Mgic Investment Corp Q3 FY2025 Earnings Call

Thank you, Josh. 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 and Chief Risk 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 you remember, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before getting 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 Form 8-K and 10-Q filed yesterday also. 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 than the time of this call or the issuance of our 8-K or 10-Q. Now with that, I now have the pleasure to turn the call over to Tim.

Thanks, Dianna, and good morning, everyone. We maintained our strong momentum in the third quarter, delivering solid financial results and meaningful capital returns to our shareholders. For the quarter, we recorded net income of $191 million, and annualized return on equity of 14.8%, once again demonstrating the durability of our business model and the rigor around our risk management and capital strategies. Our consistent performance reflects our leadership in the market and the ongoing support and confidence our stakeholders place in us. We remain focused on operational excellence, disciplined execution and sustainable long-term value for our stakeholders. Our solid operating results, together with our robust balance sheet, enabled us to grow book value per share to $22.87, up 11% compared to a year ago. During that same period, we returned $980 million of capital to shareholders through dividends and share repurchases, and reduced outstanding shares by 12%. In the third quarter, we achieved another significant milestone in our company's history and an industry first, ending the quarter with more than $300 billion of insurance in-force. This milestone reflects our historical and ongoing leadership in the market. This achievement also reflects the dedication and excellence of our talented team, their integrity, adaptability and focus sets us apart from others and propels our success. We continue to be pleased with the credit quality and strong performance of our insurance portfolio. Our prudent risk management and underwriting standards remain key drivers in the quality of our portfolio. During the quarter, our NIW was $16.5 billion of high-quality business with strong credit characteristics. Shifting to capital management. Our strategy remains consistent and grounded on maintaining financial strength and flexibility to support our long-term success across economic cycles. Key objectives included supporting prudent growth through strong capital levels at both the operating and holding company, maintaining a low to mid-teens debt-to-capital ratio and maintaining a healthy liquidity buffer. Our adherence to these strategies has put us in a position to return excess capital to shareholders through share repurchases and common stock dividends. In the quarter, share repurchases totaled 7 million shares for $188 million. We also paid a quarterly common stock dividend of $0.15 per share, totaling $34 million. Taking a longer view, over the prior 4 quarters, share repurchases totaled $786 million and shareholder dividends totaled $132 million. Combined, this represents a 122% payout of the net income we earned in that period. This share repurchase activity reflects both our capital strength and excellent financial results. We continue to expect share repurchases will remain our primary method of returning capital to shareholders, while at the same time continuing to pay a quarterly common stock dividend. As announced on October 23, the Board approved a quarterly common stock dividend of $0.15 per share payable on November 20. Additionally, earlier this week, MGIC paid a $400 million dividend to the holding company, reflecting capital levels at MGIC that were above our target. This dividend further enhances our liquidity position and financial flexibility of the holding company. Our capital structure remains robust, with $6 billion in balance sheet capital, along with our well-established reinsurance program, which remains a core element of our risk and capital management approach. Our reinsurance program reduces loss volatility in stress scenarios while also providing capital diversification and flexibility at attractive costs. We were active in the reinsurance market in the third quarter, and Nathan will provide more detail on that shortly. At the end of the third quarter, our reinsurance program reduced our PMIERs required assets by $2.5 billion or approximately 43%. Now let me turn it over to Nathan to provide more details on our financial results for the quarter.

Thanks, Tim, and good morning. As Tim discussed, we had excellent financial results for the third quarter. We earned net income and adjusted net operating income of $0.83 per diluted share compared to $0.77 per diluted share during the same period last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. In the quarter, our reestimation of ultimate losses on prior delinquencies resulted in $47 million of favorable loss reserve development. The favorable development this quarter primarily came from delinquency notices we received in 2024 and early 2025 as curates on recent new notices continue to exceed our expectations. For new delinquency notices received in the quarter, we continued to use the initial claim rate assumption of 7.5%, which is consistent with recent periods. Looking at delinquency trends, our count-based delinquency rate increased 11 basis points in the quarter to 2.32%, in line with what we expected and consistent with the seasonal trends we have discussed on past calls. We received 13,600 new delinquency notices in the third quarter, slightly less than the third quarter last year and 3% less than the third quarter of 2019, just prior to the onset of the COVID-19 pandemic. The delinquency rate at the end of the third quarter was 8 basis points higher than a year ago, and the number of new notices and delinquency rates continue to remain low by historical standards. As we look ahead, we continue to expect that the combination of seasonality and the aging of our large 2021 and 2022 book years will result in an increase in new delinquency notices received and the delinquency rate. Turning to our revenue. The in-force premium yield was 38.3 basis points in the quarter, remaining relatively flat during the year, consistent with what we expected at the beginning of the year. Investment income was $62 million in the third quarter, contributing meaningfully to our revenue again. The book yield on our investment portfolio was 4% at the end of the quarter. Investment income remained relatively flat sequentially and year-over-year as both the book yield and the size of the investment portfolio have also remained relatively flat. During the quarter, reinvestment rates on our fixed income portfolio continued to exceed our book yield. However, we anticipate the overall book yield will remain relatively flat for the remainder of the year. The unrealized loss position on our portfolio narrowed by $57 million in the quarter, primarily driven by a decrease in interest rates. Operating expenses were $50 million this quarter, down from $53 million in the third quarter last year. Through the first 3 quarters of 2025, operating expenses decreased 8.5% compared to the same period last year. We continue to expect the full year operating expenses to fall within our previously communicated range of $195 million to $205 million, but now expect it will be toward the higher end of that range due primarily to the pension settlement charges we discussed last quarter. As Tim mentioned, we have been very busy in the reinsurance market. We further bolstered our reinsurance program with a $250 million seasoned excess of loss transaction covering our 2021 NIW and a 40% quota share transaction that will cover most of our 2027 NIW. In addition, we amended the terms on our quota share treaties covering our 2022 NIW with most participants from the existing reinsurance panel. The amended terms will reduce the ongoing costs by approximately 40% starting in 2026. Because they are all effective in the future, none of these reinsurance transactions impact our reinsurance program at the end of the third quarter, but all set us up for continued success and are all consistent with our long-term reinsurance strategy and follow the same approach we have taken in recent years to managing our overall risk and capital positions. With that, let me turn it back over to Tim.

Thanks, Nathan. We are beginning to see some modest improvements in home affordability driven by easing mortgage rates and slower national home price appreciation. Housing inventory remains tight, but like affordability, it has improved since last year, and there's been a slow but steady increase in purchase applications. With that said, affordability challenges do remain, but private mortgage insurance continues to play a critical role in helping low down payment borrowers access the American dream of home ownership sooner. Last year, private MI helped more than 800,000 borrowers achieve their dream of home ownership. We are proud of the vital role private mortgage insurance plays in the housing finance system. We remain committed to working with FHFA, the GSEs and other industry stakeholders to responsibly serve low down payment borrowers and make homeownership more accessible for Americans, while also protecting taxpayers from mortgage credit risk. In closing, we delivered a strong quarter and continued to build on the momentum we have established over the past few years. We are committed to delivering high-quality offerings and solutions and best-in-class service to our customers. I remain confident in our talented team, leadership and position in the market and the ability to execute and deliver on our business strategies. With that, Josh, let's take questions.

Our first question comes from Graham Bundy with KBW.

This is Bose. In terms of your provision, what was your provision per loan on the new notices? And just from an accounting standpoint, does your provision for new notices for the quarter just net out the new notices that were new notices from the year that were also cured during the year?

Yes. This is Nathan. From a new notice perspective, we had very similar assumptions for the provision this quarter. I mentioned in the prepared remarks, the new notice claim rate was 7.5%, and we followed a similar methodology for the severity on new notices, really tracking to the exposure. The total provision is inclusive of the favorable reserve development that we had, which was $47 million in the quarter. And we've got some details of that in our portfolio supplement that's on the website as well in terms of the kind of new notice, reserving assumptions and the full notice inventory.

Okay. Great. And then actually, I wanted to just ask about the debate on the credit scores that's going on. Can you just talk about how you're looking at it? And just in terms of PMIERs, does PMIERs just use FICO and what happens if Vantage score becomes part of what lenders are starting to use or at some point?

Yes. Bose, it's Tim. Obviously, we're paying close attention. I think it's safe to say that we try to be active in the conversations, but we know that we're just one part of the ecosystem. And so for us, it's really important to understand as an example how the GSEs are going to utilize it, what they're going to do? You referenced PMIERs right, will they make any changes with regards to that? We haven't heard anything definitive in that regard, but we stand sort of ready to incorporate whatever the industry sort of moves to and are very supportive of what makes the industry stronger. So again, I don't think we have a lot of exact answers at this point. We've had a lot of good dialogue and I think we're ready to sort of move as the rest of the industry moves.

Our next question comes from Doug Harter with UBS.

This is actually Will Nasta on for Doug today. And I guess just given some recent industry news about potential new entrants into the MI space, I was just curious your thoughts on how you guys are thinking about potential increased competition in this space and any real impact this could have on MGIC.

Yes, we know that someone is considering entering the market. We've seen similar situations in the past to varying degrees. The most common question I receive is whether six is too many. If another company joins, they will need to meet all the PMI requirements, raise capital, and fulfill the operational criteria we have. At this moment, it's hard to predict. I think it's mostly speculation, but we are aware of it. I assume they would be on the same level playing field. However, I frequently get asked if there should be fewer companies rather than more. This is something that may need to be addressed, in addition to obtaining GSE approval for PMIERs.

Got it. And then I guess just moving to capital return. I know you guys mentioned 122% payout recently. I'm just curious about how you guys are thinking about that going forward? Then obviously the balance between repurchases and dividends within that payout?

Yes, it's Nathan. Thank you for the question. Our approach has remained consistent over time, focusing on maintaining the right financial strength at the operating company. Once we've reached our capital targets, we use the excess to pay dividends to the holding company. We recently paid another $400 million dividend. At the holding company level, we've aimed for payout ratios that align with the attractive valuation of our stock and strong financial results. The payout ratio has been slightly elevated, with our share repurchase levels nearly matching our net income over the past four quarters, and the dividend slightly above that. Given the current market conditions, with strong credit performance and solid capital levels at MGIC, this payout ratio feels appropriate. However, if circumstances change, we have the flexibility to adapt.

Our next question comes from Meher Bhatia with Bank of America.

This is Caroline on for Meher here. So it looks like persistency was actually modestly up quarter-over-quarter despite the rate cut. Is there anything to call out there? And then also with rates coming down prospectively, how can we think about persistency moving forward? Like how fast and how much can it come down?

In the quarter, I would say it was more flat than up. It might have increased by a couple of tenths of a percentage point, but overall, it feels pretty flat for the year. The impact of rates decreasing, when you consider our net initial weigh-ins for the third quarter and the cancellation activity during that period, more accurately reflects the rate environment in June and July rather than in September and October. Recently, we've seen an uptick in the number of refinance transactions coming through in terms of quotes and applications. So, if there are any headwinds or ongoing challenges, they may be partially offset by increased net initial weigh-ins or higher refinance volume in the third quarter and onward. However, the extent of changes in persistency is largely dependent on rates, and we've experienced times when persistency was much lower. Currently, we've maintained a stable range, but historically, when persistency trends lower, it tends to coincide with higher net initial weigh-ins.

Okay. Awesome. That's really helpful. And then just are there any markets you're seeing good opportunity in and you're leaning in on? Or similarly, are there any markets that you're more cautious on and pulling back on?

It's Nathan again. I think this is something that we're doing on a continuous basis. So the approach that we have, given the strong capital levels is really to try to find the places where we think there's the most economic value. And that's a combination of risk factors and kind of the market rate for risk for that opportunity. So we don't really have strategy to lean in or out of any one thing. It's more like kind of our models that our views of economic value dictate where we want to go without a lot of say, capital overlays on that just given the robust capital position that we've developed over the last few years.

There are no further questions. I will now turn the call back over to management for closing remarks.

Thanks, Josh. I want to thank everyone for your participation in today's call and interest in MGIC. Have a great rest of your week.

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