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

Good morning. Welcome, everyone. Thank you for joining us today and for your interest in MGIC. Joining me on the call to discuss our results for the fourth quarter are Tim Mattke, Chief Executive Officer and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC’s fourth 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 getting started today, I want to remind everybody 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 are contained in our 8-K that was 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 time other than the time of this call or the issuance of our 8-K. So with that, let’s get started. I now have the pleasure to turn the call over to Tim.

Thanks, Dianna and good morning, everyone. I am happy to report we again delivered a solid quarter, capping another year of excellent financial results while returning meaningful capital to our shareholders. Our performance is a testament to the dedication and hard work of each member of our team. Their ability to adapt to market dynamics has been instrumental in our success. During the year, we continued to benefit from favorable credit trends, prudent risk management strategies, the disciplined approach to the market and a focus on through-the-cycle performance. We remain committed to delivering long-term value for our shareholders as we begin the new year. Turning to a few highlights. In the fourth quarter, we earned $185 million of net income and produced an annualized 15.2% return on equity. For the full year, we earned $713 million. At the end of the quarter, insurance in force, the main driver of future revenue stood strong at $294 billion. The overall credit quality of our insurance portfolio remains solid, with an average FICO origination of 746 and an average original LTV of 93%. We wrote $11 billion of NIW in the fourth quarter and $46 billion of NIW for the full year. The level of NIW in the year is primarily a reflection of the smaller MI origination market. Underwriting standards remain strong and our NIW continues to have strong credit characteristics. We continue to experience the headwinds of small origination market, driven by current interest rates and affordability challenges. The supply of homes for sale remains limited due to the lock-in effect for homeowners with mortgages that have interest rates well below the current market rate. The same borrowers were also significantly out of the money to refinance, which has led to historically low refinance volumes across the mortgage origination industry, including…

Thanks, Tim and good morning. Before getting into the details on the financial results, I also want to thank Tim for the opportunity and thank Steve for his dedication and leadership. Steve was one of the first people I met when I joined MGIC in the risk management department almost 10 years ago and he has been a friend and mentor for me. We will miss Steve’s wisdom and experience, his personality and wit, and mostly, we will miss Steve because he is a great guy that people wanted to be around. I feel very fortunate for the opportunity to oversee the risk team that Steve has developed. I am excited to lead such a talented group. Turning back to the financial results. As Tim mentioned, we had another quarter of solid financial results. We earned net income of $0.66 per diluted share compared to $0.64 during the fourth quarter last year. For the full year, we earned net income of $2.49 per diluted share compared to $2.79 per diluted share last year. The results for the fourth quarter were reflective of continued exceptional credit performance we have been experiencing. This has again led to favorable loss reserve development and resulted in a negative 4% loss ratio this quarter. Our review and reestimation of ultimate losses on prior delinquencies resulted in $60 million of favorable loss reserve development in the quarter. The favorable development this quarter primarily came from the delinquency notices received in the second half of 2021 and in 2022. In the quarter, our delinquency inventory increased by 4% to 25,700 loans, which continues to be low by historical standards. In the quarter, we received 12,700 new delinquency notices compared to 12,300 last quarter and 11,900 in the fourth quarter last year. While new notices were higher year-over-year,…

Thanks, Nathan. As we celebrate another successful year, I’d like to acknowledge the collective efforts of our talented and passionate team. Each team member played a role in making 2023 a success. I want to express my appreciation and gratitude for their hard work, dedication and commitment to excellence. As we begin the new year, we continue to be encouraged by the resiliency of the housing market and optimistic about the opportunities that lie before us. With our solid foundation, talented team, financial strength and capital flexibility, we are well positioned to continue to execute on our business strategies and achieve success for all of our stakeholders. With that, operator, let’s take questions.

Thank you. [Operator Instructions] Our first question comes from the line of Bose George from KBW.

Good morning. Actually, first, on the expenses. Obviously, there is very good guidance on the reduction. Just curious – like this in 2023, you guys had the pension expense, apart from that, can you just talk about other drivers of the reduction. And then does this kind of suggest the expense ratio that can be like in that 23% range, down from kind of the mid-20’s.

Bose, this is Nathan. Thanks for the question. Yes, I think from an expense ratio standpoint, I think you’re kind of in the range that we’re thinking for 2024 as well. In terms of reductions, I mean, we did have some unique items in the fourth quarter of ‘22, in the first quarter of 2023. But really, the range that we’re providing for next year is consistent with the run rate that you’ve seen over the last couple of quarters, really just kind of the full year of that run rate that we’ve kind of brought on at for the third and fourth quarters of this year.

Okay. Great. Thanks. And then actually, in terms of share buybacks, in the supplement, you show that there is going to be a sharp increase in the contingency reserves starting in 2025. Will that have an impact on capital return? Or I mean, is it – obviously, you guys are returning it at a pretty robust level already. So just curious if that changes anything.

This is Nathan. I don’t know that it changes things necessarily, but it certainly helps alleviate something that could have been a constraint. If you look at that supplement page we’ve been kind of drawing down statutory surplus over time. This year, we’re in 2024, we are going to get some 10-year releases on contingency reserves, but really in ‘25, we start to get those full years with $500 million plus of contingency reserve releases. So that would allow us flexibility to continue to pay dividends without kind of running out of – without surplus getting too low because I think that could become a constraint. But with contingency reserves now we’re kind of approaching release, I think that’s something that may not be a practical constraint for us.

Okay, great. Thank you.

Thank you. [Operator Instructions] Our Next question comes from the line of Terry Ma from Barclays.

Hi, thanks. Good morning. I think you mentioned you expect the in-force premium yield to be flat in 2024. So how should we think about the net yield? Should that kind of just track the Q4 levels?

Terry, it’s Nathan. I think it’s a lot easier for us to feel confident providing some guidance on the in-force field. I think the net yield particularly with the profit commission on our quota share agreements becomes somewhat loss sensitive. So it’s harder to provide, I think, harder for us to provide a confident level of what the net yields will be in any one quarter. But I would say we did have some unique items in the fourth quarter, about 1.9 basis point impact due to the ILN tenders and the quota share cancellation. That quota share cancellation will reduce the amount of ceded premium that we would have had in 2024 and beyond. But I think if you look over time with our program pretty consistent over time, we’ve been in that kind of maybe 5.5 to 6.5 basis point range in terms of ceded premium. And then the accelerated earnings on single premiums, which is another volatile component really hasn’t been that way in the last couple of years because rates have been high. There hasn’t been a lot of refinance or cancellation activity. So I think there are some sources of variability there in the net yield, but I think we feel good about the in-force yield, I think, remaining flat again for 2024, as we said.

Got it. Thanks, that’s helpful. And then any color you can provide on NIW for the quarter, was quite a bit lower Q-over-Q and year-over-year. Was there any, I guess, underwriting changes or pricing actions?

No, nothing really there. This is Tim. I think it’s somewhat representative of the size of the market. We’ve the first report. I think we lost a little bit of share, but I don’t think much, and I think we’re really happy with the quality of the book that we wrote. But nothing from us as far as approach to the market, anything like that. Really happy with the quality of the $11 billion that we wrote.

Okay. Great, thank you.

Sure.

Thank you. [Operator Instructions] Our next question comes from the line of Geoffrey Dunn from Dowling & Partners.

Thanks. Good morning, guys. First question, as you look at future underwriter dividends, how do you and the regulator think about minimum surplus levels?

I’d say that’s not a conversation we’ve had directly partly because I don’t think we’ve approached that level yet. I think we’ve noted other Wisconsin domicile companies that have much less than the $600 million of surplus that MGIC had at the end of 2023. So I think we still have some flexibility to continue to pay dividends. If our capital levels are above our target level as they have been for some time. So with the contingency reserve releases coming in as well starting in ‘24 and then in ‘25, we may not get to the point where we’re talking about how little surplus we may have to continue to support dividends at the level that we had in 2023.

Are you able to give some guidance with respect to your expectations on dividends? I mean, something similar to ‘23 going forward?

Yes. I mean I think if you look at what we did in 2022 and 2023, you saw dividend levels that were kind of somewhat in-line with the income that we earned as a company. So I think if we continue to generate the financial results that we have, continue to have the capital position that we have that will continue to support dividends that have been fairly large over the last couple of years. But for us, the starting point is always making sure that we have sufficient capital above our target levels or at our target levels at the operating company. Once that’s satisfied, then I think we can start the dividend discussion. But with credit performance, the way that it’s been over the last 2 years, it’s supported, I think, $1.4 billion over the last 2 years in dividends from the opco, plus another $200 million in intercompany tax settlement. So there is a lot of cash going to the holding company over the last 2 years.

Right. Okay. And then my other question is, when you look at the reserve development, we continue to see – I think you noted it was second half ‘21, ‘22. Can you maybe parse that out a little bit more? Is the majority of the development we saw this quarter from ‘21. Because I’m assuming as you get into ‘22, the equity benefits on claim rates experienced probably gets a lot thinner. Do you have any more color there?

Yes. No, happy to. I think it’s actually more from 2022. And I think it’s less about the kind of our estimates, let’s say, embedded equity on those items. And again, these are notices received in that period, not necessarily loans from that book your vintage. But really, it’s the strength of the cure activity that we’ve seen. Our initial ultimate loss expectations have been around 7.5% ultimate claim rate for some time. But actual experience on kind of closer to fully developed notice quarters from ‘21 and early ‘22, is just much less than that. And really, it’s that cure activity that is driving the reserve development in those periods versus, I think, a view of home price appreciation or other factors like that.

Okay. Alright. So just to clarify, these are loans that have been in portfolio then for 9, 12 plus months, not ‘22 vintage that you are referring to?

Exactly. When we say that the reserve development came from, it’s really new notices received in 2022, not from the 2022 vintage. I mean there is relatively few notices that we have from ‘22 or ‘23 vintages at this point.

Okay. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Eric Hagen from BTIG.

Hi. Thanks. Good morning. I actually wanted to follow-up on that last point you were just making about the cure rate for the portfolio and what you feel like has actually kept that so stable. Are borrowers actually receiving modifications and what’s the nature of that modification of the cure? And what do you feel like would catalyze the cure rate to maybe change from here?

Alright. Eric, it’s Nathan. I mean that’s – it’s a really good question. I think it’s a tough one to know with any specificity just because there is a whole host of reasons. They all, I think have been pulling in the direction of more favorable credit performance over the last several years. The kind of forbearance in modification programs that are in the market that certainly helps, the employment rate staying very, very high, unemployment being very low, helped. The value of kind of homeownership and the utility of a house in kind of a work remote or hybrid kind of world, I think is going up and home price appreciation, even in our part of the market, which is more like the FHFA purchase-only index than maybe the Case-Shiller 20-City Index has continued to rise in ‘22 and ‘23 as well. So, that – I think that combination of factors is really all pulling towards kind of good outcomes for borrowers and ultimately kind of better-than-expected credit performance for us.

Yes, that’s definitely helpful. On the policy towards stock buybacks and capital return in general, I mean how sensitive would you say it is toward nationwide unemployment rates and other economic conditions, or is it really just sensitive to the unemployment rate or conditions in your own portfolio?

Eric, I may need you to clarify. Were you trying to draw a link between our share repurchase appetite and the unemployment rate?

Pretty much, yes. And whether you see that being sensitive to nationwide unemployment rates, or does it really just need to appear and start appearing in your own portfolio before you maybe change that policy?

Yes. I would probably just reiterate. Ultimately, our ability to return capital to shareholders via dividends and share repurchases is about getting the money to the holding company where those activities happen. We already have – at the end of the year, we had about $900 million at the holding company. So, we have a lot of flexibility even today. But over time, it will be about getting dividends out of the underwriting company. And again, that’s about capital levels being above our target levels. And our targets are built on a number of things, but one of them is what’s our expectation of future performance. And do we need that capital to support increased risk either in the loans that we are insuring or increased risk in the market that we are operating in. So, we have had periods, post-COVID where we didn’t pay dividends for about 1.5 years from MGIC to the holding company because it felt like the right thing to do was to retain that capital at MGIC because of the increased uncertainty in the environment there. So, as long as we still feel like we have capital above our target levels at MGIC that will fund dividends to the HoldCo. And as Tim said, with our debt to capital at our target range right now, the primary purpose of the holding company money above our target levels there for liquidity and kind of risk purposes is really to return.

Yes. That’s all really helpful. Thank you, guys.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Mihir Bhatia from Bank of America.

Hey. Good morning. Thank you for taking my question. The first question I had was just on the NIW outlook. I think you mentioned a similar sized NIW market in 2024 and ‘23? Like is that for MTG in particular or was that industry or both, I guess?

So, I think we are talking mostly about sort of MI originations overall. I think we would expect that the size of the overall origination market totally and then you think about penetration of those that are insured and then private mortgage insurance, but that’s probably pretty similar this coming year in ‘24 to what it was in ‘23.

So, I guess I am a little curious about that. Like, we look at industry forecasts, they generally have originations up, including purchase originations up a little bit year-over-year, but you also have some refi coming back. And I guess I am curious as to why you think, like why wouldn’t the NIW, and particularly, if we get rate cuts as everyone seems to expect now, like, will the penetration go down? Is there something about the market that’s making you feel like MI penetration is going down, because I would have thought it would be going up given affordability challenges, but I mean you tell me?

Yes. Obviously, when you think about mix and purchase and refi, if we get a little bit more refi at the back half of the year, we don’t expect that’s really going to help, it’s probably going to hurt the penetration rate, right. There would be more overall originations. But I think ultimately, it hurts the penetration for us. So, I don’t think there is a lot of pickup from MI origination of refi in the back half of this year, just what would be available to refi and what would ultimately refi. Again, I wouldn’t paint as a negative view of this year. I think we just think the ‘24 is shaping up to look pretty similar to ‘23 overall. Hopefully, there is upside to that. But I think overall, I think that’s sort of our view. From our perspective, we were a little bit lower on share on average during the course of ‘23 than we have been historically. So, I think we might pick up a little bit there if the returns are appropriate. But from an overall MI origination standpoint, we think that’s relatively flat.

Got it. Thank you. And then just switching gears a little bit maybe to the returns point, right? You had a 15% ROE this quarter for a pretty similar last quarter too. And I was wondering, is this as good as it gets? I mean you are guiding to losses going up – sorry, not losses, but delinquency notices going up, which will obviously have an effect on provisions. And presumably, you don’t assume reserve releases in the future, that would suggest ROE would go down prospectively. And I was curious, I did want to get your thoughts on that, is like the MI business, a low double-digit ROE business from here? Is that like kind of your view, or do you have any comments there?

Yes. I think it’s a really valid question, right, because we benefited from exceptional credit quality, both in the terms of low new notices as well as a good amount of reserve releases, as Nathan talked in detail about some of those. And I think we have been saying for actually a number of years that credit is as good as it can get to a large extent, right. And so if you think about normalized through the cycle, and how we price the business and think about it, we price assuming that losses are higher than what we have been experiencing, and that’s going to continue to be our view on it. So, I think there has been a tremendous amount of tailwinds from a credit standpoint. We have continued to be wrong as far as that credit could get a little bit worse. And when we say get a little bit worse, we still view it as likely better than what people think sort of historical averages are. So, still feel really good about the credit box. But again, I think we just – we want to be cautious about how good it’s been from a credit standpoint versus what we would view as still a really good credit quality market that would show some losses in it, right. It’s not usual to have negative incurred losses, quite frankly. With that, I think again, we talked a little bit at the beginning as far as originations. We think from a premium standpoint, we said relatively flat as far as the average premium this year. So, I think there is a little challenge from an ROE this next year if you don’t have the same level of reserve releases, which is quite frankly, difficult when you have less raw material in the loss reserves. But we think that’s still really good return business, high-quality, exceptional, and I think appropriate returns for the risk that we are ultimately taking.

That’s fair. Okay. Thank you for taking my questions.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Geoffrey Dunn from Dowling & Partners.

Thanks. Good morning. Sorry, just a quick follow-up. Can you just review the specifics of your targeted minimum holding company liquidity?

Geoff, it’s Nathan. I mean what we have talked about is holding back a couple of years for the dividend to protect that for periods where we are not able to pay or don’t want to pay dividends from MGIC to the holding company. And then also a few years for interest on outstanding debt, and as that debt comes closer to being due, some amount of principal there. But with the debt not coming due now for about, I think it’s 4.5 years, August 28th, that’s not really something that we are thinking much about right now.

Okay. Great. Thank you.

Thank you.

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, Gigi. I want to thank everyone for your interest in MGIC and remind you that we will be participating in the BofA and UBS Financial Services conferences later this month. Have a great rest of your week everyone. Thanks.

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