isn't growing as much as it was a couple of years ago, which is, I think, helping with demand as well. So our preference, like I said, is the place on a forward basis, multiyear.

And this is really the market telling us that there's capacity at attractive pricing for us to really accomplish our multiyear goals right now..

That sounds good. I appreciate the comments..

Thanks, Geoff..

Thank you for your question. Our last question comes from Scott Heleniak from RBC Capital Markets. The floor is yours..

Yes, thanks. Good morning. I just wonder if you could -- I know it's early still, but could you touch on any impact that you think the hurricanes might have on delinquencies in the fourth quarter, maybe the first quarter next year? Are you seeing any impacts yet.

And would you anticipate seeing very high cure rates like we have in past storms? Anything you can share on kind of what you're thinking about that at this point?.

Yes, it's Tim, and I'll start off. I appreciate the question, Scott. It is too early, again, normally, for us, it's got to be two months delinquent before we'd sort of see it come through. So I really haven't seen anything yet. We would expect some activity in the fourth quarter though.

But as you alluded to, for us, we've had these horrible events like hurricanes happened historically, they've had higher cure rates than our average delinquency, significantly higher cure rates.

And so it will be something if we do get delinquencies coming into the fourth quarter, it's something we'll have to look at from a reserving standpoint of how do we reserve for those that we believe are sort of the influx related to Hurricanes that have a higher propensity to cure over time based upon sort of federal funds that come in for release and it's sort of -- it's a life event, but it's hopefully a temporary one that ultimately they get back on their feet versus sort of our average delinquency that is maybe more related to a life event that could be more permanent in nature with job loss, things like that, that has -- still has a high propensity cure, but just not at the rate that we've seen sort of for financial disasters like Hurricanes..

Yes. That makes sense. That's helpful. And then the other question was just on the -- what's the -- what is your new money yield versus expiring yield? And any floating rate debt exposure that you can point out? Just trying to get the sensitivity to interest rates as they continue to probably go down..

Scott, listen, in terms of new money rates recently, I think kind of low-5%s, maybe to mid-5% range against the close to 4% book yield on the loan portfolio. And then exposure to floating rate, there is a little bit. We have a kind of a mid-single-digit sized CLO portfolio that's floating rate and some other things.

But generally, duration on our portfolio is around four years. So I think our biggest exposure to shorter-term rates would just be in the cash and cash equivalents portfolio, where we've benefited somewhat from having 5%-plus rates there. So if the Fed continues to cut rates, that will be a headwind.

But in terms of exposure in the longer kind of true investment portfolio, it's relatively modest..

You got it. Appreciate the answers..

Thanks, Scott..

Thank you for your question. Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn it back to management for closing remarks..

Thank you, Gerald. I want to thank everyone for your interest in MGIC. Today's election day, I hope everyone finds time to get out and vote if you haven't done so already. Have a great rest of your week..

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect..