MGIC Investment Corporation Q2 FY2025 earnings call

• Tim mentioned that the company recorded net income of $193 million and an annualized ROE of 15% in the second quarter. They wrote $16 billion of new insurance, with insurance in force ending at $297 billion and an 85% annual persistency. • The company continued its disciplined approach, with capital management strategies in place. In the second quarter, it repurchased 7.1 million shares for $181 million and paid a quarterly common stock dividend of $0.13 per share totaling $31 million. In the third quarter through July 25, an additional 2.6 million shares were repurchased for $68 million. The board authorized a 15% increase to the quarterly common stock dividend to $0.15 per share. • Nathan noted that the company had net income of $0.81 per diluted share and adjusted net operating income of $0.82 per diluted share. There was $54 million of favorable loss reserve development from reestimating ultimate losses on prior delinquencies. The account-based delinquency rate decreased 9 basis points to 2.21%. Investment income was $61 million, and operating expenses were $52 million, down from the prior year. The reinsurance program provided capital diversification and flexibility.

In the second quarter, MGIC recorded net income of $193 million and an annualized return on equity of 15%. The company wrote $16 billion of new insurance, and insurance in force ended the quarter at $297 billion with an annual persistency rate of 85%. Net income was $0.81 per diluted share, while adjusted net operating income was $0.82 per diluted share. Book value per share increased to $22.11, a 13% year-over-year growth. The company experienced $54 million of favorable loss reserve development due to reestimation of ultimate losses on prior delinquencies. Operating expenses were $52 million in the second quarter, down from $55 million in the same period last year. Additionally, the reinsurance program reduced PMIERS required assets by $2.5 billion or approximately 43% at the end of the second quarter.

• The company expects full-year operating expenses to be in the range of $195 million to $205 million. • It anticipates that capital levels of both MGIC and the holding company will stay above targets, supporting the continuation of elevated payout ratios. • Share repurchases are expected to remain the primary method of returning capital to shareholders while continuing to pay quarterly common stock dividends.

• The housing market faces headwinds from elevated interest rates, ongoing affordability challenges, and a slowdown in home sales. • There is a risk of changes in the credit performance of the insurance portfolio. • Uncertainties related to the effectiveness of the reinsurance program could pose risks.

Q: Kind of -- can you remind us how you are thinking about sizing the level of capital return you're doing? How you're thinking about the amount of holdco liquidity you want to hold? And kind of what are the gating factors as far as getting dividends up from the MI subsidiary?

A: Yes, Doug, it's Nathan. Thanks for the question. Maybe I'll start at the operating company level. We've been paying dividends twice a year for the last several years in the range of $300 million to $400 million every 6 months. And that's really been driven based on excellent credit performance and excellent financial results that are continuing to generate a lot of organic capital that we've been able to dividend out. So I think the first order condition for us is continued excellent financial results, not feeling like we can prudently redeploy that capital at the operating company into growth, that would always be the priority, but we just don't think that the current environment really supports that right now. So if the credit conditions continue to be attractive and the lack of growth on the in-force side persists, then we expect that we will continue to generate excess capital and be able to continue to pay dividends from the operating company to the holding company. I think the size of those dividends is dependent on a number of factors. But as long as our capital levels are above our targets, I think dividends at similar levels to what we've paid out the last couple of years are kind of how we would think about things going forward. And then at the holding company level, we do have about $1 billion in cash at the end of Q2. And that's really been because of the larger dividends that we've paid, I think we've got the debt-to-capital position where we want it. And all of these things have supported the elevated payout ratios that Tim has talked about, a little more than 110% over the trailing 4 quarters and a similar level in Q2. So I think if we continue in this environment where it's hard for us to prudently grow, but credit conditions remain favorable and financial results are excellent, then we do think that elevated payout ratios can continue.

Q: Can you talk about your expectation for home prices. And to the extent home prices continue to slow or potentially turn negative, could we see the industry pricing adjust for that?

A: Bose, it's Nathan. Thanks for the question. I think a lot of the forecast right now for national home prices are really flat over the next several years. So -- but increasingly, it looks like different parts of the country may behave differently and places like Florida, Texas, across the South and the West, it feels like there's maybe more supply than demand in some markets in the Northeast and Midwest, kind of the opposite dynamic. So I think one of the things that is most attractive about risk-based pricing for us is that we really can price risk at a very granular level, including all kinds of factors like the market that a particular property is in. So for us, this is something that is just part of our day-to-day operations, too, to think about the risks in the markets that we take, the risk with the products that we ensure. And it's another factor that certainly goes into pricing. I think pricing is pretty dynamic to the risk that we feel like we're facing, and we have the ability to modify that very quickly to be reactive. But I think right now, these are risk factors, not really things that we're seeing in terms of realizing those risks. There aren't large parts of the country where we're seeing home price declines. And in a long-term sense, slowing home price appreciation kind of derisk things over the long term. So I think if we see home price declines in some areas, we have a very geographically diverse portfolio. I feel like we're in a great position for that. But seeing longer periods here with low single-digit home price growth, I think is long term good for our performance, because I think the thing that we worry the most about is that home price growth is really not sustained, and then that could lead to more significant home price declines in the future. So something that we're watching every day. And I think increasingly, it does look like certain parts of the country are behaving differently or have different supply-demand dynamics than other parts of the country, but we're in a position to react to that now in a way that we really weren't in a position to react to when we use rate cards prior to maybe 6, 7 years ago. So like I said, just kind of a core part of what we do and something that we were monitoring when home prices are going up everywhere. We'll continue to monitor it kind of no matter what the situation just because it's so fundamental to our business.

Q: Okay. That makes sense. And then actually switching to the OpEx guidance. The $195 million to $205 million, does that exclude that $4 million? And then just going forward, is that kind of a number that we could see like maybe annually or something until that thing -- until the pension thing runs out fully?

A: Yes. The $4 million charge that we incurred in the second quarter is in, obviously, the Q2 number, and it's in the full year kind of reiteration of the guidance that we have. So we think that even after the $4 million charge that we had, and we do expect to have smaller, but still have charges again in the third and fourth quarter based on lump sum activity. But that's all in the expectations for the full year now. And going forward, we'll have that in the expense guide. But it is something that in the footnotes of the financial statements as always called out, so there's a footnote about the pension plan. So you can see it there, you can see it over time there. Just called it out here because it was a large enough item and kind of unique enough to the second quarter that I just wanted to highlight it for everyone.