Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation Third Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Thank you, Kurt. Good morning and welcome everyone. Thank you for your interest in MGIC Investment Corporation. 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 that were also filed yesterday. If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent 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.

Thanks, Dianna. Good morning, everyone. I am pleased to report that we had another strong quarter and continue the solid financial results we delivered in the first half of the year. During the quarter, we remain focused on executing our business strategies, including providing critical support to the housing market by making it easier for individuals and families to achieve affordable and sustainable homeownership. We will get into more details on the financial results throughout this call. But in summary, we once again demonstrated the strength of our capital position by continuing to grow our insurance in-force, paying a common stock dividend, decreasing our leverage ratio, repurchasing stock and producing an annualized 21.8% return on equity. In the quarter, we earned $250 million of GAAP net income. Insurance in-force at the end of the quarter stood at more than $293 billion, a 9.4% increase from a year ago and a 2.4% increase from the end of the second quarter. The growth in insurance in-force during the third quarter reflects an increased persistency rate. Taking a look at the performance of our in-force portfolio. Our loss ratio was a negative 41.7% in the quarter. This reflects the loss reserves established on the number of new delinquencies reported to us in the quarter, more than offset by a re-estimation of ultimate losses on delinquencies in prior quarters. In addition, approximately 60% of our insurance in-force from the 2020 and 2021 book years, and the credit quality of those books remained strong. To date, we have not seen a material change in the credit performance of our portfolio overall. We remain encouraged by the positive credit trends we are experiencing on our existing portfolio. In the quarter, we not only deployed capital to support new business and grow our insurance in-force. We used…

Thanks, Tim and good morning. As Tim mentioned, we had another strong quarter. We earned $250 million of net income or $0.81 per diluted share compared to $158 million in net income or $0.46 per diluted share during the same period last year. On an adjusted net operating income basis, we earned $0.86 per diluted share, an 87% increase from the $0.46 per diluted share in the third quarter of 2021. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release, but the primary difference in the quarter was due to the loss on debt extinguishment from redeeming the senior notes due in 2023 and continued repurchase of our convertible debentures due in 2063. Book value per share decreased modestly to $15.16 as of September 30 from $15.18 as of December 31, an increase from $14.81 last year. The modest decrease compared to December 31 was primarily the result of unrealized losses on our investment portfolio due to increases in market interest rates, offset by net income. The unrealized losses are not reflected in net income, but are reflected in shareholders’ equity and therefore, also reflected in book value per share. As mentioned last quarter, higher interest rates are a long-term positive for the earnings potential of the investment portfolio. However, the rapid increase in interest rates over the last several months resulted in unrealized losses that reduced book value per share by $1.50 at the end of the quarter, while at December 31, unrealized gains increased book value per share by $0.47 and by $0.59 a year ago. During the quarter, total revenues were $293 million compared to $296 million for the same period last year. Net premiums earned were $252 million in the quarter compared to $255 million last…

Thanks Nathan. A few additional comments before we open it up for questions. In October, the FHFA announced that it will be eliminating upfront fees for certain first-time homebuyers and affordable mortgage products. Overall, we think the pricing changes are directionally positive for low and moderate income borrowers. At this point, we are uncertain what impact these changes will have on our business overall. However, we are supportive of the efforts to facilitate access to low down payment lending for first-time and low-to-moderate income homebuyers. We look forward to continuing to work with FHFA and the GSEs to responsibly and sustainably expand access to homeownership. In closing, we had another successful quarter and continued the solid financial results we have been delivering. We believe that our financial strength and capital flexibility, combined with our quality offerings and superior customer service, put us in the best position to achieve success for all of our stakeholders. We have the right team in place to remain focused on executing our business objectives for the long-term success of the company. We have successfully navigated many different economic cycles throughout our 65-year history, and we will continue to adapt to the changing needs of our customers so that we may help borrowers overcome the largest obstacle to homeownership, the down payment. With that, operator, let’s take questions.

[Operator Instructions] At this time, we now have Mark DeVries from Barclays on the line. Your line is open. Please go ahead.

Okay. Thank you. Tim, I know you don’t like to talk about pricing, but could you just talk kind of directionally how you are thinking about pricing here just given some of the macro uncertainties and also some of the pressure we are seeing on home prices here? And also kind of any observations you have made about what competitors are doing?

Yes. Mark, I appreciate the acknowledgment that we don’t like to talk about pricing. And I will answer your questions in the way that I think is hopefully responsive for you. I think about deploying capital and the returns were required to get off of that in an environment where there is more uncertainty and more potential expectation for losses. You need to make sure that you can price accordingly to do that. I think we continue to remain focused on return expectations, and the environment that we are operating is obviously influences that. So, feel really good about the business we wrote this quarter. As we look forward, we will continue to adapt to what the environment is, but I would rather not comment on what we are seeing from competitors.

Okay. Fair enough. And then circling back to the comments you made around capital and liquidity of the holding company. Should we expect the pace of capital returns that we saw this quarter to slow, or were those capital returns kind of consistent with the slightly more conservative view you seem to be taking here around liquidity and capital?

I think there is a couple of things in there. One, we have been using a lot of liquidity at the holding company to repurchase debt at the same time, and we got another large dividend up to the holding company. We want to make sure that the expectations aren’t that all of that will roll into share repurchase. We do anticipate to still execute on share repurchase, but don’t want, I guess you just think that we are going to – we will put all of that right into share repurchase and increase the level of that versus maintain what we think is a good level and a prudent level.

Okay. Great. That’s helpful. Thank you very much.

Sure.

Thank you for your question, Mark. We will now bring our next person in, and that next person is George Bose with KBW. Your line is now open. Go ahead.

Hey guys. This is Bose. I just wanted to follow-up on the buyback. Are you done in terms of capital actions to reduce your debt is given where things stand now? And then just when we think about buybacks going forward, should we really think about it coming out of earnings and your leverage kind of remain stable?

Bose, this is Nathan. I think relative to the first part of the question about that, we are kind of at our debt-to-capital target, so there is no intention at this point to de-lever further with the exception of the approximately $20 million of the junior convertible debentures that are still outstanding. If we had the opportunity to retire those, we would certainly consider that. And as Tim mentioned, relative to go forward, capital return, we have obviously got the quarterly dividend to shareholders in place, and then we have consistently executed on share repurchase. I think in this environment, we will be thoughtful about the pacing of share repurchase. But with the $400 million dividend to the holding company, we have got, on a pro forma basis, from where we were at year-end, we have got about $750 million at the holding company. That gives us a lot of flexibility over the next several quarters and year.

Okay. Great. Thanks. And then actually touching on persistency, can you just give us any updated thoughts about where you think that could go? Assume that rates kind of remain at this whatever 7%-plus rate for a while, what could that do to persistency?

Yes. Bose, this is Tim. I think I always ground to 80% in an environment where you expect maybe higher persistency, you can see that tracking up. Historically, again, I don’t think we have seen persistency go above 90%. I view it as easier to refinance now than probably we have ever seen historically, and then also you have to think about sort of the mix that you have within your in force potentially impacting sort of persistency as well and things that cancel from Homeowner Protection Act all those different types of things. So, I think 80% going in that direction, obviously, as we move to the end of the year, I think quarterly run rate most recently was 82%. So, that seems to imply something that is in the low to mid-80s, but don’t really anticipate anything much higher than that.

Okay. Great. Thanks.

Thank you so much for your question. And our next participant is Douglas Harter from Credit Suisse. Your line is now open. Go ahead.

Sticking with the persistency question, are you seeing any change in the consumer behavior around getting appraisals to maybe look to have an early cancellation of policies?

Doug, it’s Tim. I would say nothing that I would view as material. That’s normally a very small amount of what actually causes persistency to go down or cancellations to happen, I should say. And so I would say we haven’t noticed any meaningful change in consumer behavior at this point. But the longer that interest rates stay at higher levels, it’s something that we keep an eye on, but I wouldn’t expect that to become a meaningful portion of any of our cancellations.

Great. Thank you.

[Operator Instructions] And our next question is from Mihir Bhatia of Bank of America. Your line is open. Go ahead.

Hi. Thanks for taking the question. I wanted to start with maybe just going back to your comment about reduced potential for dividends from the holding company. Is that just based on the macro, or is that something you are hearing from the regulators where as you have had these discussions with them about the current quarter…?

Yes. Mihir, it’s Nathan. No, I think it’s more of a reflection on just the more uncertain outlook. At this point, the approach that we will take is to evaluate our capital position in the future relative to what we think the needs of the business are in our target levels. I think we have been very successful when we have had capital above our target levels at getting dividends out of the operating company. But in an environment that could be more challenged, our target levels will also change as a result of that. And there just may not be as much, from our view, capital that’s appropriate to dividend out in the future. It was more just calling that out. But that’s a decision that we will make in the future based on what our capital position looks like at that point and the outlook from there going forward.

Right. And then just can you just remind us what are your target levels for capital? Is it like the current – it sounds like the current level is the right level we should be thinking about?

We have talked about the framework that we think about is really stated in an excess to PMIERs, but thinking about a wide range of reasons why we might want to hold an access to PMIERs. So, we haven’t gotten into the details of exactly what that level is, but the $2.6 billion at the end of the quarter was above our targets, and that’s really what prompted the discussion with the OCI and internally and, ultimately, the approval and payment of the $400 million dividend.

Okay. And then just my last question on expenses, any update to your expense outlook? And how should we think about next year or 2 years, if you can just talk about that a little bit, too?

So, full year, in January, we talked about a full year $225 million to $230 million range. I think owing to a couple of factors, we are likely to end up at the high end or maybe just above the high end of that range. The biggest drivers so far this year are performance-based compensation due to ROE being so much higher than we would have expected are higher. And then within the 10-Q, there is also some additional information, but we did have, in the third quarter, a settlement accounting charge related to our pension plan that generated about $6 million of expense. So, those things are impacting 2022. Relative to 2023, I do expect that, on our Q4 earnings call, we will be able to provide kind of some better guidance, put finer points on it. But at this point, I think we are thinking something in line to slightly less than where we are in 2022.

Thank you so much.

Thank you. And our next question comes from Geoffrey Dunn of Dowling. Your line is open. Go ahead.

Thanks. Good morning. Nathan, I think we have to look back to the mid-2000s for the last time we saw MIs with investment yields above 4%. Given where new money is today, and the turnover of your portfolio, if conditions are sustained, could we be seeing that again within the next 2 years?

I think right now, reinvestment rates are actually even quite a bit higher than 4%. If you assume that those rates – the rate environment and the spread environment don’t change for the next 2 years, I do think you would start to see the all-in book yields approaching 4% in 2 years. But some of that will have to do with what we want to do with the operating cash. Do we want to retain it to invest or like we have done pay down debt or other uses of cash. But the reinvestment opportunity for kind of the strong positive cash flows that we continue to generate on a quarterly basis, we really haven’t seen an opportunity like this, as you mentioned.

Okay. And then just trying to put a point on the holdco cash, have you changed your multiple target in terms of the coverage ratio formally at all, or is it still the 3 years of interest, plus a year dibs?

Yes. We really haven’t gotten into all the details of how we think about the liquidity targets. But I think certainly, with the actions that we have taken, the continued share repurchases, that’s because our levels of liquidity are above our targets at the holding company. The $400 million dividend that we just paid does give us additional flexibility. But as we talked about more in the last year, we don’t expect to pay quarterly dividends going forward. We expect them to be more ad hoc. So, we need to think about the money at the holding company as being something not just for the next quarter, but for a longer period of time.

Okay. Thanks.

Thanks Geoff.

Thank you very much. There are no further questions, so I will now turn it back over to management for closing remarks. End of Q&A:

Thanks Kurt. Appreciate everyone’s interest in MGIC, another phenomenal quarter, and look forward to talking to all of you in the near future.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. We will now disconnect.