Q2 2024 MGIC Investment Corp Earnings Call
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and R. F. M. and N. R. F. M. and O. F. M. and N. R. F.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation second quarter 2024 earnings call. At this time, all participants 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. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I'll now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation second quarter 2024 earnings call.
Speaker Change: At this time, all participants have been placed on mute to prevent any background noise. At the end of today's presentation, we'll have a question and answer session. To ask a question during the session, you will need to press star one one on your telephone.
You will then hear an automated message advising that your hand has been raised.
Dianna Higgins: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded I'll now turn the conference over to Dianna Higgins head of investor relations. Please go ahead
Dianna Higgins: Thank you, Andrew. Good morning and welcome, everyone.
Dianna Higgins: Thank you, Andrew. Good morning and welcome, everyone. Thank you for your interest in MGIC.
Dianna Higgins: Thank you for your interest in MGIC. Joining me on the call today to discuss our results for the second quarter are Tim Mattke, Chief Executive Officer, and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC's second quarter financial results, was issued yesterday and is available on our website at mtg.mgic.com under the newsroom section. It also 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.
Speaker Change: Joining me on the call today to discuss our results for the second quarter are Tim Mattke, Chief Executive Officer, and Nathan Colson, Chief Financial Officer.
Speaker Change: Our price release, which contains MGIC's second quarter financial results, was issued yesterday.
Dianna Higgins: and is available on our website at mtg.mgic.com under newsroom, also includes additional information about our quarterly results that we will refer to during the call today.
Speaker Change: It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures.
Dianna Higgins: In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk and force and other information you may find valuable.
Dianna Higgins: 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.
Dianna Higgins: In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk and 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 getting started today, I want to remind everyone that during the call today, we may make comments about our expectations of the future.
Dianna Higgins: Before getting started today, I want to remind everyone that during the call today, we may make comments about our expectations of the future.
Dianna Higgins: 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 is contained in our 8K and 10Q files from 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 developments. Moreover, no one should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of our 8K and 10Q. With that, I now have the pleasure to turn the call over to Tim. Thank you, Dianna, and good morning.
Dianna Higgins: Actual results could differ materially from those contained in these forward-looking statements.
Dianna Higgins: 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 files yesterday also.
Dianna Higgins: 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.
Dianna Higgins: No one should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of our 8K and 10Q. With that, I now have the pleasure to turn the call over to Tim.
Timothy Mattke: Thank you, Dianna. And good morning, everyone.
Timothy Mattke: I am pleased to report that we had another solid quarter and, with that, an excellent first half of the year. We have been consistently generating mid-team returns on equity while returning meaningful capital to our shareholders and creating long-term value for our stakeholders. Our results demonstrate the strength and flexibility of our business model, prudent risk management strategies, and focus on through-the-cycle performance. Coupled with our ongoing commitment to serve our customers with quality offerings and solutions, we're able to help borrowers achieve the dream of affordable home ownership sooner.
Timothy Mattke: Now, let's dive into the highlights of our financial results for the second quarter. For the quarter, we earned net income of $204 million and generated an annualized 16% return on equity. Insurance Enforced, the main driver of revenue, ended the quarter at $292 billion, up slightly in the quarter. However, our insurance in force has remained relatively flat over the past several quarters, consistent with what we expected. Annual persistency ended the first quarter at 85%, down slightly in the quarter.
Tim Mattke: Our insurance enforcement has remained relatively flat over the past several quarters, consistent with what we expected. Annual persistency ended the first quarter at 85%, down slightly in the quarter.
Timothy Mattke: We wrote $13.5 billion in new insurance, and the new insurance we write continues to have strong credit characteristics. Our focus on prudent risk management strategies has enabled us to build and maintain a strong and balanced insurance portfolio. We continue to be very pleased with the overall credit quality and performance of our portfolio. This credit performance continues to be a tailwind for our financial results. As we expected at the beginning of the year, this year's MI market is similar to last year's.
Tim Mattke: We wrote $13.5 billion in new insurance, and new insurance we write continues to have strong credit characteristics. Our focus on prudent risk management strategies has enabled us to build and maintain a strong and balanced insurance portfolio. We continue to be very pleased with the overall credit quality and performance of our portfolio.
Dianna Higgins: This credit performance continues to be a tailwind for our financial results.
Timothy Mattke: The mortgage origination industry continues to be hindered by the higher interest rate environment, resulting in affordability challenges and the supply of homes for sale being limited, creating pent-up demand. While the current supply-demand dynamic creates challenges for first-time home buyers, it continues to support home prices. Pent-up demand and the strong desire of the millennial and Gen Z populations to own homes are reasons to continue to be optimistic about BMI opportunities in the long run.
Dianna Higgins: As we expected at the beginning of the year, this year's MI market is similar to last year's market. The mortgage origination industry continues to be hindered by the higher interest rate environment, resulting in affordability challenges and the supply of homes for sale being limited, creating pent-up demand.
Dianna Higgins: While the current supply-demand dynamic creates challenges for first-time homebuyers, it continues to support home prices.
Timothy Mattke: Shifting to our capital activities, the strength and flexibility of our capital position in the quarter supported the repurchase of 7.6 million shares of common stock for $157 million and the payment of a quarterly CommonStock dividend for a total of $31 million. This represents a 92% payout ratio of this quarter's net income. And, as previously announced, in the quarter, we paid a $350 million dividend from MGIC to the holding company, ending the quarter with $990 million of liquidity at the holding company.
Dianna Higgins: Shifting to our capital activities, the strength and flexibility of our capital position in the quarter supported the repurchase of 7.6 million shares of common stock.
Dianna Higgins: for $157 million, and the payment of a quarterly CommonStock dividend for a total of $31 million.
Timothy Mattke: In addition, in April, the board authorized an additional $750 million share repurchase program, and last week, the board authorized a 13 percent increase to our quarterly common stock dividend to 13 cents per share, marking four consecutive years of dividend increases with a compound annual growth rate of 21 percent over that period.
Timothy Mattke: Maintaining financial strength and flexibility are the cornerstones of our approach to capital management. However, while we prioritize prudent growth over capital return, opportunities to grow our insurance in force over the last two years have been constrained due to the size of the market. During that same time, operating results and credit performance have been exceptional, leading to higher payout ratios in recent quarters. As part of our capital management, we assess current and expected future operating environments and the best options to deploy capital in order to maximize long-term shareholder value.
Dianna Higgins: Maintaining financial strength and flexibility are the cornerstones of our approach to capital management. While we prioritize prudent growth over capital return, opportunities to grow our insurance in force over the last two years have been constrained due to the size of the market.
Dianna Higgins: During that same time, operating results and credit performance have been exceptional, leading to higher payout ratios in recent quarters.
Timothy Mattke: We continually monitor our risk and capital position, and as long as credit performance is excellent and our risk position is stable or improving, I would expect our capital levels to remain above our targets at both MGIC and the holding company, and payout ratios will remain elevated. Taking a step back to a long-term view provides perspective on our ability to grow while maintaining financial strength and managing our capital position. We have faced a wide range of operating environments over the last five years, and our dynamic approach to capital management, while always prioritizing financial strength and flexibility, has served our stakeholders well.
Dianna Higgins: We continually monitor our risk and capital position, and as long as credit performance is excellent and our risk position is stable or improving, our expected capital levels will remain above our targets at both MGIC and the holding company, and payout ratios will remain elevated.
Timothy Mattke: Over the last five years, we have increased our insurance in force by $78 billion, or 36%, from $214 billion to $292 billion. During that same period, we generated $3.4 billion in net income, $3.5 billion in operating cash flows, and GAAP equity increased by $1.1 billion after returning approximately $2 billion to shareholders through dividends and share repurchases. The combination of 97 million shares we purchased and the elimination of our legacy convertible debt has reduced diluted shares by 30%.
Timothy Mattke: The growth of our PMAR's excess from $1.1 billion to $2.4 billion during the same five-year period further demonstrates our commitment to maintaining robust financial strength. With that, I will turn it over to Nathan to get into more details on our financial results for the quarter.
Dianna Higgins: The growth of our PMAR's excess from $1.1 billion to $2.4 billion during the same five-year period further demonstrates our commitment to maintaining robust financial strength.
Nathaniel Colson: As Tim mentioned, we had another quarter with excellent financial results. We earned net income of $0.77 per diluted share compared to $0.66 per diluted share last year. Adjusted net operating income was also $0.77 per diluted share compared to $0.68 last year. A detailed reconciliation of gap net income to adjusted net operating income can be found in our earnings release.
Dianna Higgins: Thanks Tim and good morning. As Tim mentioned we had another quarter with excellent financial results.
Speaker Change: Adjusted Net Operating Income was also $0.77 per diluted share compared to $0.68 last year.
Nathaniel Colson: The results for the second quarter were reflective of the strong credit performance we continue to experience, which again led to favorable loss reserve development and resulted in a negative loss ratio for this quarter. Our re-estimation of ultimate losses on prior delinquencies resulted in $67 million of favorable loss reserve development during the quarter. The favorable development this quarter primarily came from delinquency notices we received in 2022 and 2023. As cure rates on those delinquency notices continue to exceed our expectations, we have made favorable adjustments to our ultimate loss expectations.
Nathaniel Colson: As a reminder, the delinquency notices we receive during a quarter will include loans from many different book year ventages. We continue to maintain our initial ultimate loss assumptions related to new delinquencies from the most recent quarters. Our delinquency inventory decreased in the second quarter by 3%, with CARES slightly outpacing new notices.
Nathaniel Colson: We continue to expect that the level of new delinquency notices may increase in the second half of 2024 due to seasonality and the large books from 2020 through 2022 being in what were historically higher loss emergence years. The enforced premium yields 38.4 basis points in the quarter, flat quarter over quarter. As I mentioned on the last call, given our expectations for another year of higher persistency and a smaller MI market, we expect the enforced premium yield to remain relatively flat for the year. We remain disciplined in our approach to expense management and focused on operational efficiency. Operating expenses in the quarter were $55 million, down from $61 million in the previous quarter and $57 million in the second quarter last year.
Speaker Change: We continue to expect that the level of new delinquency notices may increase in the second half of 2024 due to seasonality and the large books from 2020 through 2022 being in what were historically higher loss emergence years.
Nathaniel Colson: We continue to expect the full-year operating expenses will be in the range we previously provided of $215 million to $225 million. Our operating results, together with our strong balance sheet, enabled us to grow book value per share to $19.58, a 15% increase compared to a year ago after returning $568 million of excess capital to shareholders through dividends and accretive share repurchases. While higher interest rates and the resulting lower valuations for fixed income investments continue to be a headwind for book value per share, higher interest rates have been a positive for the earnings potential of the investment portfolio.
Nathaniel Colson: The book yield on the investment portfolio was 3.8% at the end of the second quarter, up 10 basis points in the quarter and up 55 basis points from a year ago. Net investment income was $61 million in the quarter, up $1.7 million sequentially and up $9 million from the second quarter last year. The increase in investment income has benefited total revenue, which was $305 million in the quarter compared to $294 million in the previous quarter and $291 million in the second quarter last year.
Dianna Higgins: The book yield on the investment portfolio was 3.8% at the end of the second quarter, up 10 basis points in the quarter, and up 55 basis points from a year ago.
Nathaniel Colson: During the second quarter, the reinvestment rates in our fixed income portfolio were above the book yield, and assuming a similar interest rate environment, we expect the book yield to continue to increase, but at a slower rate, as the increase in book yield continues to narrow the difference between our book yield and reinvestment rates. As Tim discussed, our approach to capital management is dynamic and intended to maintain financial strength that positions us to achieve our objectives in varying macroeconomic environments. MGIC's capital structure includes $6 billion of balance sheet capital.
Dianna Higgins: During the second quarter, the reinvestment rates in our fixed income portfolio were above the book yield, and assuming a similar interest rate environment, we expect the book yield to continue to increase, but at a slower rate, as the increase in book yield continues to narrow the difference between our book yield and reinvestment rates.
Dianna Higgins: As Tim discussed, our approach to capital management is dynamic and intended to maintain financial strength that positions us to achieve our objectives in varying macroeconomic environments.
Nathaniel Colson: Our well-established reinsurance program remains integral to our risk and capital management strategy. In addition to reducing the volatility of losses and stress scenarios, our reinsurance agreements provide diversification and flexibility to our sources of capital at attractive costs and reduce our PMIRs required assets to $2.2 billion at the end of the second quarter. We further bolstered our reinsurance program in the second quarter with an excessive loss agreement with a panel of highly rated reinsurers to cover most of our 2024 NIW. This reinsurance agreement complements the 30% quarterly share agreement we had in place at the start of the year to cover the 2024 NIW. With that, let me turn it back over to Tim.
Tim Mattke: Our well-established reinsurance program remains integral to our risk and capital management strategies.
Tim Mattke: In addition to reducing the volatility of losses and stress scenarios, our reinsurance agreements provide diversification and flexibility to our sources of capital at attractive costs and reduce our PMIRs required assets by $2.2 billion at the end of the second quarter.
Tim Mattke: We further bolstered our reinsurance program in the second quarter with an excessive loss agreement with a panel of highly rated reinsurers to cover most of our 2024 NIW.
Timothy Mattke: Thank you, Nathan. In closing, we had another successful quarter and an excellent first half of the year. We have been consistently generating meaningful returns for our shareholders. Our balance sheet and liquidity remain strong. I continue to be encouraged by the positive credit trends we are experiencing in our existing insurance portfolio, the favorable employment trends, and the resilience of the housing market. As we navigate the second half of the year, we remain confident in our position and leadership in the market, as well as our ability to execute our business strategies. With that, Andrew, let's take questions.
Tim Mattke: And with that, let me turn it back over to Tim.
Tim Mattke: As we navigate the second half of the year, we remain confident in our position and leadership in the market, as well as our ability to execute our business strategies.
Operator: Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. And our first question comes from the line of Soham Bhonsle with BTIG.
Tim Mattke: With that, Andrew, let's take questions.
Andrew: Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Soham Bhonsle: Hey guys, good morning. So I'm looking at slide five in your deck, which is a really helpful chart. And it looks like you've been able to sort of seed 40% of, you know, your PMI required assets into the reinsurance markets. And I mean, Nathan, you noted 2 billion of credit over time. Is there sort of a good way to think about, you know, sort of the optimal funding profile for you guys going forward?
Speaker Change: And our first question comes from the line of Soham Bhonsle with VTIG.
Nathaniel Colson: Yes, Nathan, thanks for the question. You know, I think that chart really does show how we really approach reinsurance, which is that we try to concentrate our reinsurance buying on the most recent and future NIW. So, if you look at that chart, you know, from 2020 and prior, when you look at what we're covering, we're not covering very much of that. I feel very comfortable with that risk and try to concentrate on the deal that we do have, like the excess of loss deal that we announced this quarter and, previously, the quarter share agreement covering our 2024 business.
Speaker Change: How we really approach reinsurance, which is we try to concentrate our reinsurance buying
Speaker Change: on the most recent and future NIW.
Nathaniel Colson: So, you know, I don't think overall we don't target a specific funding level from a reinsurance standpoint in the overall book. We are much more concentrated on trying to get reinsurance coverage on the most recent and future NIW.
Tim Mattke: The deal that we do have, like the Excessive Loss deal that we announced this quarter, and previously the Quarter Share Agreement covering our 2024 business.
Timothy Mattke: Okay. And then, Tim, just zooming out a little bit, credit performance just remains stellar. It seems like the market, the mortgage insurance market, seems pretty disciplined on pricing, and everything feels really good right now. But maybe just walk us through, you know, how you're planning for downside scenarios from here, and just making sure that we're not getting too comfortable with the current state of things right now. Thanks.
Speaker Change: Okay, and then Tim, just zooming out a little bit, you know, credit performance just remains stellar, you know, it seems like the market, the MI market, seems pretty disciplined on pricing and everything feels really good right now, but maybe just walk us through, you know, how you're planning for downside scenarios from here and just making sure that we're not getting too comfortable with the current state of things right now. Thanks.
Operator: Yeah, Soham, it's Tim. I appreciate the question. You know, it's something I think that we do every day. I mean, being an insurance company, we always have to stay focused on the downside. And we think about executing in the market, and we think about pricing. Our focus, quite frankly, is on the downside much more than it is on sort of expectations because we think that's critical to being a healthy company over the long run.
Operator: And we think that has served us well for the better part of six decades. So it's something we're conscious of. We look for softening in any sort of credit. The good news is we haven't really seen that in our space. But it's something we have to remain very diligent about and be ready to adjust for. The good thing is, with the tools we have these days, we can make moves really quickly from a pricing standpoint, and we haven't been afraid to do that in the past.
Speaker Change: for the better part of six decades. So it's something we're conscious of. We look for softening in any sort of credit. The good news is we haven't really seen it in our space.
Bose George: Thank you. One moment, please, for our next question. Our next question comes from the line of Bose George with KVW.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment, please, for our next question.
Tim Mattke: Bye.
Speaker Change: Our next question comes from the line of Bose George with KBW.
Nathaniel Colson: Hey guys, good morning. Can we start this one on the new insurance written trends? Just with the companies that have reported so far, you guys look like you're kind of behind in the range. Any thoughts there on, you know, market share or just trends in the market?
Bose George: Hey guys, good morning. Can we start this one on the new insurance written trends? Just with the companies that have reported so far, you guys look like you're kind of at the high end of the range. Any thoughts there on market share or just trends of the market?
Nathaniel Colson: Yeah, Bose, I think, you know, still one to report. I think we're coming in from a share perspective, probably where we would expect the size of the market to be pretty similar to what we would have thought. Again, I don't, I don't look at, you know, any one quarter as, you know, there's volatility that's going to be there. Shares can move a little bit here or there. So, I think it's safe to say we gained a little bit.
Nathaniel Colson: But it's mostly focused on, are we getting the right return for the capital we're deploying, you know, feel good about this quarter, just like we felt good about last quarter as well. You know, I think as we move through the year here, we have a wide customer base that gives us an opportunity to really be able to win business when we want to be able to win the business and deploy capital at good returns.
Nathaniel Colson: So, again, I think it's fair to say we may have picked up a little bit this quarter, but I think we look over a longer period of time and the amount of customers that we have activated and are able to do business with is the other barometer as well. Okay.
Nathaniel Colson: Okay, that makes sense. Thank you. And then, actually, in terms of capital return, how do you sort of balance the share price in terms of buybacks versus dividends? I mean, the share price is up, and if it continues to do that, does that play a role at some point in terms of the mix?
Nathaniel Colson: Yeah, Bose is Nathan. Certainly, share price is an important consideration for us as we think about share repurchases. But the number one consideration is, do we have excess capital at the holding company above the other things that we use capital at the holding company for? But recently, the answer to that has been yes.
Tim Mattke: Yeah, Bose is Nathan, you know, certainly share price is an important consideration for us as we think about
Speaker Change: Charity Purchases
Nathaniel Colson: We have looked to increase payout ratios and have returned more capital to share repurchases. But even in the month of July, our repurchases were at a little less than 1.1 times tangible book. I think even with the increase in the share price, we still think that we're at very attractive levels for long-term value accretion via share repurchases. So obviously, the price has come up quite a bit in the sector and in our company. And I think that's great news. But we still think we're trading at very attractive levels for long-term value creation as well.
Bose George: Okay, great. Thanks.
Operator: Thank you. Thanks, folks. One moment, please, for our next question. And our next question comes from the line of Terry Ma with Barclays. Hey, thank you. Good morning.
Terry MA: Hey, thank you. Good morning. Is there any color you can provide on the characteristics or makeup of new notices this quarter and last quarter? The implied kind of provision per new notice was elevated compared to 2023. So any color you can provide there?
Speaker Change: And our next question comes from the line of Terry Ma with Barclays.
Terry MA: Hey, thank you. Good morning. Is there any color you can provide on the characteristic or makeup of new notices this quarter and last quarter? The implied kind of provision per new notice was elevated compared to 2023, so any color you can provide there?
Nathaniel Colson: Terry, it's Nathan. I mean, on new notices, we do have some descriptive information in the portfolio supplement. I think the new notice claim rate that we used was the same as we have for the recent quarters at seven and a half percent. I think the biggest driver of maybe the provision on a per notice basis increasing then really has to do with the average exposure on new notices. And that, I think, is to be expected as we start to shift more towards notices from the last five or seven years and less from 2012 and prior years.
Nathan Colson: I'm curious, Nathan, I mean, on new notices, we do have some, some descriptive.
Nathan Colson: information in the portfolio supplement.
Nathan Colson: The recent quarter is at seven and a half percent.
Nathan Colson: We start to shift more towards notices from the most recent five or seven years and less from, you know, the 2012 and prior years. Those have higher average loan balances, higher coverage levels, higher risk,
Nathaniel Colson: Those have higher average loan balances, higher coverage levels, higher risk, and risk amounts on a per loan basis. So I think that's really driving up the severity assumption is just the size of the policy, not an increase in the ratio that we have, you know, the kind of risk to reserve. We continue to target around 105% for new notices in terms of what we're reserving for compared to the risk on those delinquent items.
Nathan Colson: risk amounts on a per loan basis. So I think that's really driving up the severity assumption.
Nathan Colson: is the, you know, just the size of the policy, not an increase in the ratio that we're, that we have a, you know, kind of risk to reserve. We continue to target around 105% for new notices in terms of, you know, what we're reserving for compared to the risk on those delinquent items.
Terry MA: Got it. Helpful. Thank you.
Operator: Thank you. One moment, please, for our next question. Our next question comes from the line of Doug Harter with UBS.
Speaker Change: Got it. Helpful, thank you.
Speaker Change: Thanks. Can you talk about the pricing you're seeing and how that compares to kind of the enforced yield and, you know, kind of, therefore, kind of what your expectation is over the coming 12 months?
Douglas Harter: Yeah, I think Doug, I can start, and Nathan has anything to add. Again, we don't want to get too specific on pricing. I think if you look at sort of our yield on the portfolio over the last few quarters, it's been really stable. And I think if you think about over the course of the year here, that's really going to be dictated by the enforced portfolio more than anything that comes down from a new business.
Douglas Harter: So, I think we can feel pretty confident saying that we expect it's going to be relatively stable over the remainder of the year, which I think we said coming into the year we felt was the case. So, again, I think from an overall market perspective, we feel really comfortable with the price we're able to get on the capital we're deploying. It's a good environment. Again, we always have to be careful about downside scenarios. But we feel that we're able to get a really good return for the capital we're deploying in this current market.
Speaker Change: I think we said coming into the year, we felt that was...
Speaker Change: I think from an overall market perspective, we feel really comfortable with the price we're able to get on the capital we're deploying. It's a good environment. Again, we always have to be careful about downside scenarios. But we feel that we're able to get really good return for the capital we're deploying in this current market.
Timothy Mattke: Sure. Thank you. One moment, please, for our next question. And our next question comes from the line of Mihir Bhatia with Bank of America.
Speaker Change: Thank you.
Speaker Change: Sure. Thank you. One moment please for our next question.
Speaker Change: Our next question comes from the line of Mihir Bhatia with Bank of America.
Mihir Bhatia: Hi, good morning for good morning. And thank you for taking my questions.
Mihir Bhatia: I wanted to start with the cure rate a little bit higher. Look, it's been pretty elevated the last couple of quarters, obviously, you know, with the strong housing credit backdrop. But what I was really curious about, and I'm trying to understand is what would need to change in the backdrop for that cure activity to weaken, as you think about it? And like, you know, any thoughts on where the default rate could trend here over the next few quarters? Does cure activity continue to be stronger than new notices? Or will the uptick in new notices kind of push total defaults maybe a little bit higher?
Mihir Bhatia: Hi, good morning and thank you for taking my questions. I wanted to start with the cure rate a little bit up.
Mihir Bhatia: What I was really curious about and I'm trying to understand is what would need to change in the backdrop for that cure activity to weaken as you think about it and like, you know, any thoughts on where the default rate could trend here over the next few quarters? Does cure activity continue to be stronger than new notices or will the uptick in new notices
Speaker Change: kind of push total defaults maybe a little bit up.
Nathaniel Colson: I'm here with Nathan. I'll start on that at least. And I think what we've observed over the last two years is, I think, a return of some level of seasonality. So, the first and second quarters are historically seasonally good credit quarters, both from a number of new notices but also pure activity. So, we do expect, and we saw this last year, we do expect some softening of that in the second half of the year.
Speaker Change: Here's Nathan, I'll start on that at least, and I think what we've observed over the last two years is I think a return of some level of seasonalities.
Nathan Colson: So the first and second quarters.
Nathan Colson: are historically seasonally good credit quarters, both from a number of new notices, but also pure activity. So.
Nathaniel Colson: So, while we had declines in the first and second quarters in the delinquency inventory, really driven by cures outpacing notices, we don't expect that to happen in the second half of the year. But in terms of broader trends, things that could drive, not seasonally adjusted, I guess we'll say, cure activity, I think that has to do with the general macroeconomic backdrop that we operate in. So, unemployment has remained low, and wage growth has been strong.
Speaker Change: But, you know, kind of in terms of broader trends, things that could drive
Nathan Colson: Unemployment has remained low. Wage growth has been strong. Home prices have continued to increase. Those things are all... Unemployment has remained low. Wage growth has been strong. Home prices have continued to increase.
Nathaniel Colson: Home prices have continued to increase. Those things are all tailwinds to credit performance for us. And if one or more of those started to come under pressure, I think that could impact not only the level of new notices but also how quickly they're curing and, ultimately, how many cure out and how many result in claims. But the experience that we've had over the last several years has been quite favorable because all of those key factors, whether it's macroeconomics, interest rates, or home prices, have all been kind of working in a very favorable direction for credit performance.
Speaker Change: tailwinds to credit performance for us. And if one or more of those started to come under pressure, I think that would
Speaker Change: has been quite favorable because all of those key factors, whether it's macroeconomics, interest rates, or home prices, have all been kind of working in a very favorable direction for credit performance.
Mihir Bhatia: Okay, maybe switching to capital returns. I think you talked about them staying elevated in this operating environment for a little bit. Maybe to put a finer point on it, is this 90 percent payout ratio the right way to think about it? That gives you enough, you know, that 10% that you store is enough to fund the growth to the extent you're seeing that.
Speaker Change: Okay.
Speaker Change: Maybe switching to capital returns. I think you talked about them staying elevated.
Speaker Change: in this operating environment for a little bit. Maybe to put a finer point on it, is this 90%-ish payout ratio the right way to think about it that gives you enough, you know, that 10% that you store is enough to fund the growth to the extent you're seeing that?
Nathaniel Colson: Give me here, I wouldn't I wouldn't target a specific payout issue in any one quarter. You know, I think, like Tim mentioned in the opening comments, For us, it really starts with making sure we have enough capital at the operating company to support the risk that we have on the books and the risk that we want to write and be able to do that in a variety of operating environments. From there, we've been above our target levels at the operating company, which has led us to pay dividends, larger dividends over the last several years up to the holding company, which has enabled this capital return that we've seen.
Speaker Change: Give me here. I wouldn't I wouldn't target a specific payout issue in any one quarter You know, I think like Tim mentioned in the opening comments
Speaker Change: For us, it really starts with making sure we have enough capital at the operating company to support the risk that we have on the books and the risk that we want to write and be able to do that in a variety of operating environments.
Speaker Change: larger dividends over the last several years up to the holding companies that has enabled this capital return that we've seen. But it doesn't start with a.
Nathaniel Colson: But, you know, it doesn't start with a target payout ratio for us. It really starts from ground up from, you know, what's the right level of capital for us to have at the operating company? So, you know, there are a lot of ifs here, right? But if the environment remains similar to what we've experienced, which is excellent credit performance and not a lot of growth, I think those are the conditions that lead to higher payout ratios.
Speaker Change: A target payout ratio for us, it really starts ground up from, you know, what's the right level of capital for us to have the operating company. So.
Mihir Bhatia: Got it. Well, that's helpful. And then just my last question, I just wanted to follow up a little bit on Bose's question about sharing. Really, my question is just pretty straightforward. Was there anything episodic or unusual about the second quarter that maybe drove the uptick for you guys being a little bit more than some of the peers who have reported so far? Like, did you pick up any bulk business, or anything specific that you would point to in the second quarter?
Speaker Change: Got it.
Speaker Change: Well, that's helpful. And then just my last question. I just wanted to follow up a little bit on Bose's question about share.
Speaker Change: Really, my question is just pretty straightforward. Was there anything episodic or unusual about the second quarter that maybe drove the uptick for you guys being a little bit more than some of the peers who reported so far? Did you pick up?
Speaker Change: Any bulk business, anything specific that you would point to in the second quarter?
Timothy Mattke: You know, I appreciate that. No, no, no bulk type deals for us. It's all sort of winning the business every day. I think, you know, I think where our shares get on this quarter is probably more representative of where I think we normally would be when you think about sort of our, our broad customer base. It's probably not even a little bit higher. So it's probably more of a reflection of being back, you know, in sort of where we are closer to where we should be, as opposed to maybe in Q1. But no bulk deals this quarter, anything like that's in play for that. It's just, it's winning business every day. Okay, thank you. Thanks for taking my question.
Speaker Change: Here, no, I appreciate that. No, no, no bulk type deals for us. It's all sort of winning the business every day. I think, you know, I think where our share is going to end up this quarter is probably more representative where I think we normally would be when you think about sort of our broad customer base. It's not probably even a little bit higher. So it's probably more reflection of being back, you know, in sort of where we closer to where we should be, as opposed to maybe in Q1. But no bulk deals this quarter, anything like that's in play today. It's just, it's winning the business every day.
Speaker Change: Okay, thank you. Thanks for taking my questions.
Operator: Our next question comes from the line of Jeffrey Dunn with Dowling.
Speaker Change: And our next question comes from the line of...
Jeffrey Dunn: Geoffrey Dunn with Dowling
Jeffrey Dunn: I know it's still early in the seasoning pattern, but you are getting a growing number of new notices coming from the 22-23 books. Any quality of commentary you can provide with respect to how those notices are performing with the lower HPA relative to the bigger 2021 books?
Jeffrey Dunn: Thanks. Good morning. I know it's still early in the seasoning pattern, but you are getting a growing amount of new notices coming from the 22-23 books.
Nathaniel Colson: Jeff, it's Nathan. I'll take that one. We do look at, you know, vintage level performance and how things are looking both from a, you know, transition to notice standpoint and also from a cure out. And I think the cure activities that we've seen, and we kind of look at this on a monthly basis. So one month's cure rates, two months, three months, four months, we're not seeing a lot of changes in the patterns that we've seen.
Speaker Change: Jeff and Nathan, I'll take that one. I mean.
Speaker Change: We do look at
Speaker Change: Vintage-level performance and how things are looking both from a
Speaker Change: Transition to notice standpoint, but also curing out. And I think the cure activity that we've seen and kind of look at this on a monthly basis. So one month curates two months, three months, four months. We're not seeing a lot of changes in the patterns that we've seen. So I.
Nathaniel Colson: So I think there should be some, you know, differential performance in some of those vintages. I think we do see 2022, which, especially in the back half of the year, kind of somewhat elevated compared to say the 21 or 23 vintages, but I mean, this is, you know, very, very slight. Post COVID, actual loss ratios on more recent vintages are running much below that level.
Speaker Change: It does feel like there should be some, you know, differential performance in some of those vintages. I think we do see 2022, which, especially the back half of the year, you know, kind of somewhat elevated compared to the 21 or 23 vintages, but I mean, this is, you know,
Speaker Change: very, very slight. And in the grand scheme of things, and not a big driver, we think of ultimate losses because care activity has been so good. And then we try to ground a lot of things and looking back to 2009, which was a vintage that, you know, incurred some stress.
Speaker Change: Ultimately, you know, fully developed out into a sub-20 loss ratio and the malignancy patterns that we're seeing relative to 2009 are really favorable for, you know, more recent vintages and post-delinquency cure activity has been so strong post-COVID that, you know, actual loss ratios on more recent vintages are running much below that level, so.
Nathaniel Colson: So, yeah, I think it's definitely something that we keep an eye on and we'll keep an eye on, but I don't, I don't have a lot for you on that specifically right now, just because we're not seeing much difference in terms of, you know, post-delinquency cure performance when we look at it at a cohort level.
Speaker Change: Yeah, I think it's definitely something that we keep an eye on and we'll keep an eye on, but I don't have a lot for you on that specifically right now, just because we're not seeing much differential in terms of, you know, post-delinquency cure performance when we look at it at a cohort level.
Jeffrey Dunn: As far as embedded equity is concerned, I think some companies and maybe Magic have provided some kind of embedded equity on average for the overall portfolio. I think the latest HPAM number was over 5%. Is it fair to speculate that there's maybe five, six percent embedded equity in the 23 book and more so in the 22 book? Or is that too general?
Speaker Change: Okay.
Speaker Change: As far as embedded equity, I think some companies, and maybe MGIC has as well, provided kind of the embedded equity on average for the overall portfolio. I think the latest HPAM number was over 5%.
Speaker Change: Is it fair to speculate that there's on average maybe 5, 6% embedded equity in the 23 book and more so on the 22 book? Or is that too general?
Nathaniel Colson: I think that's fair. I think that's a fair way to look at it.
Speaker Change: I think that's fair. I think that's a fair way to look at it. You know, again, one of the reasons that we don't
Nathaniel Colson: You know, again, one of the reasons that we don't, you know, have disclosed that and also, you know, don't do it for delinquent loans is that those are averages over large geographic areas. And, you know, there are certainly homes that experience better than average appreciation. But there are also, you know, some that experience lower than average appreciation or even depreciation, even if the overall market is up 5%. And in our business of, you know, ensuring your kind of mortgage credit tail risk, we're most focused on the worst 3% to 5% to 7% of performance, not the average.
Speaker Change: You know
Speaker Change: have disclosed that, and also don't do it for delinquent loans, is those are...
Speaker Change: averages over large geographic areas. And, you know, there's certainly homes that experience better than average appreciation. But there's also some that experience lower than average appreciation or even depreciation, even if the overall market is up 5%.
Speaker Change: and in our business of, you know, ensuring your really kind of mortgage credit tail risk.
Speaker Change: Yeah, we're most focused on the worst three to five to seven percent of performance, not the average. So, yeah, we see those same numbers when we run that for our book.
Nathaniel Colson: So, you know, we see those same numbers when we run that for our book. But I think we're, you know, kind of more focused on the full distribution of outcomes. But if you wanted to look at the full 2023 book, you know, using either regional or kind of localized home prices or national home prices, I think you would see the same kind of same dynamic that you're describing. But I think for us, it's more focused on the kind of full distribution and really the worst 10% of the distribution, because that's really what we're there to cover, not kind of the average loan.
Speaker Change: But I think we're, you know, kind of more focused on the full distribution of outcomes. But if you wanted to look at the full 2023 book.
Speaker Change: You know, using either regional or kind of localized home prices or national home price, so I think you would see those same, you know, that kind of same dynamic that you're describing.
Speaker Change: But I think for us, it's, you know, it's more focused on the kind of full distribution and really the worst 10% of the distribution because that's really what we're there to cover, not kind of the average loan.
Operator: Thank you. There are no further questions. I will now turn the call back over to management for closing remarks.
Speaker Change: Thank you.
Speaker Change: Thank you. There are no further questions. I will now turn the call back over to management for closing remarks.
Timothy Mattke: Thank you, Andrew. I want to thank everyone for your interest in MGIC. We'll be participating in the Barclays Financial Services Conference and the Zellman Housing Summit in September. Have a great rest of your week and summer. Thanks, everyone.
Speaker Change: Thank you, Andrew. I want to thank everyone for your interest in MGIC. We will be participating in the Barclays Financial Services Conference and the Zellman Housing Summit in September . Have a great rest of your week and summer. Thanks, everyone.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.