Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Second Quarter 2023 Earnings Call. [Operator Instructions] I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Thank you, Joel. 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 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 Newsroom, includes additional information about our quarterly results that we will refer to during the call. 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 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 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 and 10-Q. With that, I now have the pleasure to turn the call over to Tim.

Thanks, Diana, and good morning, everyone. We had another quarter of solid results, writing $12.4 billion in new insurance and ending the quarter was $292 billion of insurance in force, flat quarter-over-quarter and 2% higher than a year ago. In the second quarter, we earned net income of $191 million and generated an annualized 16% return on equity. Our strong performance in the quarter and first half of the year reflects our disciplined approach to the market. We consistently focus on the long-term success of our company through executing our business strategies and maintaining exceptional financial strength and flexibility. We remain in an excellent position to serve our customers with quality offerings and solutions, while creating shareholder value. As we expected at the beginning of the year, both mortgage origination and MI markets are smaller this year, driven by higher mortgage rates, which are leading to fewer homes for sale due to the lock-in effect for borrowers with lower mortgage rates. Higher mortgage rates have also dramatically reduced refinance transactions that were a large part of the market in 2021 and in early 2022. For our business, those headwinds are somewhat offset by the tailwinds that higher interest rates have on the persistency of our insurance in force. Annual persistency has increased in each of the last nine quarters to 83.5% at the end of the second quarter. The net result of lower volumes of new insurance written and increased persistency is that our insurance in force has remained relatively flat for the first half of 2023, consistent with what we expected at the start of the year. While the affordability issues and high interest rates continue to put downward pressure on home prices, the home price decline seen in the last year or so have been more modest than…

Thanks, Tim, and good morning. As Tim mentioned, we had another quarter of strong financial results. In the second quarter, we earned net income of $0.66 per diluted share compared to $0.80 per diluted share last year. Adjusted net operating income was $0.68 per diluted share compared to $0.81 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. The results for the second quarter were reflective of continued strong credit performance, which led to favorable loss reserve development and resulted in a negative 7% loss ratio this quarter. Net losses incurred were negative $18 million in the second quarter compared to $6 million last quarter and negative $99 million in the second quarter last year. Our review and re-estimation of ultimate losses on prior delinquencies resulted in $60 million of favorable loss reserve development in the quarter. The favorable development in the quarter was broad-based with about half coming from new delinquency notices received in 2020 and prior and half coming from new delinquencies in 2021 and early 2022. We continue to maintain our initial ultimate loss assumptions related to new delinquencies from the most recent quarters. In the quarter, our delinquency inventory decreased by 4% to 23,800 loans, which is the lowest level in at least the last 25 years. In the quarter, we received 10,600 new delinquency notices compared to 11,300 last quarter and 9,400 in the second quarter last year. While new notices were higher year-over-year, they were 18% below the pre-pandemic levels seen in the second quarter of 2019. During the quarter, total revenues were $291 million compared to $293 million in the second quarter last year. Net premiums earned were $243 million in the quarter compared to $256 million last year. The decrease…

Thanks, Nathan. I'll close my comments where I started. We had another solid quarter and excellent financial results for the first half of the year. Our strategic long-term focus, prudent risk management and balanced approach to capital management positions us to serve our customers with quality offerings and solutions, so together, we can help borrowers overcome the largest obstacle to homeownership, the down payment. As we look forward to the second half of the year, we remain encouraged by the positive credit trends we are experiencing on our existing insurance portfolio, including the favorable employment trends as well as the resiliency of the housing market. We're excited for the rest of the year we’ll bring. With that, Joel, let's take questions.

Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Bose George of KBW. Your line is now open.

Hey, everyone. Good morning. Actually, can you talk a little bit about what you're seeing in terms of pricing? And if the macro environment continues to improve, is it possible that we see some of the improvements over the last year reverse?

I know it's tough, and I don't want to speculate about what will happen in the future, Bose. I think as we said, we took pricing actions in the third, fourth quarter of last year because we saw that the risk was elevated, and we needed to get the appropriate sort of pricing to get the right returns. As we said in our script, we think over the last couple of quarters, we've seen that moderate from our view of the ultimate risk. I think we will be a little bit higher from a market share standpoint this quarter. And we sort of said next quarter, we think we'll continue to see things progress from an NIW standpoint as well. But it's really hard to speculate what's going to happen going out. We're in a competitive industry, but we have to do what's right for us from a pricing and return standpoint, and I expect others to do the same for them.

Okay, great. Thanks. And then can you talk about any changes to assumptions you're using for new notices or loss severities just based on some of the improvements that we've seen out there in the market?

Bose, it's Nathan. On the new notice ultimate claim rate assumption, it was still at 7.5% in the quarter. Historically, that's a very, very good level. We have been running better than that, hence, the favorable loss reserve development that we've seen over the last couple of years, but no change to that assumption. And then on the severity side, we're really just following the exposure that comes in on new notices. So as we've seen more new notices from more recent vintages with higher loan amounts and higher exposures, the severity has ticked up a little bit, but on the order of maybe a 1% change this quarter. So not a big change to the severity assumptions.

Okay. Great. Thanks.

Thanks, Bose.

Thank you. Please stand by for our next question. Our next question comes from the line of Mihir Bhatia of Bank of America. Your line is now open.

Hey, good morning, and thank you for taking my questions. Wanted to just ask about the NIW in the quarter. Obviously, you saw a nice uptick, a little bit more than some of the others. I guess what I'm really curious about is, are there particular markets or segments where you are seeing strength this quarter? Like, where do you think you picked up share? What changed this quarter versus last quarter? Just any relative comments, I'll be curious about that. Thank you.

Sure, Mihir, it's Tim. I mean I would say that there's no specific areas that I would call out. If you look at our additional information that we include, you can see some minor changes above 95% LTVs as an example and above 45% DTI. I think it's fair to say that we said tolerances from a risk standpoint of how much we want to write and certain characteristics. But I think I would view sort of where we won some additional volume, it's fairly broad-based and nothing that I would call out specifically about certain loan characteristics or anything like that.

Okay. And then just maybe turning to credit for a second. Look, it's clearly a reasonably favorable backdrop, right, for credit. But as you sit there and look at your results, are there any potholes that you're looking out at? Anything in particular you're worried about? I guess I'm trying to understand just from a credit perspective, what are some of the metrics or some of the potential issues that are upcoming that you maybe are paying a little bit more attention to that could cause credit hiccups for you all?

Yeah. I mean it's -- when we have negative loss incurred per period, I think we view that as not sustainable. I think we've been in the phenomenal credit environment. The things we watch are what a lot of people watch, right, unemployment what's happening there. We do think that the values of housing is an important characteristic whether we'll have losses or not. So we've been very, very happy with how resilient home prices have been over the last nine to 12 months. So I think we're watching that, obviously watch for any deterioration you can see in other credit lines as well. But a lot of times, those don't correlate exactly to what we see in mortgage credit, especially if home prices are solid. The reality is the underwriting and the credit box for mortgage and especially the area that we operate in has been phenomenal for over a decade now. And so while we'll be careful to say that it's tough to see that how well it's performed will continue because it's just been phenomenal. It is something that feels inherently different than it would have 15 years ago as a comparison. So feel really optimistic about that.

Okay. And on that last point, this is my last question. I'll hop back in queue after, but like in terms of the underwriting environment, given the high mortgage rates have been, I guess, almost a year now that originators have been working with it, are you seeing any move by originators, any appetite to expand the credit box, maybe giving -- pushing you on, hey, maybe we want to do some nonagency lower credit [deal in] (ph) non-agency, I mean, like not jumbo? Anything you're seeing, any pressure, anything from originators, anyone in the ecosystem looking to expand that credit box?

Yeah. No, that's a good question. I think from how broad MI fees, I mean I think you always look for lenders who are looking to do things that are the right answer that they can find other borrowers that can make eligible that they want to do that, they still have strong credit profile, and we have those conversations every day with our customers. But I think what you are hinting at is some -- a broader sort of view of let's expand the box, let's figure out ways to get more loans. It's really a supply issue as much as it is a demand issue at this point. So qualifying more borrowers, I don't think really helps. I think there's plenty of qualified borrowers at this point, although we can always help those around the margins for sure, but it's really a supply issue out there. And I think the interest rate lock-in effect is real. Although I think they will dissipate over time as people get more comfortable and earn their house longer, and look to move up to their second home as opposed to their starter home.

Okay. Thank you so much.

Sure.

Thank you. Please stand by for our next question. Our next question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is now open.

Thank you. Good morning guys.

Good morning.

With respect to new provisioning and particularly the severity assumption, is it fair to assume that there's kind of pressure on that number for the foreseeable future as the '21 through '23 book season? Or is there something in your approach that could soften that?

Geoff, it's Nathan. I mean -- I do think that given the average loan amounts from the more recent vintages compared to the average loan amount that came in certainly in the kind of financial crisis years, much higher. So the average exposures on those are a lot higher. We have had a pretty consistent severity to exposure ratio that we're putting on new notices. We've been running better than that. We’ve -- actual realized severities have been in the 60s and 70s for the last several years. I think we think that's really an artifact of things that are not long-term sustainable. But at some point, if that became what we thought the true new normal go-forward was, I mean, that could have an impact and a consideration that we would have. But I do think that we are likely to see a gradual uptick in that just as the average exposure on new notices goes up as more and more of those new notices come from more recent vintages at higher loan amounts.

Okay. And then just a quick number. You said you're at 7.5% claim rate assumption. Did you drop to 7.5% in the first quarter? Or was that incremental this quarter?

The 7.5% has been our new notice claim rate assumption for several quarters.

Okay. I thought you were at 8% in the fourth quarter, that's why I just wanted to clarify.

Okay. No, I think -- yeah, 7.5% for the last several quarters.

Okay. And then last question. I think, Tim, it was in your commentary about some of the competitive advantages beyond pricing for new business. How do you think the market is shaped up? It seems to me every day that goes by, mortgage insurance is almost kind of becoming more like auto insurance, where people are shopping the best rate on the engines out there. Where do you think we are in terms of mix of purely price shopping customers versus those that still value broader relationships and services? And how is that today compared to maybe three years ago?

I think there's definitely more price shoppers, if you wanted to find that way now than there were three years ago. I think what we like to call out is there's a fairly good percentage of our customers that aren't price shoppers. Now, they're not agnostic to price by any means, but they value, I think, some of the things that we can deliver and that we have delivered for over 65 years to them in those relationships that they aren't as focused on price as some others are. And again, that's up to the customer to decide what they want to do. We try to reflect on what we do to understand what our customers expect from us. So we have a core group of customers, we have a broad-based group of customers, all of them are phenomenal. But we definitely have a good cross-section that aren't as focused on prices as others are.

And does that fall into like typically like a regional or a local type of customer versus the nationals?

I think we've always felt like we do really, really strong in community banks, regional banks, credit unions, those types of institutions. So it's -- I think it's fair to say that it's probably a pretty strong correlation.

Okay. Thank you.

Sure.

Thank you. Please stand by for our next question. Our next question comes from the line of Eric Hagen of BTIG. Your line is now open.

Hey, thanks. Good morning. I think I've got a couple of follow-ups. First on risk-based pricing. I mean would you say risk-based pricing is more effective when mortgage rates are high, relatively volatile? Or what would you say is kind of the ideal environment to leverage some of the inputs that go into risk-based pricing? And then second question, I mean, how are we thinking about any further rotation of mortgage origination and servicing from banks to the non-bank community? Does that drive your thoughts around any capital ratios, even how you think about the longer-term growth rate in the business, more generally, just given where the capital is being sourced and where that's coming from? Thank you.

Sure. I'll start off for risk-based pricing. I think we think about it across a number of different dimensions. I haven't thought about it too much with interest rates being higher, if that makes it more conducive. I think there's a sensitivity always to cost and us, the advantage of risk-based pricing is being able to ultimately reflect the risk that we think exists with a loan based upon the current conditions. And interest rate is one of those, but it's much to do with what's going to happen with home prices and the ultimate credit characteristics of the loan as well. So I wouldn't put it as something that is more pronounced in my mind in this environment. And then the second part of your question, can you just refresh me on that again?

Yeah. Rotation of origination and servicing from bank to non-bank, thoughts around capital ratios, longer-term growth rate, just given where that capital is coming from. Thank you.

Yeah. I think it's -- there's always some ebbs and flows as far as where things go to. I think the non-banks have obviously taken a larger and larger percentage recently. I think we feel really great about those customers as well. And I think it's one of those things where when the market sees a little bit of disruption, you sort of look for what will the shakeout be? And I think there's still some more to go there ultimately. And we'll stay close. The good thing is we have a broad base of customers and do well across all those segments. And so I feel really good about however that organizes on the origination and servicing side, that we're well positioned to be able to engage and win our fair share of business.

All right. Thanks for the comments. Appreciate it.

Sure.

Thank you. At this time, there are no further questions. I will now turn the call back over to management for closing remarks.

Thank you, Joel. I want to thank everyone for your interest in MGIC. We'll be participating at Zelman’s Housing Summit in September. I look forward to talking to all of you at some point in the near future. Have a great rest of your week.

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