MGIC Investment Corporation

Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation fourth quarter 2022 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'll have a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I will now turn the conference over to Diana Higgins, Head of Investor Relations. Please go ahead.

Thank you, Justin. 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 fourth quarter are Tim Mackey, 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 and force and other information you may find valuable. As a reminder, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before we get started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results to differ materially from those discussed on the call today are contained in our 8K 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 issuance of our 8K. With that, I now have the pleasure to turn the call over to Tim.

Thanks, Diana. Good morning, everyone. I'm pleased to report that we had another great quarter. For that matter, we delivered exceptional financial results for the entire year while providing meaningful capital returns to our shareholders. Simply put, we had the best financial results in our 65-year history. We will get into details of the financial results throughout this call, but we again demonstrated the strength and flexibility of our capital position in the quarter and produced an annualized 16.9% return on equity. In the quarter, we earned $191 million of net income, an increase of 10% compared to the same period last year. For the full year, net income increased 36% to $865 million, an all-time high, compared to $635 million in 2021. Insurance in force at the end of the quarter stood at more than $295 billion, a 7.6% increase from a year ago. The growth in insurance in force during the year reflects an increased persistency rate offset by lower volumes of new insurance written. Persistency increased to 80% at the end of the quarter, up from 63% a year ago. In the quarter, we wrote $13 billion of NIW, and we finished the year with $76 billion of NIW. Although the volume of NIW is lower than the record volumes of the prior two years, 2022 was another great year, the third largest year in our 65-year history. We expect the reduction in our NIW volume for the fourth quarter is a reflection of the smaller MI market, but also reflective of our market position as we continue to take actions based upon the increased risk in the current environment with a focus on the continued long-term success of our company. Turning to the performance of our insurance and force portfolio, approximately 80% of our insurance and force is from the 2020 and later book years, and the credit quality of those books remains strong. To date, we have not seen a material change in credit performance in our portfolio overall. We remain encouraged by the continued favorable employment trends and the positive credit trends we continue to experience, including the low level of early payment defaults, which we believe is a good indicator of near-term credit performance. I also want to highlight that the rapid home price appreciation experience in the past couple years allowed homeowners to build up significant equity. This equity, combined with the strong credit quality of our insured portfolio, should help reduce the incidence of claims on the related mortgages on much of our risk and force, even with the modest declines of home prices in recent months. Our comprehensive reinsurance program will also help mitigate potential losses. As a result of the strength and flexibility of our capital position, During the year, we not only deployed capital to support new business and grow our insurance in force, we also paid $800 million in dividends from MGIC to the holding company. We used our strong capital position to repurchase most of the remaining convertible junior debentures due in 2063, repay MGIC's federal home loan bank advance, and redeem our senior notes due in 2023, reducing our leverage ratio to approximately 12% in annual interest expense by $25 million. We also returned approximately $500 million of capital to our shareholders through a combination of repurchasing common stock and paying common stock dividends, including a 25% increase in the quarterly dividend beginning in the third quarter. As I mentioned during last quarter's call, retiring debt and delevering has been a significant use to holding company cash in 2022. But with our debt to capital ratio in our target range and with the uncertainties and potential challenges in the economic environment in the near term, we continue to expect to retain higher levels of liquidity at the holding company. Our approach to capital management is dynamic so that we may continue to achieve our objectives in changing or stressed economic environments. We continually assess and evaluate the level of capital of both the operating company and holding company, including the level of capital that we retain for future deployment versus return to shareholders. As part of our assessment, we consider the operating environment we are or expect to be in. We strive to be prudent and thoughtful in our capital allocation decision making so that both the operating company and the holding company are positioned to achieve success in varying environments. Our balanced approach to capital management includes the use of forward commitment quota share reinsurance agreements and excess of loss reinsurance agreements. These agreements reduce the volatility of losses in weaker economic environments and provide diversification and flexibility of sources of capital. Approximately 85% of our risk and force was covered to some extent by reinsurance transactions at the end of the fourth quarter. Drilling down further, approximately 97% of the risk and force relating to the 2020 and later books was covered to some extent by reinsurance transactions at the end of the fourth quarter. We agreed to terms on a quota share agreement that will cover most of the policies written in 2023. This is in addition to the 15% quota share reinsurance agreement we already had in place to cover the 2023 NIW. bringing the total quota share that will cover most of the policies written in 2023 to 25%. In light of the current economic environment and near-term uncertainties, let me take a few minutes to provide some detail on our approach to credit risk. We employ a comprehensive risk management framework that includes our proprietary risk-based pricing engine for the majority of our customers, MIQ. MIQ allows for frequent and granular pricing changes including those to address our view of emerging and evolving market conditions and risk. We take actions intended to manage the mix of our portfolio, including expected returns, with a goal of positioning ourselves for continued success in changing environments. The timing between taking actions in the resulting NIW is not immediate, as pricing leaves NIW by a month or two on average. So what you see in the Q4 NIW is primarily a reflection of our views of risk return from last fall. While we won't comment on current market position and giving competitive considerations, our internal analytics indicate that our lower Q4 NIW was likely impacted by both the smaller MI market and a market share that was down a couple percentage points in the fourth quarter. Our market position continued to be defensive in recent months, which we expect will lead to further declines in our market share in the first quarter of 2023 and may be larger than the expected decline in the fourth quarter. We are comfortable with our actions and the results because it's reflective of our views of risk return while maintaining focus on our customer relationships and the continued long-term success of our company. With that, let me turn it over to Nathan.

Thanks, Tim, and good morning. As Tim mentioned, we had another strong quarter. We earned $191 million of net income, or $0.64 per diluted share, compared to $0.52 per diluted share during the fourth quarter last year. For the full year, we earned $865 million in net income compared to $635 million last year. On an adjusted net operating income basis, we earned $2.91 per diluted share, a 52% increase from the $1.91 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release. but the primary differences in the past two years have been losses on debt extinguishment from our debt reduction actions. The results for the fourth quarter and the full year were reflective of continued strong credit performance, which has led to favorable loss reserve development and resulted in losses incurred being negative each quarter in 2022. Net losses incurred were negative $31 million in the fourth quarter compared to negative $25 million in the fourth quarter last year. For the full year, losses incurred were negative $255 million compared to $65 million last year. Our review and re-estimation of ultimate losses on prior delinquencies resulted in $76 million of favorable loss reserve development compared to $141 million of favorable loss reserve development last quarter and $56 million of favorable loss reserve development in the fourth quarter of last year. The favorable development in the quarter was primarily related to new delinquencies from 2020 and 2021. As cure rates on those delinquencies continue to exceed our expectations, we have continued to adjust our ultimate loss expectations. In the quarter, the delinquency inventory increased by 2% to 26,400 loans. In the quarter, we received 11,900 new delinquency notices compared to 11,000 last quarter, and 13,700 in the fourth quarter of 2019 before the start of the COVID-19 pandemic. We continue to expect that the level of new delinquency notices may increase due to the seasoning of the large 2020 and 2021 vintages into what are historically the peak loss emergence years. During the quarter, total revenues were $292 million compared to $294 million for the same period last year. For the full year, total revenue was $1.2 billion, flat with last year. Net premiums earned were $244 million in the quarter, compared to $253 million last year. The decrease in net premium earned was primarily due to a decrease in accelerated single premium cancellation, an increase in seeded premiums, and a decrease in our premium yield, offset somewhat by growth in our insurance and force. The enforced premium yield was 38.9 basis points in the quarter, down one-tenth of a basis point from last quarter. The enforced portfolio yield reflects the premium rates in effect on our insurance in force and has been declining for some time, but the pace of decline has been slowing in recent quarters. With the smaller origination market, higher persistency, and continued high credit quality for NIW that we expect in 2023, we expect the in-force premium yield to remain relatively flat during 2023. Book value per share increased 4.4% during the quarter to $15.82 from $15.16 last quarter and $15.18 at the end of 2021. Unrealized losses in the investment portfolio due to higher interest rates continue to be a headwind for book value per share, reducing book value per share by $1.39 at year end, while unrealized gains on the investment portfolio added 47 cents per share last year. While higher interest rates are a headwind for book value per share in the short term, higher interest rates are a long-term positive for the earnings potential of the investment portfolio, and that is starting to come through the results. The book yield on the investment portfolio ended the year at 3%. up 20 basis points in the fourth quarter and 50 basis points from the end of last year. Sequentially, investment income was up approximately $4 million in the quarter and up $7 million in the fourth quarter of last year. Assuming a similar interest rate environment, we expect a book yield on the investment portfolio will continue to increase during the year and approach 3.5% by the end of 2023 as reinvestment rates remain significantly higher than the current book yield. Operating expenses in the quarter were $74 million, up from $62 million last quarter and $46 million in the fourth quarter last year. For the full year, expenses were $249 million compared to $211 million last year. The increase in expenses during the fourth quarter compared to recent quarters was primarily due to higher pension settlement costs in the fourth quarter. Other factors impacting the full year expenses included higher performance-based compensation expense due to our exceptional financial results in 2022, as well as continued technology investments, particularly in our data and analytics infrastructures. We expect full year operating expenses will be down modestly in 2023 in the range of $235 to $245 million. Turning to our capital management activities, Our priorities have been consistent and include maintaining the financial strength and flexibility of the holding company and deploying capital for growth at the writing company. For the holding company, this means maintaining a target level of liquidity in excess of near-term needs. At the operating company, it means maintaining a robust level of PMIR's excess that we expect will enable growth in changing operating environments. During the fourth quarter, the capital levels at MGIC and liquidity levels at the holding company were above our targets and we paid a $400 million dividend from MGIC to the holding company. Consistent with our capital strategy, we repurchased 6.1 million outstanding shares of common stock for a total cost of $80 million and we paid a 10 cent per share dividend to our shareholders for a total of $30 million. The holding company ended the year with cash and investments of $647 million. In January of this year, we repurchased an additional 2.1 million shares for $28 million, and our board authorized a 10 cent per share common stock dividend payable on March 2nd. At the end of January, we had $87 million remaining on our current share repurchase authorization, which we expect to exhaust in the first half of 2023. Any additional share repurchase authorization will be determined in consultation with the board. At the end of 2022, MGIC had $2.3 billion of available assets in excess of the PMIRES minimum requirements compared with a $2.2 billion excess at the end of 2021. Throughout 2022, MGIC's capital level was above our target. Consistent with our capital strategy, we received OCI approval and paid $800 million in dividends from MGIC to the holding company. Future dividends from MGIC to the holding company will also require OCI approval. As we mentioned last quarter, in the near term we expect to retain higher levels of liquidity at the holding company. Part of the reason for maintaining higher levels of liquidity at the holding company is the outlook for future dividends from the operating company is more uncertain than in the past 18 months. We will evaluate future dividends to the holding company using a consistent framework But if we experience the more challenged economic environment for mortgage credit, that will impact our target capital levels, which could extend the time between dividends or reduce the amount of future dividends. Our strong capital position entering 2022, combined with the exceptional financial results during the year, positioned us to reduce our debt outstanding by approximately $500 million, increase our quarterly shareholder dividend by 25%, reduce diluted shares by more than 10%, and end the year with a stronger excess capital position relative to PMIRES than we started the year.

With that, let me turn it back over to Tim. Thanks, Nathan. A few additional comments before we open it up for questions. In January, under the direction of FHFA, the GSEs announced certain pricing changes effective May 1st of this year. Overall, we think the actions taken since October of 2022 have been directionally positive for low down payment borrowers. At this point, we are uncertain what impact these changes will have on our overall business. However, we are supportive of efforts to facilitate access to low down payment lending for first time low to moderate income homebuyers. We look forward to continue to work with FHFA, the GSEs, and other industry key stakeholders to responsibly expand access to home ownership. As we look ahead into 2023, We do expect downward pressure on home prices to continue and further expect the overall market opportunity for new private mortgage insurance to be smaller compared to 2022. Even so, we remain encouraged by favorable demographics that suggest meaningful long-term MI opportunities. As we close out another record year, we have confidence in our transformed business model and believe that our strength and flexibility position us to continue to execute and deliver on our business strategies in 2023 and beyond to create value for all of our stakeholders. Lastly, we're often asked what differentiates us. First and foremost, it's our people. Our people have been the cornerstone of our accomplishments. Additionally, there's the 65 years of industry thought leadership that we bring to the table. We listen, build partnerships, provide a superior customer experience, and deliver quality offerings and solutions to our customers so that together we can help borrowers overcome the largest obstacle to homeownership, the down payment. Our commitment and ability to help borrowers achieve their dream of affordable and sustainable home ownership has never been stronger. With that, operator, let's take questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. Again, that is one question and one follow-up, and one moment for our first question. And our first question comes from Mark DeBrise from Barclays. Please proceed.

Yeah, thanks. I had a question about how you're thinking about the alternative uses of your excess capital. One of your competitors announced an interesting acquisition this morning. I'm wondering what your latest thoughts are on using some of that capital to potentially diversify the business in ways that may, you know, either kind of dampen some of the cyclicality of your earnings and or, you know, be accretive to returns or the multiple?

Mark, it's Tim. I appreciate the question. It's something that we think about from an overall strategic standpoint. It's safe to say that on a routine basis, we consider alternatives, deployment of capital, and whether it's diversification, other lines. Quite frankly, we haven't seen opportunities that we think move the needle and that we think would be a benefit to the franchise and to our shareholders.

um that could change in the future but um today have not really seen that okay got it and then just one question um nathan i heard you comment that guidance for the the enforced portfolio yield to be relatively flat in 2023 what's the outlook for for the net premium yield should that kind of track that or is there still more pressure there

Yeah, Mark, I think the net premium yield, there's a couple of factors that are hard to forecast, whether that's accelerated single premiums or things like that. The one thing I would point you to is the seeded premium number was benefited in the year from our negative losses incurred, which drove profit commissions to be very high on those quota share deals. As loss levels return to the more normal level, certainly you know, positive numbers versus negative numbers, that will have an impact on the profit commission, which was, I'd say, unusually large in 2022. So I think that seeded premium number, all else equal, is likely to increase a little bit, which would, you know, with a constant enforced premium yield number, that would lead the net premium yield to come down a little bit. But we'd also see the benefit then come through from the quota share on the loss line.

Got it. All right. Thank you. Thank you.

And thank you. And one moment for our next question. And our next question comes from both George from KBW. Your line is now open.

Hey, guys. Morning. So, you know, your commentary on market share. suggested, or just curious, in terms of that commentary, is the decline that you're anticipating driven by your tighter underwriting or prices or, you know, a combination of both, or just a little more color on that would be great?

No, I appreciate the question, Bo, and again, it's not exact time to be able to predict exactly where we are, but we feel like we have a pretty good handle on that it's not just market size that's down, that we've We're probably down some share and want to call out probably even more so as we look to report out Q1. I think it's safe to say that, as I mentioned, MIQ allows us the ability to more granularly price express our views on risk into the marketplace through price as well as dimensions as far as the risk factors. But, you know, it's a combination of those. But I think the thing that I most likely think about in terms of risk return is what do you do to reflect the premium you need to get in return for the risk that you think that you're taking?

Okay. Yep, that makes sense. Thanks. And then you noted that, you know, you'll maintain higher liquidity at the holding company. I mean, is there a way for us to kind of size that? You know, what does that mean just so we can kind of triangulate into potential capital returns?

Yeah, folks, it's Nathan. I think what we were trying to call out there is throughout 2022, when we were getting the large dividends up, we were using that money very quickly, and a lot of debt reduction activities in particular, and that without that as a need for cash right now at the holding company, because our liquidity and leverage ratios are near our targets right now, that we continue to repurchase shares in the fourth quarter and through January. As we said, we expect that we'll exhaust our repurchase authorization. But beyond that, repurchase activity and the dividend are things that we continually discuss with the board. And I think in April or in Q1 in our earnings, we'll have a better update for you on what that looks like, both from dividends from the OPCO up to the Holdco with three more months of you know, kind of performance and macroeconomic updates, as well as, you know, what the go-forward plan is on repurchases.

Okay, great. Thanks.

And thank you. And one moment for our next question. And our next question comes from Mahir Bhatia from Bank of America. Your line is now open.

Hi. Thank you for taking my question. I did want to ask about just delinquencies. Are we back to just the normal cadence of delinquencies now, just from regular wave business, like nothing unusual going on there in terms of both cures or just new notices coming in? And does that mean the delinquency rate drifts a little higher from here as we enter those peak years of losses that you mentioned? Just trying to understand the expectations around delinquency rate.

Yeah, I'm here. It's Nathan. Appreciate the question. I think, you know, as I mentioned in the opening remarks, the level of new notices is still down quite a bit from pre-COVID levels. So I think we're still really pleased with the level of credit performance, but I don't think we're seeing a lot of, you know, kind of direct COVID or unusual circumstance notices. I do think that this is becoming more just kind of regular way delinquencies that we've seen throughout time. In terms of where it trends, I think there's a couple of things. We do think that we're likely to see increased delinquencies out of the 2020 and 2021 books over time. They're entering their third and fourth years now of seasoning, and that's typically when we've seen the increase in delinquencies. I think in terms of the impact on the delinquent inventory, some of the reason that it's remained as elevated as it is is that the pace of paid claims is still very, very slow. And if the pace of paid claims starts to pick up, if foreclosure activity starts to pick up, we might see resolution from some of these long delinquent notices that we do expect will ultimately go to claim at a pretty high rate. And that could impact the size of the inventory too. So I think the other thing that we would have seen pre-COVID is more seasonality. I think a lot of that got really muted. But historically, you know, the months of February, March, April are pretty strong seasonal months for credit. So, you know, I don't know if it's kind of monotonically increasing from this point. But we might see – I think we do think it's relatively flat with maybe a slight increase as we've insured a lot more loans than we had pre-COVID. And, you know, these books – these large books get into their peak – peak notice years in 2023 and 2024 here.

Thank you. Maybe just going into expenses for a second. You know, for many, many years, MGIC was the market leader in terms of like just having the lowest expense ratio in the industry. 2023, on the other hand, 2022, sorry, on the other hand, was quite different. Was there a little bit of a catch up in 2022? And I guess the question is like, I know you gave numbers for 2023, but I'm just talking about just more generally, is the expense philosophy a little difference going forward? How are you thinking about that expense ratio? Just is there a target expense ratio you work towards? Just trying to understand like, you know, your philosophy around expenses, because there does seem to be a little bit of a change. Thank you.

Yeah, I appreciate the question, Mahira. I'll start and Nathan can chime in if he wants to. I think it's safe to say that the last couple of years we felt it important to invest in the platform over the long run. Part of that is to make sure we invest on the actual technology platforms that are our legacy, but a big part of it is investing in our data and analytical capabilities that we think are critical as the industry continues to evolve. As Nathan called out, sort of the biggest headwind in Q4 was really related to the pension expense, and really that's coming from the discount rate moving up there as much as anything. So I think you should think about it as continuing to be very focused and disciplined on expenses I think Nathan talked about where we think we'll be in 23. It's a reflection of us wanting to exercise discipline around expenses because we do believe that over the long run within this industry, being good stewards of how you spend dollars is very important. Although you have to do it, you have to invest in the platform to make sure that you can continue to progress and grow over the long run. So I wouldn't say change in philosophy as much as a recognition that we have to invest to grow over the long run. to be as competitive as we can in the marketplace. But we want to do that in a very thoughtful manner.

Thank you. And this is my last question. We're seeing more and more mortgage companies offering higher interest rates, buy-downs, and things like that. Do you underwrite those differently? How do you think that some of those kinds of, I guess, innovations will impact the credit performance longer term? Thanks.

No, it's a good question, Mihira, and it's innovation. I think the concern will be as a return to what we've seen before. I think the good news is buy-downs, I think, will get a lot of press. I think rightfully so, as hopefully people have long memories. The good news is for anything that we underwrite that are buy-downs, normally those are qualifying buy-downs. Assuming that there is no buy-down, so qualifying that at the sort of the full rate. So that makes us give a certain comfort level over that there's not undue risk being put into that loan. I always have some concern about, you know, payment shock example, but if they're underwritten with the thought that there is not the buy-down in there, that goes a long way towards making sure that you have a borrower who can not only get in the home, but can sustain that at a level. So feel generally comfortable about what's happening in that aspect of the market right now.

Thank you. Sure.

Thank you. And one moment for our next question. And our next question comes from Doug Harder from Credit Suisse. Your line is now open.

Thanks. Just one more on the market share outlook. Just wondering if there's anything that's kind of changed in your view that's leading to that, whether it's kind of your outlook on credit quality or your outlook on kind of the competitive dynamics that kind of led to this happening kind of 4Q and into 23?

Yeah, I think, Doug, it's really a matter of our views that home prices are actually falling right now. I think we're all hopeful that unemployment doesn't spike up. But we are in a more stressful environment. We think our premium rates should reflect that. And we're okay if we lose some share because of that. Ultimately, we want to make sure we're getting the right return in our views of what we need to have to cover that risk. MIQ gives us a great ability to do that and do that in a real-time basis. And so we feel very comfortable with it. It's for a company that has a lot of strong customer relationships. We want to win as much business as we can, but we also want to be very disciplined about making sure that we're getting the appropriate return for deploying that capital.

I appreciate that. Thank you.

Thank you.

Thank you. And one moment for our next question.

And our next question comes from Jeffrey Dunn from Dowling.

Your line is now open.

Thanks. Good morning. A couple questions. First, with respect to your guidance on the core premium rate being stable for 23, if we look at your disclosure on the MRA charge on new risk, it was climbing over the four quarters coming up to Q4. So I would guess that there was a mixed shift benefit to your premium rate that's helping that stabilization. But this quarter it dropped down as you, it looks like, maybe became tighter on your credit. If that rate stays low, below 7%, is that something where, as it builds throughout the year, we'd expect the core premium rate to then decline again in 24? How does that mixed shift in an MRA charge act as a bit of a guidance for where that core rate might go?

Jeff, it's Nathan. I think you're calling out a really important factor there that the mix does matter a lot for the overall enforced premium yield. I think one factor that may cause it not to have as big of an impact next year is just that we don't expect that the market will be as large, so we won't be writing as much volume. But I think I would think about that guidance as kind of indexed to maybe the back half of 2022 business, so maybe somewhere in between the mix of business that we wrote in the third and fourth quarter, so something around that 7% level. So if we were writing business that was well below that or well above that, but I think, you know, even the third and fourth quarters at, you know, 10, 20, 30 basis points on either side of that 7%, I think that's still kind of within the range that, you know, that we'd be comfortable with that flat guidance.

Okay. And then I was wondering if it were possible to help simplify the impact on credit from the equity buildup in the portfolio. You know, obviously a number of people, including myself, think we're heading into some sort of recession type of scenario in which you would normally see notices go up, incident assumptions go up, claims severity assumptions go up. If I painted it in an environment where it was a 10% incidence assumption, but then you adjusted that for how much equity is built up in your existing book. Is that something you can help frame up? All of a sudden, does that 10 become 9.5 or 10 become 9 simply because of the benefits from the equity?

Jeff, I think I'll start, and Tim, I mean, I'll have to think a little bit more. I probably won't be able to answer it as precisely as the question. It's obviously something we think about. I mean, from an overall perspective, It's obviously fair to say that the mark-to-market LTVs are continuing to improve and are probably sub-70% at the end of the year. The way we think about it, though, is there's a good home price appreciation for a good chunk of our book, especially before interest rates started to rise. The back half of 22 is probably somewhere around 10% of our inflow, so that feels like it doesn't have the same embedded home price appreciation in it. And so it really feels like you're looking at two different sort of groupings of loans to a certain extent that could respond a little bit differently depending upon home price path, unemployment. But all of it underlying is, again, we're in a business where when home prices, if they decline and if there's unemployment challenges, those confer losses. I think to your point, built-in equity, helps mitigate that. And so we feel really good about having built-in equity in a lot of our book of business, because that goes a long way towards not only reducing severity on anything that would come in, but also, quite frankly, reducing incidents, because it will never turn into a claim because there's other ways to resolve a homeowner not being able to pay their mortgage.

Okay. And then just the last question. Nathan, was the incident rate unchanged at 8% this quarter, and can you also provide your average new money yield?

Yes, there was no change in the new notice claim rate. And then, I'm sorry, Jeff, the second part of the question, are you referring to the investment portfolio?

Yeah, I'm sorry, new money yield on investments.

Yeah, so in kind of the non-cash portion of the portfolio and the core investment portfolio, it was more like 5.5%.

Great. Thank you.

Thanks.

And thank you. And one moment for our next question. And our next question comes from Eric Hagan from BTIG. Your line is now open.

Hey, thanks. Good morning. I'm curious if you would say there's any meaningful catalysts away from lower mortgage rates which could lead to lower persistency and call it the near term? And in that near term, do you think we could get a nice pop in housing demand, especially from first-time buyers if mortgage rates fall, even just a little bit? Thanks.

Yeah, I think from a persistency standpoint, we're at 80%. Now I think run rates higher than that could get into the low to mid-80s at best is what we would say. you know, from a refi, if rates go down, there's just not a lot of loans that have been done that would be sort of in a range that would be want and willingness to refi. So I think there could be challenges to that persistency, but I don't see a lot, especially in the very short term here, because you're really talking about our portfolio in the back half of the year, which I said was, you know, it's probably 10% of our overall in-force that might have some The ability if rates drop down closer to five is an example, but not a lot of built-up equity at that point either. So I think that's something that we feel good about the persistency of the book running forward. And Eric, remind me of the second half of your question.

Demand for housing, especially from first-time buyers on the back of lower mortgage rates.

Yeah, I think, you know, as I said in the opening comments, demographics still remain strong over the long run, and we still think there's a lot of pent-up demand for first-time homebuyers. I think when rates rose as quick as they did, that has people stand by the sidelines, especially when you consider how much home prices have went up, so affordability gets stretched. I think once you get past the sticker shock of the higher interest rates and you look back and say, okay, do I feel comfortable in my job? Do I have a life event? Is it the right time to purchase a home? That shock of the higher interest rates, which just get closer to longer term sort of historical norms, becomes less of an issue. And to the extent that home prices have come down a little bit in certain markets makes it more affordable, that combination. So again, I think over the long run, really attractive for first-time homebuyers, and ultimately that's a big chunk of our market. I think there is just a little bit of sticker shock with affordability with both the double whammy of home price appreciation and rates. But I think that moderates over time, quite frankly.

Yep, that's helpful. And then following up on the GFE changes, can you talk about how much demand you've typically seen for the cohorts where they cut the fees the most? And then kind of to that same point, can you talk about how much risk layering you guys have typically done in the 90-plus LTV bucket?

Yeah, you know, we try to look at all the fee changes really combined, looking at what the GSEs did from October. And so it's safe to say that a good chunk of our book gets affected by it. I think you put it all together. I don't think we feel like there's a very material change. in what ultimately might flow to MI versus other sort of executions. Some changes within the different categories, but it doesn't feel like it dramatically expanded or narrowed the box of what would come to private MI.

Yeah. And in that 90-plus LTV bucket, how much risk layering have you guys typically done there? Thank you.

Yeah, Eric, it's Nathan. I mean, most of our business is done, you know, at the 90 LTV and above. So I think when we think about risk layering, we think about it as combinations of, you know, the highest LTVs, so say 97 LTV with higher DTI or lower FICO or things like that. And, you know, on some of those dimensions, if you look at above 45 DTI, for instance, and 97 LTV and below 680 FICO, you know, the amount of business that we do that has, say, two of those factors is in the low single digits. I don't have it exactly in front of me, but maybe 3% or 4% of our new business is in that category. So not a lot of business, but, you know, if you include kind of 90 LTVs and up, that's most of what we do, just given the space that we operate in.

Yep, that's helpful. Thank you guys very much.

Thank you.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Tim for closing remarks.

Thanks, Justin. I thank everyone for their interest and attention to MGIC. Thank all of our coworkers for another phenomenal year. And being Groundhog's Day, hope that Puxatawney Phil is correct with only six more weeks of winter. Thanks, everyone.

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

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1. you Thank you. Thank you

Thank you.

Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation fourth quarter 2022 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'll have a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I will now turn the conference over to Diana Higgins, Head of Investor Relations. Please go ahead.

Thank you, Justin. 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 fourth quarter are Tim Mackey, 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 and force and other information you may find valuable. As a reminder, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before we get started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results to differ materially from those discussed on the call today are contained in our 8K 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 issuance of our 8K. With that, I now have the pleasure to turn the call over to Tim.

Thanks, Diana. Good morning, everyone. I'm pleased to report that we had another great quarter. For that matter, we delivered exceptional financial results for the entire year while providing meaningful capital returns to our shareholders. Simply put, we had the best financial results in our 65-year history. We'll get into details of the financial results throughout this call, but we again demonstrated the strength and flexibility of our capital position in the quarter and produced an annualized 16.9% return on equity. In the quarter, we earned $191 million of net income, an increase of 10% compared to the same period last year. For the full year, net income increased 36% to $865 million, an all-time high, compared to $635 million in 2021. Insurance in force at the end of the quarter stood at more than $295 billion, a 7.6% increase from a year ago. The growth in insurance in force during the year reflects an increased persistency rate offset by lower volumes of new insurance written. Persistency increased to 80% at the end of the quarter, up from 63% a year ago. In the quarter, we wrote $13 billion of NAW, and we finished the year with $76 billion of NIW. Although the volume of NIW is lower than the record volumes of the prior two years, 2022 was another great year, the third largest year in our 65-year history. We expect the reduction in our NIW volume for the fourth quarter is a reflection of the smaller MI market, but also reflective of our market position as we continue to take actions based upon the increased risk in the current environment with a focus on the continued long-term success of our company. Turning to the performance of our insurance and force portfolio, approximately 80% of our insurance and force is from the 2020 and later book years, and the credit quality of those books remains strong. To date, we have not seen a material change in credit performance in our portfolio overall. We remain encouraged by the continued favorable employment trends and the positive credit trends we continue to experience, including the low level of early payment defaults, which we believe is a good indicator of near-term credit performance. I also want to highlight that the rapid home price appreciation experience in the past couple years allowed homeowners to build up significant equity. This equity, combined with the strong credit quality of our insured portfolio, should help reduce the incidence of claims on the related mortgages on much of our risk and force, even with the modest declines of home prices in recent months. Our comprehensive reinsurance program will also help mitigate potential losses. As a result of the strength and flexibility of our capital position, During the year, we not only deployed capital to support new business and grow our insurance in force, we also paid $800 million in dividends from MGIC to the holding company. We used our strong capital position to repurchase most of the remaining convertible junior debentures due in 2063, repay MGIC's federal home loan bank advance, and redeem our senior notes due in 2023, reducing our leverage ratio to approximately 12% in annual interest expense by $25 million. We also returned approximately $500 million of capital to our shareholders through a combination of repurchasing common stock and paying common stock dividends, including a 25% increase in the quarterly dividend beginning in the third quarter. As I mentioned during last quarter's call, retiring debt and delevering has been a significant use to holding company cash in 2022. But with our debt to capital ratio in our target range and with the uncertainties and potential challenges in the economic environment in the near term, we continue to expect to retain higher levels of liquidity at the holding company. Our approach to capital management is dynamic so that we may continue to achieve our objectives in changing or stressed economic environments. We continually assess and evaluate the level of capital of both the operating company and holding company, including the level of capital that we retain for future deployment versus return to shareholders. As part of our assessment, we consider the operating environment we are or expect to be in, We strive to be prudent and thoughtful in our capital allocation decision making so that both the operating company and the holding company are positioned to achieve success in varying environments. Our balanced approach to capital management includes the use of forward commitment quota share reinsurance agreements and excess of loss reinsurance agreements. These agreements reduce the volatility of losses in weaker economic environments and provide diversification and flexibility of sources of capital. Approximately 85% of our risk and force was covered to some extent by reinsurance transactions at the end of the fourth quarter. Drilling down further, approximately 97% of the risk and force relating to the 2020 and later books was covered to some extent by reinsurance transactions at the end of the fourth quarter. We agreed to terms on a quota share agreement that will cover most of the policies written in 2023. This is in addition to the 15% quota share reinsurance agreement we already had in place to cover the 2023 NIW. bringing the total quota share that will cover most of the policies written in 2023 to 25%. In light of the current economic environment and near-term uncertainties, let me take a few minutes to provide some detail on our approach to credit risk. We employ a comprehensive risk management framework that includes our proprietary risk-based pricing engine for the majority of our customers, MIQ. MIQ allows for frequent and granular pricing changes including those to address our view of emerging and evolving market conditions and risk. We take actions intended to manage the mix of our portfolio, including expected returns, with a goal of positioning ourselves for continued success in changing environments. The timing between taking actions and the resulting NIW is not immediate, as pricing leaves NIW by a month or two on average. So what you see in the Q4 NIW is primarily a reflection of our views of risk return from last fall. While we won't comment on current market position and giving competitive considerations, our internal analytics indicates that our lower Q4 NIW was likely impacted by both the smaller MI market and a market share that was down a couple percentage points in the fourth quarter. Our market position continued to be defensive in recent months, which we expect will lead to further declines in our market share in the first quarter of 2023 and may be larger than the expected decline in the fourth quarter. We are comfortable with our actions and the results because it's reflective of our views of risk return while maintaining focus on our customer relationships and the continued long-term success of our company. With that, let me turn it over to Nathan.

Thanks, Tim, and good morning. As Tim mentioned, we had another strong quarter. We earned $191 million of net income, or 64 cents per diluted share, compared to 52 cents per diluted share during the fourth quarter last year. For the full year, we earned $865 million of net income, compared to $635 million last year. On an adjusted net operating income basis, we earned $2.91 per diluted share, a 52% increase from the $1.91 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release, but the primary differences in the past two years have been losses on debt extinguishment from our debt reduction actions. The results for the fourth quarter and the full year were reflective of continued strong credit performance, which has led to favorable loss reserve development and resulted in losses incurred being negative each quarter in 2022. Net losses incurred were negative $31 million in the fourth quarter compared to negative $25 million in the fourth quarter last year. For the full year, losses incurred were negative $255 million compared to $65 million last year. Our review and re-estimation of ultimate losses on prior delinquencies resulted in $76 million of favorable loss reserve development compared to $141 million of favorable loss reserve development last quarter and $56 million of favorable loss reserve development in the fourth quarter of last year. The favorable development in the quarter was primarily related to new delinquencies from 2020 and 2021. As cure rates on those delinquencies continue to exceed our expectations, We have continued to adjust our ultimate loss expectations. In the quarter, the delinquency inventory increased by 2% to 26,400 loans. In the quarter, we received 11,900 new delinquency notices compared to 11,000 last quarter and 13,700 in the fourth quarter of 2019 before the start of the COVID-19 pandemic. We continue to expect that the level of new delinquency notices may increase due to the seasoning of the large 2020 and 2021 vintages into what are historically the peak loss emergence years. During the quarter, total revenues were $292 million compared to $294 million for the same period last year. For the full year, total revenue was $1.2 billion, flat with last year. Net premiums earned were $244 million in the quarter compared to $253 million last year. The decrease in net premium earned was primarily due to a decrease in accelerated single premium cancellation, an increase in seeded premiums, and a decrease in our premium yield offset somewhat by growth in our insurance and force. The enforced premium yield was 38.9 basis points in the quarter, down one-tenth of a basis point from last quarter. The in-force portfolio yield reflects the premium rates in effect on our insurance in force and has been declining for some time, but the pace of decline has been slowing in recent quarters. With the smaller origination market, higher persistency, and continued high credit quality for NIW that we expect in 2023, we expect the in-force premium yield to remain relatively flat during 2023. Book value per share increased 4.4% during the quarter, to $15.82 from $15.16 last quarter and $15.18 at the end of 2021. Unrealized losses in the investment portfolio due to higher interest rates continue to be a headwind for book value per share, reducing book value per share by $1.39 at year end, while unrealized gains on the investment portfolio added $0.47 per share last year. While higher interest rates are a headwind for book value per share in the short term, higher interest rates are a long-term positive for the earnings potential of the investment portfolio, and that is starting to come through the results. The book yield on the investment portfolio ended the year at 3%, up 20 basis points in the fourth quarter and 50 basis points from the end of last year. Sequentially, investment income was up approximately $4 million in the quarter and up $7 million in the fourth quarter of last year. Assuming a similar interest rate environment, we expect a book yield on the investment portfolio will continue to increase during the year and approach 3.5% by the end of 2023 as reinvestment rates remain significantly higher than the current book yield. Operating expenses in the quarter were $74 million, up from $62 million last quarter and $46 million in the fourth quarter last year. For the full year, expenses were $249 million compared to $211 million last year. The increase in expenses during the fourth quarter compared to recent quarters was primarily due to higher pension settlement costs in the fourth quarter. Other factors impacting the full year expenses included higher performance-based compensation expense due to our exceptional financial results in 2022, as well as continued technology investments, particularly in our data and analytics infrastructures. We expect full year operating expenses will be down modestly in 2023 in the range of $235 to $245 million. Turning to our capital management activities. Our priorities have been consistent and include maintaining the financial strength and flexibility of the holding company and deploying capital for growth at the writing company. For the holding company, this means maintaining a target level of liquidity in excess of near-term needs. At the operating company, it means maintaining a robust level of PMIRES excess that we expect will enable growth in changing operating environments. During the fourth quarter, the capital levels at MGIC and liquidity levels at the holding company were above our targets, and we paid a $400 million dividend from MGIC to the holding company. Consistent with our capital strategy, we repurchased 6.1 million outstanding shares of common stock for a total cost of $80 million and we paid a 10 cent per share dividend to our shareholders for a total of $30 million. The holding company ended the year with cash and investments of $647 million. In January of this year, we repurchased an additional 2.1 million shares for $28 million, and our board authorized a 10 cent per share common stock dividend payable on March 2nd. At the end of January, we had $87 million remaining on our current share repurchase authorization, which we expect to exhaust in the first half of 2023. Any additional share repurchase authorization will be determined in consultation with the Board. At the end of 2022, MGIC had $2.3 billion of available assets in excess of the PMIRES minimum requirements compared with a $2.2 billion excess at the end of 2021. Throughout 2022, MGIC's capital level was above our target. Consistent with our capital strategy, we received OCI approval and paid $800 million in dividends from MGIC to the holding company. Future dividends from MGIC to the holding company will also require OCI approval. As we mentioned last quarter, In the near term, we expect to retain higher levels of liquidity at the holding company. Part of the reason for maintaining higher levels of liquidity at the holding company is the outlook for future dividends from the operating company is more uncertain than in the past 18 months. We will evaluate future dividends to the holding company using a consistent framework, but if we experience the more challenged economic environment for mortgage credit, that will impact our target capital levels, which could extend the time between dividends or reduce the amount of future dividends. Our strong capital position entering 2022, combined with the exceptional financial results during the year, positioned us to reduce our debt outstanding by approximately $500 million, increase our quarterly shareholder dividend by 25%, reduce diluted shares by more than 10%, and end the year with a stronger excess capital position relative to PMIRES than we started the year. With that, let me turn it back over to Tim.

Thanks, Nathan. Few additional comments before we open it up for questions. In January, under the direction of FHFA, the GSEs announced certain pricing changes effective May 1st of this year. Overall, we think the actions taken since October of 2022 have been directionally positive for low down payment borrowers. At this point, we are uncertain what impact these changes will have on our overall business. However, we are supportive of efforts to facilitate access to low down payment lending for first-time low to moderate income homebuyers. We look forward to continue to work with FHFA, the GSEs, and other industry key stakeholders to responsibly expand access to home ownership. As we look ahead into 2023, we do expect downward pressure on home prices to continue and further expect the overall market opportunity for new private mortgage insurance to be smaller compared to 2022. Even so, we remain encouraged by favorable demographics that suggest meaningful long-term MI opportunities. As we close out another record year, we have confidence in our transformed business model and believe that our strength and flexibility position us to continue to execute and deliver on our business strategies in 2023 and beyond to create value for all of our stakeholders. Lastly, we're often asked what differentiates us. First and foremost, it's our people. Our people have been the cornerstone of our accomplishments. Additionally, there's the 65 years of industry thought leadership that we bring to the table. We listen, build partnerships, provide a superior customer experience, and deliver quality offerings and solutions to our customers so that together we can help borrowers overcome the largest obstacle to homeownership, the down payment. Our commitment and ability to help borrowers achieve their dream of affordable and sustainable homeownership has never been stronger. With that, operator, let's take questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. Again, that is one question and one follow-up. And one moment for our first question. And our first question comes from Mark DeVries from Barclays. Please proceed.

Yeah, thanks. I had a question about how you're thinking about the alternative uses of your excess capital. One of your competitors announced an interesting acquisition this morning. I'm wondering what your latest thoughts are on using some of that capital to potentially diversify the business in ways that may either kind of dampen some of the cyclicality of your earnings and or be accretive to returns or the multiple.

Mark, it's Tim. I appreciate the question. It's something that we think about from an overall strategic standpoint. It's safe to say that On a routine basis, we consider alternatives, deployment of capital, and whether it's diversification of other lines. Quite frankly, we haven't seen opportunities that we think move the needle and that we think would be a benefit to the franchise and to our shareholders. That could change in the future, but to date, have not really seen that.

Okay, got it. And then just one question. Nathan, I heard you comment that guidance for the enforced portfolio yield to be relatively flat in 2023. What's the outlook for the net premium yield? Should that kind of track that, or is there still more pressure there?

Yeah, Mark, I think the net premium yield, there's a couple of factors that are hard to forecast, whether that's accelerated single premiums or things like that. The one thing I would point you to is The seeded premium number was benefited in the year from our negative losses incurred, which drove profit commissions to be very high on those quota share deals. As loss levels return to the more normal level, certainly positive numbers versus negative numbers, that will have an impact on the profit commission, which was, I'd say, unusually large in 2022. So I think that seeded premium number, all else equal, is likely to increase a little bit, which would, with a constant enforced premium yield number, that would lead the net premium yield to come down a little bit. But we'd also see the benefit then come through from the quota share on the loss line.

Got it. All right. Thank you. Thank you.

And thank you. And one moment for our next question. And our next question comes from Bose George from KBW. Your line is now open.

Hey, guys. Good morning. So, you know, your commentary on market share suggested – or just curious, in terms of that commentary, is the decline that you're anticipating driven by your tighter underwriting or prices or, you know, a combination of both? Or, yeah, just a little more color on that would be great.

No, I appreciate the question, Bo. And, again, it's not exact time to be able to predict exactly where we are, but we feel like we have a pretty good handle on that it's not just market size that's down that we've probably down some share and want to call out probably even more so as we look to report out Q1. You know, I think it's safe to say that, as I mentioned, MIQ allows us the ability to more granularly price express our views on risk into the marketplace through price as well as dimensions as far as the risk factors. But, you know, it's a combination of those. But I think the thing that I most likely think about in terms of risk return is what do you do to reflect the premium you need to get in return for the risk that you think that you're taking.

Okay. Yep, that makes sense. Thanks. And then you noted that, you know, you maintain higher liquidity at the holding company. I mean, is there a way for us to kind of size that? You know, what does that mean just so we can kind of triangulate into potential capital returns?

Yeah, this is Nathan. I think what we were trying to call out there is throughout 2022, when we were getting the large dividends up, we were using that money very quickly in a lot of debt reduction activities in particular. And that without that as a need for cash right now at the holding company, because our liquidity and leverage ratios are near our targets right now, that we continue to repurchase shares in the fourth quarter and through January. As we said, we expect that we'll exhaust our repurchase authorization. But beyond that, repurchase activity and the dividend are things that we continually discuss with the board. And I think in April or in Q1 in our earnings, we'll have a better update for you on what that looks like, both from dividends from the OPCO up to the Holdco with three more months of you know, kind of performance and macroeconomic updates, as well as, you know, what the go-forward plan is on repurchases.

Okay, great. Thanks.

And thank you. And one moment for our next question. And our next question comes from Mahir Bhatia from Bank of America. Your line is now open.

Hi. Thank you for taking my question. I did want to ask about just delinquencies. Are we back to just the normal cadence of delinquencies now, just from regular way of business, like nothing unusual going on there in terms of both cures or just new notices coming in? And does that mean the delinquency rate drifts a little higher from here as we enter those peak years of losses that you mentioned? Just trying to understand the expectations around delinquency rate.

Yeah, Mihir, it's Nathan. Appreciate the question. I think, you know, as I mentioned in the opening remarks, the level of new notices is still down quite a bit from pre-COVID levels. So I think we're still really pleased with the level of credit performance, but I don't think we're seeing a lot of, you know, kind of direct COVID or unusual circumstance notices. I do think that this is becoming more just kind of regular way delinquencies that we've seen throughout time. In terms of where it trends, I think there's a couple of things. We do think that we're likely to see increased delinquencies out of the 2020 and 2021 books over time. They're entering their third and fourth years now of seasoning, and that's typically when we've seen the increase in delinquencies. I think in terms of the impact on the delinquent inventory, some of the reason that it's remained as elevated as it is is that the pace of paid claims is still very, very slow. And if the pace of paid claims starts to pick up, if foreclosure activity starts to pick up, we might see resolution from some of these long delinquent notices that we do expect will ultimately go to claim at a pretty high rate. And that could impact the size of the inventory too. So I think the other thing that we would have seen pre-COVID is more seasonality. I think a lot of that got really muted. But historically, you know, the months of February, March, April are pretty strong seasonal months for credit. So, you know, I don't know if it's kind of monotonically increasing from this point. But we might see, I think we do think it's relatively flat with maybe a slight increase as we've insured a lot more loans than we had pre-COVID. And, you know, these books, these large books get into their peak periods. peak notice years in 2023 and 2024 here.

Thank you. Maybe just going to expenses for a second. You know, for many, many years, MGIC was the market leader in terms of like just having the lowest expense ratio in the industry. 2023, on the other hand, 2022, sorry, on the other hand, was quite different. Was there a little bit of a catch-up in 2022? And I guess the question is, like, I know you gave numbers for 2023, but I'm just talking about just more generally, is the expense philosophy a little different going forward? How are you thinking about that expense ratio? Just is there a target expense ratio you work towards? Just trying to understand, like, you know, your philosophy around expenses because there does seem to be a little bit of a change. Thank you.

Yeah, I appreciate the question, Mahira. I'll start, and Nathan can chime in if he wants to. I think it's safe to say that the last couple of years, we felt it important to invest in the platform over the long run. Part of that is to make sure we invest on the actual technology platforms that are our legacy, but a big part of it is investing in our data and analytical capabilities that we think are critical as the industry continues to evolve. As Nathan called out, sort of the biggest headwind in Q4 was really related to the pension expense, and really that's coming from the discount rate moving up there as much as anything. So I think you should think about it as continuing to be very focused and disciplined on expenses I think Nathan talked about where we think we'll be in 23. It's a reflection of us wanting to exercise discipline around expenses because we do believe that over the long run within this industry, being good stewards of how you spend dollars is very important. Although you have to do it, you have to invest in the platform to make sure that you can continue to progress and grow over the long run. So I wouldn't say change in philosophy as much as a recognition that we have to invest to grow over the long run. to be as competitive as we can in the marketplace. But we want to do that in a very thoughtful manner.

Thank you. And then this is my last question. We're seeing more and more mortgage companies offering higher interest rates, buy-downs, and things like that. Do you underwrite those differently? How do you think that some of those kinds of, I guess, innovations will impact the credit performance longer term? Thanks.

No, it's a good question, Mihir, and it's innovation. I think the concern will be as a return to what we've seen before. I think the good news is buy-downs, I think, will get a lot of press. I think rightfully so, as hopefully people have long memories. The good news is for anything that we underwrite that are buy-downs, normally those are qualifying, assuming that there is no buy-down, so qualifying at sort of the full rate. So that makes us give a certain comfort level over that there's not undue risk being put into that loan. I always have some concern about, you know, payment shock example, but if they're underwritten with the thought that there is not a buy-down in there, that goes a long way towards making sure that you have a borrower who can not only get in the home but can sustain that at a level. So I feel generally comfortable about what's happening in that aspect of the market right now.

Thank you.

Thank you. And one moment for our next question. And our next question comes from Doug Harder from Credit Suisse. Your line is now open.

Thanks. Just one more on the market share outlook. Just wondering if there's anything that's kind of changed in your view that's leading to that, whether kind of your outlook on credit quality or your outlook on kind of the competitive dynamics that kind of led to this happening kind of 4Q and into 23?

Yeah, I think, Doug, it's really, it's a matter of, you know, our views that, you know, home prices are actually falling right now. I think we're all hopeful that unemployment doesn't spike up. But we are in a more stressful environment. We think our premium rates should reflect that. And we're okay if we lose some share because of that. Ultimately, we want to make sure we're getting the right return in our views of what we need to have to cover that risk. MIQ gives us a great ability to do that and do that in a real-time basis. And so we feel very comfortable with it. And again, it's for a company that has a lot of strong customer relationships, we want to win as much business as we can. But we also want to be very disciplined about making sure that we're getting the appropriate return for deploying that capital.

I appreciate that. Thank you.

Thank you.

Thank you. And one moment for our next question. And our next question comes from Jeffrey Dunn from Dowling. Your line is now open.

Thanks. Good morning. A couple questions. First, with respect to your guidance on the core premium rate being stable for 23, if we look at your disclosure on the MRA charge on new risk, it was climbing over the four quarters coming up to Q4. So I would guess that there was a mixed shift benefit to your premium rate that's helping that stabilization. But this quarter, it dropped down as you, it looks like, maybe became tighter on your credit. If that rate stays low, below 7%, is that something where, as it builds throughout the year, we'd expect the core premium rate to then decline again in 24? How does that mixed shift in an MRA charge act as a bit of a guidance for where that core rate might go?

Yeah. Jeff, it's Nathan. I think you're calling out a really important factor there that the mix does matter a lot for the overall enforced premium yield. I think one factor that may cause it not to have as big of an impact next year is just that we don't expect that the market will be as large, so we won't be writing as much volume. But I think I would think about that guidance as kind of indexed to maybe the back half of 2022 business, so maybe somewhere in between the mix of business that we wrote in the third and fourth quarter, so something around that 7% level. So if we were writing business that was well below that or well above that, but I think, you know, even the third and fourth quarters at, you know, 10, 20, 30 basis points on either side of that 7%, I think that's still kind of within the range that, you know, that we'd be comfortable with that flat guidance.

Okay. And then I was wondering if it were possible to help simplify the impact on credit from the equity buildup in the portfolio. You know, obviously a number of people, including myself, think we're heading into some sort of recession type of scenario in which you would normally see notices go up, incident assumptions go up, claims severity assumptions go up. If I painted it in an environment where it was a 10% incidence assumption, but then you adjusted that for how much equity is built up in your existing book. Is that something you can help frame up? All of a sudden, does that 10 become 9.5 or 10 become 9 simply because of the benefits from the equity?

Jeff, I think I'll start, and Tim, I mean, I have to think a little bit more. I probably won't be able to answer it as precisely as the question. It's obviously something we think about. I mean, from an overall perspective, standpoint, it's obviously fair to say that the mark-to-market LTVs continue to improve and are probably, you know, sub-70% at the end of the year. The way we think about it, though, is that, you know, there's a good home price appreciation for a good chunk of our book, especially before interest rates started to rise. You know, the back half of 22 is probably somewhere around 10% of our inflow, so that feels like it doesn't have the same embedded home price appreciation in it. And so it really feels like you're looking at two different sort of groupings of loans to a certain extent that could respond a little bit differently depending upon home price path, unemployment. But all of it underlying is, again, we're in a business where when home prices, if they decline and if there's unemployment challenges, those confer losses. I think to your point, built-in equity, helps mitigate that. And so we feel really good about having built-in equity in a lot of our book of business, because that goes a long way towards not only reducing severity on anything that would come in, but also, quite frankly, reducing incidents, because it will never turn into a claim because there's other ways to resolve a homeowner not being able to pay their mortgage.

Okay. And then just the last question. Nathan, was the incident rate unchanged at 8% this quarter, and can you also provide your average new money yield?

Yes, there was no change in the new notice claim rate. And then, I'm sorry, Jeff, the second part of the question, are you referring to the investment portfolio?

Yeah, I'm sorry, new money yield on investments.

Yeah, so in kind of the non-cash portion of the portfolio, in the core investment portfolio, it was more like 5.5%.

Great. Thank you.

Thanks.

And thank you. And one moment for our next question. And our next question comes from Eric Hagan from BTIG. Your line is now open.

Hey, thanks. Good morning. I'm curious if you would say there's any meaningful catalysts away from lower mortgage rates which could lead to lower persistency and call it the near term? And in that near term, do you think we could get a nice pop in housing demand, especially from first-time buyers if mortgage rates fall, even just a little bit? Thanks.

Yeah, I think from a persistency standpoint, we're at 80%. Now I think run rates higher than that could get into the low to mid-80s at best is what we would say. you know, from a refi, if rates go down, there's just not a lot of loans that have been done that would be sort of in a range that would be want and willingness to refi. So I think there could be challenges to that persistency, but not, I don't see a lot in the, especially in the very short term here, because you're really talking about our portfolio in the back half of the year, which I said was, you know, it's probably 10% of our overall inflows that might have some the ability if rates drop down closer to five as an example, but not a lot of built-up equity at that point either. So I think that's something that we feel good about, the persistency of the book running forward. And Eric, remind me of the second half of your question.

Demand for housing, especially from first-time buyers on the back of lower mortgage rates.

Yeah, I think, as I said in the opening comments, Demographics still remain strong over the long run, and we still think there's a lot of pent-up demand for first-time homebuyers. I think when rates rose as quick as they did, that has people stand by the sidelines, especially when you consider how much home prices have went up, so affordability gets stretched. I think once you get past the sticker shock of the higher interest rate and you look back and say, okay, do I feel comfortable in my job? Do I have a life event? Is it the right time to purchase a home? That shock of the higher interest rates, which just get closer to longer term sort of historical norms, becomes less of an issue. And to the extent the home prices have come down a little bit in certain markets makes it more affordable, that combination. So again, I think over the long run, really attractive for first-time homebuyers, and ultimately that's a big chunk of our market. I think there is just a little bit of sticker shock with affordability with both the double whammy of home price appreciation and rates. But I think that moderates over time, quite frankly.

Yep, that's helpful. And then following up on the GFE changes, can you talk about how much demand you've typically seen for the cohorts where they cut the fees the most? And then kind of to that same point, can you talk about how much risk layering you guys have typically done in the 90-plus LTV bucket?

Yeah, you know, we try to look at all the fee changes really combined, looking at what the GSEs did from October. And so it's safe to say that a good chunk of our book gets affected by it. I think you put it all together. I don't think we feel like there's a very material change. in what ultimately might flow to MI versus other sort of executions. Some changes within the different categories, but it doesn't feel like it dramatically expanded or narrowed the box of what would come to private MI.

Yeah. And in that 90-plus LTV bucket, how much risk layering have you guys typically done there? Thank you.

Yeah, Eric, it's Nathan. I mean, most of our business is done, you know, at the 90 LTV and above. So I think when we think about risk layering, we think about it as combinations of, you know, the highest LTVs, so say 97 LTV with higher DTI or lower FICO or things like that. And, you know, on some of those dimensions, if you look at above 45 DTI, for instance, and 97 LTV and below 680 FICO, you know, the amount of business that we do that has, say, two of those factors is in the low single digits. I don't have it exactly in front of me, but maybe 3% or 4% of our new business is in that category. So not a lot of business, but, you know, if you include kind of 90 LTVs and up, that's most of what we do, just given the space that we operate in.

Yep, that's helpful. Thank you guys very much.

Thank you.

And thank you. And I am showing no further questions. I would now like to turn the call back over to Tim for closing remarks.

Thanks, Justin. I thank everyone for their interest and attention to MGIC. Thank all of our coworkers for another phenomenal year. And being Groundhog's Day, hope that Puxatawney Phil is correct with only six more weeks of winter. Thanks, everyone.

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