MGIC Investment Corporation (NYSE:MTG) Q2 2025 Earnings Call Transcript

MGIC Investment Corporation (NYSE:MTG) Q2 2025 Earnings Call Transcript July 31, 2025

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Second Quarter 2025 Earnings Call. [Operator Instructions]. I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead.

Dianna L. Higgins: Thank you, Brittany. Good morning, and welcome, everyone. 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 and Chief Risk 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 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 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 Form 8-K and 10-Q 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 or 10-Q. With that, I now have the pleasure to turn the call over to Tim.

Timothy James Mattke: Thanks, Dianna, and good morning, everyone. In the second quarter, we recorded net income of $193 million and an annualized return on equity of 15%. Our performance this quarter and throughout the first half of the year reflects our continued disciplined approach to the market, prudent risk and capital management strategies and our ongoing commitment to creating long-term value for our stakeholders. During the quarter, we wrote $16 billion of new insurance. Insurance in force, the primary driver of our revenue ended the quarter at $297 billion. Annual persistency was 85% at the end of the quarter. Both insurance in force and annual persistency remained relatively flat over the past 2 quarters, in line with our expectations at the start of the year.

We continue to be encouraged by the strong credit performance of our insurance portfolio. Our disciplined risk management and strong underwriting standards remain key drivers of the quality of our portfolio and the new insurance we’ve written continues to have solid credit characteristics. As always, we remain focused on building and maintaining a high-quality, well-diversified portfolio that supports our long-term success. Turning to capital management. As we discussed on prior calls, our strategy is grounded in maintaining financial strength and flexibility to best position ourselves to navigate and achieve success in a range of economic scenarios. Key objectives include supporting growth by maintaining strong capital at the operating company and the holding company, sustaining a low to mid-teens debt-to-capital ratio and a healthy liquidity buffer.

When these objectives are met, we remain committed to returning excess capital to shareholders through share repurchases and common stock dividends. During the second quarter, we continue to allocate excess capital to share repurchases, which totaled 7.1 million shares for $181 million. We also paid a quarterly common stock dividend of $0.13 per share, totaling $31 million. Over the prior 4 quarters, share repurchases totaled $721 million and shareholder dividends totaled $132 million. Combined, this represents a 112% payout on the net income we earned in the period. In addition, in the third quarter, through July 25, we repurchased an additional 2.6 million shares of common stock for $68 million. This share repurchase activity continues to reflect our capital strength and solid financial results.

As of July 25, we had $734 million remaining on our current share repurchase authorization. We continue to expect share repurchases will remain our primary method of returning capital to shareholders, while at the same time continuing to pay a quarterly common stock dividend. As previously announced, in the second quarter, we paid a $400 million dividend from MGIC to the holding company, ending the quarter with $1 billion of liquidity at the holding company. As always, we prioritize prudent growth over capital return. However, market conditions have continued to limit our growth of insurance in force, a trend we expect will persist through the remainder of the year. As a result, our credit performance remained strong, we anticipate capital levels of both MGIC and the holding company will stay above targets supporting the continuation of elevated payout ratios.

The strong financial position of both the holding company and the operating company were key factors in the Board last week authorizing a 15% increase to our quarterly common stock dividend to $0.15 per share, marking 5 consecutive years of dividend increases with a compound annual growth rate of 20% over that period. Turning more broadly to the current environment. While the housing market continues to face headwinds from elevated interest rates, ongoing affordability challenges and a slowdown in home sales, we remain encouraged by demographic trends and pent-up demand supporting long-term growth in MI opportunities. Nationally, home price growth has moderated in many markets, particularly in the South and West are seeing rising inventory, but to date, the housing market has remained resilient.

While affordability remains a challenge for many prospective homebuyers, private mortgage insurance continues to play a critical role in helping low down payment borrowers access homeownership sooner. Now let me turn it over to Nathan to get into more details on our financial results for the quarter.

Nathaniel Howe Colson: Thanks, Tim, and good morning. As Tim discussed, we had solid financial results for the second quarter. We earned net income of $0.81 per diluted share, compared to $0.77 per diluted share during the same period last year. Adjusted net operating income was $0.82 per diluted share, compared to $0.77 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. Our solid operating performance and strong balance sheet drove an increase in book value per share to $22.11, an increase of 13% year-over-year. In the quarter, our reestimation of ultimate losses on prior delinquencies resulted in $54 million of favorable loss reserve development. The favorable development this quarter primarily came from delinquency notices we received in 2023 and 2024.

Cure rates on recent delinquency notices continue to exceed our expectations and we adjusted our ultimate loss expectations accordingly. For new delinquency notices, we continue to use the initial claim rate assumption of 7.5%, which is consistent with recent quarters. Taking a look at delinquency trends, our account-based delinquency rate decreased 9 basis points in the quarter to 2.21%, consistent with the seasonal trends we have discussed on past calls. Historically, February, March and April are seasonally the best months for mortgage credit performance. We continue to see evidence that seasonal credit trends have returned after being disrupted during the pandemic. As a result, we do not expect the decrease in the delinquency rate in the first half of the year, will continue in the back half of the year.

We received 12,000 new delinquency notices in the second quarter, 5% higher than the second quarter of last year and 7% less than the second quarter of 2019. Cures outpaced new notices in the quarter, reflecting the seasonality we’ve been discussing. Although the delinquency rate at the end of the second quarter was 12 basis points higher than a year ago, the number of new notices and the delinquency rate remained low by historical standards. Looking ahead, we continue to expect that the combination of seasonality and the aging of our large 2021 and 2022 book year vintages into what are historically higher loss emergence years will result in an increase in new delinquency notices and the delinquency rate in the second half of the year. The in-force premium yield was 38.3 basis points in the quarter, relatively flat sequentially and with the second quarter last year and consistent with what we expected.

As I mentioned on prior calls, with high persistency expected again this year and MI origination trends similar to last year, we continue to expect in-force premium yield to remain relatively flat for 2025. Investment income continues to contribute meaningfully to our revenue. The book yield on the portfolio was 4% at the end of the second quarter, relatively flat quarter-over-quarter, but up 10 basis points from a year ago. Net investment income was $61 million in the quarter, relatively flat sequentially and year-over-year. During the quarter, reinvestment rates on our fixed income portfolio continued to exceed our book yield. However, we anticipate the overall book yield will remain relatively flat for the remainder of the year. This is primarily due to a decline in shorter-term interest rates and elevated levels of capital return, both of which limit the growth of the investment portfolio.

The unrealized loss position on our portfolio narrowed by $36 million, primarily driven by a decrease in interest rates. We remain focused on disciplined expense management and continuing to drive operational efficiency across the organization. Operating expenses were $52 million this quarter, down from $55 million in the second quarter last year. Included in operating expenses this quarter was a $4 million accounting charge related to lump sum settlements from our pension plan due to the amount of those settlements. As a reminder, we froze the pension plan at the end of 2022. But as the plan gets smaller, we are more likely to trigger these accounting charges as lump sum settlements are paid out of the plan. We continue to expect the full year operating expenses will be in the range we previously provided of $195 million to $205 million.

As Tim mentioned earlier, our capital management strategy is grounded in maintaining flexibility and resilience in various environments. Our capital structure includes $6 billion of balance sheet capital and our well-established reinsurance program remains a key component of our risk and capital management strategies. In addition to reducing the loss volatility and stress scenarios, our reinsurance agreements provide capital diversification and flexibility at attractive costs and reduced our PMIERs required assets by $2.5 billion or approximately 43% at the end of the second quarter. We further bolstered our reinsurance program in the second quarter with two excess of loss agreements with panels of highly rated reinsurers to cover most of our 2025 and 2026 NIW.

These reinsurance agreements complement the 40% quota share agreements we had in place at the start of the year to cover the same in NIW. With that, let me turn it back over to Tim.

Timothy James Mattke: Thanks, Nathan. A couple of additional comments before we open it up for questions. The passing of One Big Beautiful Bill Act restores and makes permanent the tax deduction of MI premium, delivering meaningful tax relief to homeowners without increasing risk to the housing finance system. We are very pleased with the inclusion of this deduction and the tax relief that will be delivered to millions of homeowners. Private MI allows down payment to homebuyers to get off the sidelines and achieve the American dream of homeownership sooner. In closing, I am pleased with our financial performance in the second quarter and throughout the first half of the year. As we look ahead, our focus remains on driving long-term value creation for our shareholders while continuing to support our customers with high-quality products and solutions.

Together, we are helping low down payment borrowers achieve the dream of homeownership sooner. With that, Brittany, let’s take questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Doug Harter with UBS.

Douglas Michael Harter: 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?

Nathaniel Howe Colson: 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.

Douglas Michael Harter: And I guess just taking the other side, if these conditions continue, I mean what — could there be a case where you could even increase the payout further just given the strong capital and strong capital generation?

Nathaniel Howe Colson: At the operating company level, we are constrained at some level by our contingency reserve balance. So we do still have enough statutory surplus to continue to pay out dividends at these levels, but we have been drawing down that surplus level over time. So there is kind of a natural governor there over time. But I think for us, we do like to think about, it’s a long-term business. We like to think about things in the long term. So the idea of resetting the capital levels with maybe significant returns at any one time is not likely how we would approach it. I think this elevated payout ratio is a way to slowly draw down the excess capital while keeping an eye on what’s going on in the market is what’s been our approach the last several years, and I think it’s worked well for us, and I think that’s how we would think about it going forward.

Operator: Our next question comes from the line of Bose George with KBW.

Bose Thomas George: 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?

Nathaniel Howe Colson: 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.

Bose Thomas George: 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?

Nathaniel Howe Colson: 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.

Operator: Thank you so much. There are no further questions. I would now like to turn the call back over to management for closing remarks.

Timothy James Mattke: Thank you, Brittany. I want to thank everyone for your participation in today’s call and interest in MGIC. We will be participating in the Barclays Financial Services Conference and the Zelman Housing Summit in September. I look forward to talking to all of you again in the near future. Have a great rest of your week.

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