Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation Fourth Quarter 2021 Earnings Call. At this time, all lines have been placed on mute to prevent any background noise. At the end of today's presentation, we will have a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mike Zimmerman. Please go ahead.

Thanks, Jay. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the fourth quarter of 2021, our Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. I want to remind all participants that our earnings release of last evening which may be accessed on MGIC's website which is located at mtg.mgic.com, includes additional information about the company's quarterly results that we will refer to during the call and includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force, new insurance written reinsurance transactions and other information which we think you'll find valuable. I also wanted to remind -- and always, I wanted to remind listeners that from time-to-time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and other interested parties may find valuable. 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 those factors, including COVID-19, that could cause actual results to differ materially from those discussed in the call are contained in the Form 8-K that was filed last night. If the company makes any forward-looking statements, we're not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested party 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 the 8-K. With that, I'd like to turn the call over to Tim Mattke.

Thanks, Mike and good morning, everyone. I'm pleased to report that we achieved very strong financial results in the fourth quarter and for that matter, the full year of 2021. These results reflect the solid credit quality of our growing insurance in force, a strong housing market, the decreasing delinquency rate and our market presence as well as the current favorable economic conditions. After my opening remarks, Nathan will provide more detail on our financial results and review the progress we have made executing on our capital management strategy. Then before we open the line for questions, I will wrap up by discussing the current operating environment, including activities related to housing finance policy. During the quarter, we earned GAAP net income of $174 million, nearly 15% more than the same period last year. For the full year of 2021, GAAP net income increased 42% to $635 million compared to $446 million in 2020. These strong quarterly and annual financial results improved primarily because losses incurred were materially lower when compared to the same periods of 2020. The improved credit performance reflects the lower level of new delinquency notices received throughout 2021 compared to 2020 and the improved cure rates on policies previously reported delinquent. I am optimistic that the favorable delinquency trends that we have been experiencing will continue throughout 2022. In addition to our improvement in losses incurred, in 2021, we capitalized on one of the largest mortgage insurance markets in the company's 65-year history by writing a record $120 billion of new insurance, including $27 billion in the fourth quarter. This level of new business writings combined with a higher annual persistency resulted in our insurance in force increasing to $274 billion, 11% higher than the same period last year. Going into 2022, single-family housing demand remained…

Thanks, Tim and good morning. As Tim mentioned, we ended 2021 with another quarter of strong financial results. In the fourth quarter, we earned $174 million of net income or $0.52 per diluted share and generated an annualized 16.6% return on beginning shareholders' equity. For the full year, net income was $635 million or $1.85 per diluted share compared to $446 million or $1.29 per diluted share in 2020. The return on beginning shareholders' equity was 13.5% in 2021 compared to 10.4% last year. On adjusted net operating income basis, in the fourth quarter, we earned $0.61 per diluted share versus $0.43 per diluted share in 2020. For the full year, we earned $1.91 per diluted share versus $1.32 in 2020. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release. During the quarter, total revenues were $294 million compared to $302 million last year. The net premium yield for the fourth quarter was 37.3 basis points which was down 1.1 basis points compared to last quarter and down 5.6 basis points from the fourth quarter of 2020. The decrease in the net premium yield continues to be primarily the result of a decline in the in-force premium yield as the older policies continue to run off and be replaced with policies which generally have lower premium rates. The low level of refinance activity decreased the amount of accelerated premiums earned from single premium policy cancellations. During the quarter, they were $18 million which was flat to last quarter but down from $32 million earned in the fourth quarter of 2020. We expect that as the older vintages continue to run off, the in-force premium yield will continue to decline throughout 2022 at a similar pace that it did in 2021.…

Thanks, Nathan. Before moving to questions, let me address a few additional topics. The federal government through various agencies, including the FHFA, CFPB and the FHA, continues to focus its housing policy efforts on promoting equitable access to sustainable and affordable housing, mitigating foreclosure and eviction risk for homeowners impacted by COVID-19 and ensuring a successful economic recovery as opposed to making large-scale changes to the housing finance infrastructure. We will continue to advocate for the increased use of private mortgage insurance in the housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system. At MGIC, we are focused on providing critical support to the housing market, especially low and moderate income and first-time homebuyers. We had a very successful year. We wrote a record $120 billion of new business through our insurance in-force book by 11%, generated $635 million of net income, delivered a 7 -- 13.5% return on equity, improved book value per share by 9.3% and reduced the number of shares outstanding by 5.4%. Longer term, I remain encouraged about the future role that our company and industry can play in housing finance and believe that many regulators and policymakers share a similar view as our company and the industry are organized solely to provide credit enhancement solutions to lenders, borrowers and the GSEs in all economic cycles. Not only does private mortgage insurance offer dedicated capital day in and day out to the housing industry but also offers many solutions and a great value proposition for lenders and consumers to overcome the #1 barrier to homeownership, the down payment. In summary, we are currently writing high levels of quality new insurance and are experiencing low levels of delinquencies. The housing market remains robust and we have a book of business that has strong underlying credit characteristics which is supported by a strong and dynamic balance sheet with a low debt-to-capital ratio, an investment portfolio of nearly $7 billion, contractual premium flow and a robust reinsurance program. I'm confident in our positioning in this market and we like the risk reward equation that the current conditions offer. We have the right team in place to build up our solid foundation to continue to deliver competitive offerings and our best-in-class service to our customers and generate strong returns for our shareholders through the core business as well as capital returns. With that, operator, let's take questions.

Thank you. [Operator Instructions] Our first question comes from the line of Doug Harter of Credit Suisse. Your line is open.

Thanks. In your prepared remarks, you mentioned that you expect the in-force yield to continue to decline. Is there any sense you can give us as to maybe over the course of '21 where the yield is on new insurance written versus the in-force yield, just to get a sense of magnitude as to where that ultimately might level out?

Hey, Doug, it's Nathan. Thanks for the question. We haven't disclosed what the kind of current rate on new business is. But we saw the in-force yield come down about a basis point a quarter throughout 2021. That's kind of what we're -- what we think is the most likely scenario for 2022.

Great. And then I guess on the single premium cancellation given that rates have kind of already risen, has that kind of stabilized? Or is there more pressure -- is that number set to come down as persistency improves further?

Yes. It's Nathan again. I think that even in environments with flat or even rising rates, we will see some level of accelerated single cancellation just as we see some level of kind of normal fall off. But the level that we're seeing now reflects an environment where we had less than 10% refinance transaction. So could it go lower from here? Certainly. But I don't think it's not as if it's going to go to 0 just because rates are rising.

That's helpful. Thank you, Nathan.

Thank you. Our next question comes from the line of Cullen Johnson of Riley. Your line is open.

Hey, good morning, thanks for taking my questions. When you look at the percentage of risk in force, it's concentrated in the policy years 2020 and 2021, had about 70% that it kind of appears high for any two policy years just by historical levels. So I'm curious how do you think about maybe that level of concentration risk, so to speak, in those two policy years going forward?

Hey Cullen, it's Tim. It's a good question. I think it's something we're cognizant of, right? And two of the biggest sort of markets in our history. I think we also look at 2022. As we said, we think that's going to be another large market. So we think about sort of temporal diversification that you'll have with that. I think ultimately, we also look at the underlying credit quality of those books of business and have a great amount of confidence in what that credit quality is absent [ph] what's happened with home price appreciation. But obviously, with the home price appreciation that's happened over the last couple of years, feel good, especially about the 2020 book of business that would have been originated sort of prior to a lot of that sort of appreciation happening. So while it's something we do keep an eye on. It's something I would say that we're not concerned about based upon all those sort of qualities that I discussed.

Got it. That's helpful. And then the release kind of mentioned that you terminated the 2017 and 2018 QSR transactions in the quarter. I'm just curious maybe what drove that decision? Or maybe just more broadly, what are the advantages of ending a QSR policy early?

Yes. Cullen, it's Nathan. Yes, we mentioned last quarter on the call that we had elected to cancel those. We had to give kind of a notice period. But I think the rationale is really that because of the large amounts of runoff out of those book years, those deals have just gotten relatively small. Each one was providing maybe less than $50 million of PMIERs benefit for us. So partially, administratively, we feel really comfortable coming back on to risk from loans that were written in 2017 and 2018. And just felt like the right answer for us from a -- and I think given our capital position, could certainly absorb taking on that incremental risk as well.

Okay, great. That makes sense. Thanks, you answered all of my questions.

Thanks.

Thank you. Next question comes from the line of Mark DeVries of Barclays. Your line is open.

Yes, thanks. Actually, I have a couple of follow-ups on topics already addressed. On the average premium, Nathan, my understanding is that one of the headwinds has been the accelerated kind of runoff of higher premium business written in the past. Wouldn't you expect that headwind to at least fade some as we go into 2022, is refinance release falls off?

Yes. No, Mark, it's a good question. I do think we expect that 2022 is going to be a large market as well. Some of that may start to fall off a little bit but current new business is being written below the average in-force yield. So we do think that just naturally, it's going to continue to come down. Certainly have a lot more conviction in that over the next quarter or two than beyond that just because market dynamics evolve and the size of the market and runoff, et cetera. But I think continuing to guide to about a basis point a quarter for us on the in-force yield coming down through 2022.

Okay, got it. And then, could you discuss what impact high HPA we've seen as having on the quality of the borrowers you're ensuring? Are higher prices pushing out lower-income borrowers and maybe pushing some higher-income borrowers into needing loans with MI who might have otherwise had enough money to kind of put down to buy a home?

Hey Mark, it's Mike. On the margin, I'll say, yes, to that. And you can kind of see that reflective -- I'd say, really in any purchase market but certainly because of the HPA over the last couple of years, it's probably tighten that a little bit more but you see a little bit of a drift up in the percentage of DTIs above 45% which for us still remains pretty low, somewhere around 14%, 15% or so above that 45%, a little bit lower -- a little bit higher on the LTV. So I'd say on the margin, that's the case but we haven't seen a broad swath of -- when you look at the FICO distributions and things of that nature, there's not material changes there but certainly on the margin.

Yes. And then just a related question on that; how do you think about the impact of that HPA on risk? I mean, obviously, it's an unmitigated positive for your existing risk. But when you think about writing new business on prices which are up 20% year-over-year, how do you think about kind of the risk of a correction and what that could do for credit on new business?

Yes Mark, it's Tim. I mean it's something that we have to think about, right? It's -- as with any sort of asset when there's increased depreciation, you think about what the stress scenarios can be and what sort of peak to trough can be. I think we feel pretty confident in the work we do on stress scenarios that we're taking that into account in our pricing dynamics and feel like we still are a really good risk return equation. But I think you're right. When you think about home price appreciation, it makes you feel really good about the books of business you've already written but you have to -- I mean what we're focused on always is what does it do to your pricing now and still feel really confident about sort of pricing dynamics to be able to get the right return, even with -- I think it's safe to say, you can paint worse stress scenarios, although with the credit quality of the book of business, I think it's tough to paint really dire sort of stress scenarios for us, especially when we consider all the reinsurance we have behind our books of business as well.

Okay, Tim. That's helpful.

Yes. Mark, I was just going to add on that with the reinsurance comment that, Tim, made there to a lot of the focus over the last -- recent period is a bit about the capital benefits of the reinsurance. But obviously, there's multiple values of having programs in place that, to Tim's point.

Yes, that makes sense. Thank you.

Thanks.

Thank you. Next question comes from the line of Bose George of KBW. Your line is open.

Bose?

Hi, guys. Can you hear me?

Yes.

Yes.

Great. First, actually, can you just talk about how we could think about the size of potential dividends up to the holding company this year relative to what you've paid back -- paid in 2021?

Bose, it's Nathan. I'll take that one. I think like we've said for some time, it's really going to be dependent on the capital situation that we are throughout the year. So if we're in a favorable macroeconomic environment, we do think that we're going to continue to generate capital above our target levels. That will be supportive of dividends. And we've shown in the last half of this year that we can pay dividends at a fairly high rate. But I think first order condition there is that the environment is attractive for us and that we think we have excess capital. So that's an evaluation that we'll continue to make. And if appropriate and if we can get the approvals from our regulators, we'll look to continue to pay dividends.

And just a follow-up on that. I mean the dividends in the back half of '21. I guess was that -- should we think of that as a bit of a catch-up in the sense of that -- maybe that's more of an annualized level of payout that you did, I guess, effectively $400 million for the year?

Yes. Again, I would just point to, given our capital position at both kind of the end of the second quarter and the end of the third quarter, I feel comfortable with the $150 million dividend and then the $250 million dividend. We'll continue to reassess. And if we think that our capital position and the environment supports dividends at that level, or higher or lower, then that's kind of the path that we'll follow going forward.

Okay. And then actually just one on market share. I mean, I guess, it's early to tell but it looks your NIW came in a little better than we had expected. Just curious your thoughts on how you see your share in the market? And then also on a related note, just in the bulk market, how is that trending? Or is that moving share around a little bit as well? Thanks.

I don't -- from a bulk market, I really don't think there's much there to, I guess, to focus on removing share around. It's tough to know obviously exactly where other people are being only the second release, again, it's tough to know where we fall in a market share. I think we fall back on -- we felt really good about the capital, we were able to deploy this quarter, felt the market was good. I think we feel like we have a pretty good read on what the market is and sort of pricing in the market. And I also think that we're delivering sort of the customer service to our customers that they want and that's translating into a lot of good high-quality business that we're writing. So we'll wait and see what other people report but we feel good about what we were able to accomplish in the fourth quarter.

Okay, great. Thanks.

Thank you. Next question comes from the line of Mihir Bhatia of Bank of America. Your line is open.

Hi, good morning and thank you for taking my questions. Just one maybe to start, I did want to ask about just loan performance of the forbearance loans in particular. Are they performing in line with regular performing mortgages? Or is it more in line with reperforming mortgages as they cure?

Hey Mihir, this is Mike. If I'm following all right, I mean, because both when they're reperforming, they're reperforming. So they got higher the same when you're recurrent. But these loans that are coming out of forbearance, we don't get complete reporting but on the reporting we get, the majority of them are coming out that are considered current have used the deferral program and they're continuing to need their monthly obligations and staying current. So performing just like any other borrower that is current on our obligations.

Okay. Yes, maybe I'm not asking it clearly. I guess what I was trying to understand is like it seems like previously delinquent mortgages have a higher tendency to be delinquent again versus regular...

No, I see. Yes, I got you. Yes. No, I mean, I think too early in the cycle there. But I think just like with the HAMP modifications, right? The borrowers' payments did not go up. The mortgages weren't capitalized. And like on the HAMP modifications, the vast majority of those continue to perform. They don't redefault. I think we'd expect similar, if not better, performance out of these because they just extended out the mortgage payments but too early to tell anything definitive on it.

Understood. And then, just one other question. In terms of your delinquent inventory, just given the home price appreciation, can you give a statistic on how much -- or can you give a statistic on how much of the inventory has, I don't know, like LTV below 90%? As you estimated, I understand it's probably at like an MSA level versus individual level but just trying to understand how much home price appreciation has your delinquent inventory?

They don't have the right [indiscernible]. We do certainly look at the adjusted the mark-to-market LTV and maybe kind of referring back to a question earlier about the risk profile of so much being in the '21 business. So you certainly look at it. I'd say the vast majority have seen price appreciation because you look at it the MSA level. I don't have a precise figure for you to give. But I think similar to what you're hearing across the marketplace, general that the vast majority of loans '18, '19 and '20 [ph] are the ones that are delinquent and there's been a lot of price appreciation.

Okay. And my last question is just, are there any markets, anything you're looking at right now where it gives you pause? I mean it feels like it's a very benign housing credit environment, very favorable backdrop. So I'm just curious, is there anything out there that you're looking at which is maybe giving you pause or where you're thinking you might be pulling back a little bit? Anything that you can comment on that? Thank you.

Yes. It's Tim. I mean we're always looking for if there's any weaknesses in if it's certain markets, certain sectors. So it's something we look at regularly. I think it's fair to say that we still feel really good about housing and HPA and sort of the environment that we're originating into right now. And I think that's pretty broad, right? I would say from any market specifically, I don't think anything that gives us tremendous amount of pause. But again, I think as we talk about factors of HPA and where prices continue to go up, when you think about affordability, it's something that we'll continue to watch as we move through 2022 but I'd say through what we've written in 2021 in the first part of -- the first month here in '22. It's just something we're monitoring but nothing that I would say that we feel concerned about.

Thank you.

Sure.

Thank you. Next question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is open.

Hi guys, good morning. Nathan, just to revisit the dividend discussion, you've historically been a quarterly consistent dividend payer out of MGIC. Obviously, the last two quarters have been lumpy specials. Are you going back to a regular quarterly dividend supplemented by specials? Or is it more of a one-off special approach on an annual basis going forward?

Yes. Geoff, no, thanks for the question. We did have the quarterly dividend from MGIC, the holding company pre-COVID. But if you recall, we also paid a $320 million kind of special dividend on top of that. At the time, initially, the dividends were really trying to line up to the holding company's obligations. But given our liquidity position, that didn't make as much sense to us. And so I think we're probably down the path of seeking special dividends on a kind of more ad hoc basis. But I wouldn't say they're necessarily annual. I think they could be more frequent than annual. I just don't think they're going to happen quarterly like they did pre-COVID.

Okay. And then, Tim, you mentioned that expenses are going to remain elevated with your tech investment and you call them kind of transformational. Can you talk a little bit more about that? What does that mean for MGIC [ph]? What does it improve at your business? What does it change going forward? And what is the underlying run rate expense base? And when might we return to that? Or do you just grow into it?

Yes. I'll talk a little bit about, I guess, the high level and let Nathan talk a little bit about the run rate. But I view it on a couple of dimensions. One is, I think we've tried to invest smartly about how we approach the market. And Nathan sort of alluded to that in the opening remarks. The environment in which we compete and how we need to understand market dynamics from a pricing standpoint are different than they were three or four years ago. And so we've tried to invest in that regard and think that we've done a really good job of understanding sort of the market dynamics through some of that investment. I think when you dive a little bit deeper from an analytical standpoint, we strongly believe, too, that there's things that we can think about from a credit standpoint over time in the underwriting process and pricing the risk appropriately. I think others have talked about that in the industry, too. And so I think we're -- I think just scratching the surface on those types of things and I don't think those things probably pay as quick a dividend necessarily but to make sure that we're staying on top of that. And then, the other way is really how we think about our customer service, right and how we interact with our customers and making sure that we -- our platforms from an operation standpoint allow us to integrate seamlessly with our customers who are, over time, really going to be looking to be more efficient themselves. And so from our company standpoint, we always want to make sure that we can meet customers where they want to be met and we can meet and exceed their expectations as to how to interact with the company and think that there's more investment in the digitization of mortgage than probably ever has been. And we want to make sure that we're on the forefront of that as opposed to lagging behind on that. And I think that will pay dividends as well as it has over time for MGIC of maintaining great customer service when we interact with our customers.

Yes. And Geoff, just relative to kind of run rate and where we are today versus the future, I think we do expect some level of elevated investment. I gave the kind of guidance in the kind of $230 million range. I think if you think about 2023, we think there's -- that's another year of elevated investment for us. Exactly what that looks like will be largely dependent on our successes in 2022 and where the market is and where we need to be. But as we sit here today, I think -- we think that level starts to come down a little bit beyond that point. But we'll continue to kind of reevaluate what we need to compete effectively in the market and make sure we're well positioned to do that.

Okay. And then my last question is on ILN cost of capital. If you do the upfront expense when the deal is launched, the credit you get, it looks like it's low to mid-single digit after tax. But how do you think about the true cost of capital across the cycle when you look at your two oldest deals that are still outstanding, providing no PMIERs capital benefit?

Yes Geoff, it's Nathan. I think it's a good question. And those first two deals were structured in a way with delinquency triggers that didn't react great during COVID, where we had a large increase in delinquencies but also a large runoff of in-force policies which has kept the delinquency rate which is kind of the number of loans divided by the now remaining number of loans above those thresholds. The whole market has changed the structure of the deals to not necessarily -- to contemplate that situation so that, that doesn't happen again. And you see on our kind of most recent two deals, the one that's starting to pay down, it's happening kind of consistent with the PMIERs benefit running off. But when we think about cost of capital for doing a deal, we're not just thinking about one scenario, we're looking at a wide range of scenarios, including somewhere the [indiscernible] take losses, scenarios where prepayments are fast or slow. And for us, at inception, the expected cost is very attractive which is, I think, why we'll continue to try to execute on that market as long as it's available.

Okay, great. Thank you.

Thank you. Next question comes from the line of Ryan Gilbert of BTIG. Your line is open.

Hi, good morning, everyone. First question on purchase NIW. The year-over-year growth looked particularly strong, better than I expected. And I'm wondering if you can add any details into what was driving the growth. Is that just how you think the -- is that just how volume looked in the fourth quarter? Or do you think that there were some differences in your competitive positioning relative to peers that drove that growth? Any details would help.

It's Tim. I don't think there is anything specific that we did on that regard. Obviously, it's mostly driven by our customers and where they're producing. So I don't think there's -- I don't have any great insights as to why that performed better than maybe what you would have expected. But it wasn't anything, from a positioning standpoint, on our end, just trying to deploy capital and obviously a heavy purchase market that we saw in the fourth quarter.

Okay, got it. Thanks. And then second question would just love to hear some details or color around the new business opportunities that you're evaluating. Is that within the core PMI business? Or are you looking at adjacent industries?

Yes. I would -- it's Tim. I would say that there's nothing specific to talk about there. I think what we have said in the past and we'll continue to say is, we want to make sure that we keep our eyes open to opportunities. First, we got to service the market and our customers the way that we currently do. But as we've had excess capital and think about sort of how we can deploy that, we want to at least think about those type of opportunities and consider them. And obviously, here few different opportunities that could be out there. And quite frankly, I haven't found anything that's really actionable and think that ultimately for our shareholders, the best thing that we could do then at that point is purchase down -- purchasing some of the debt, share repurchases, the dividends to the shareholders. But we always want to be cognizant of if there's other opportunities out there that could either enhance what we currently do or be something else. But I would say that there's nothing specific that we think is actionable in the near term by any means.

Okay, got it. Yes. And the capital priorities as you laid them out, make a lot of sense. Is there just -- has there been any just change in terms of quality of opportunities or pricing in the market that warranted to call out this quarter versus others?

I don't think anything specifically. No. I mean, I think the market obviously dictates a little bit of what flows to you at certain time depending upon maybe how other people react. But I think the fourth quarter in particular, I didn't -- I don't think we saw much of anything that seemed unusual or that significant shift in maybe how competition was behaving. So it felt like it was, again, a very good quarter, felt comfortable with the capital we were able to deploy it, the returns we're able to deploy it. And again, looking forward to 2022.

Okay, that's all I have. Thank you very much.

Thank you.

There are no further questions at this time. And I would like to turn the call over to our presenters for closing remarks.

Okay. Thanks, Jay. I appreciate everyone's interest in MGIC and hope everyone has a great day.

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