Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation Third Quarter 2026 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. To ask a question, please press star 11 on your phone. 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 Andrea Bolyard, Director of Corporate Communications. Please go ahead.
Thank you, Janelle. Good morning and welcome, everyone. Thank you for your interest in MGIC. Joining me on the call today to discuss our results for the third quarter are Tim Mattke, Chief Executive Officer, and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC's third quarter financial results, was issued yesterday and is available on our website at mtg.mgic.com under Newsroom. It includes additional information about our quarterly results that we will refer to during the call. It also includes the reconciliation of non-GAAP financial measures to their most comparable GAAP measures. In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable. As a reminder, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website.
Before getting started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Our eight-K and 10-Q filed yesterday include additional information about the factors that could cause actual results to differ materially from those discussed on the call today. If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. No one should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of our eight-K or 10-Q. With that, I will now turn the call over to Tim.
Thank you, Andrea, and good morning, everyone. Before I start my prepared remarks, I want to take a moment to recognize this is Andrea's first earnings call. While Andrea has been working behind the scenes since the beginning of the year in anticipation of the retirement of Dianna Higgins, this is the first time you are hearing her voice on the call. I want to say thank you to both Dianna and Andrea for working together on the transition and wish Dianna a long and prosperous retirement after 30 years with MGIC. Now back to my prepared remarks. Our experience, financial strength, and consistent focus on our customers remain foundational to our business. Our third quarter results reflect solid performance and disciplined execution across the company. In the third quarter, we generated net income of $175 million, delivering an annualized return on equity of 14.2%.
We wrote $17 billion of new insurance in the third quarter, an increase of 3.6% from the third quarter of 2025. Insurance in force ended the quarter at $307 billion, up slightly in the quarter and up 2.2% from a year ago. At the end of the third quarter, annual persistency was 83%, flat compared to the last quarter. Both insurance in force and annual persistency were in line with the expectations we previously shared. Our insured portfolio continues to perform well, reflecting the quality and the underlying credit in our underwriting discipline. Early payment defaults remain low, consistent with our near-term credit outlook. Our capital position remains strong, with $5.5 billion of balance sheet capital, complemented by a well-established reinsurance program. Reinsurance is an important part of how we manage risk and capital.
It helps reduce risk volatility and loss volatility in stress scenarios while providing capital diversification and flexibility at attractive costs. In addition, our capital allocation priorities remain consistent. We prioritize prudent growth in insurance in force when market opportunities support it, while maintaining a disciplined approach to capital returns. Market conditions have constrained insurance in force growth in recent years. During that time, strong mortgage credit performance and our financial position have supported continued capital returns. In the third quarter, we paid a common stock dividend of $0.17 per share. We also repurchased 5.1 million shares for $152.5 million. Over the prior four quarters, we returned $711 million through share repurchases and $135 million through shareholder dividends. Together, those capital returns represented a 122% payout of the net income earned over that period.
Last week, the board approved another quarterly common stock dividend of $0.17 per share. The strong financial position of both the holding company and the operating company was a key factor in that decision. With that, let me turn it over to Nathan to provide more details on our financial results for the quarter.
Thanks, Tim, and good morning. As Tim discussed, we had solid financial results for the third quarter. We earned net income of $0.85 per diluted share compared to $0.83 per diluted share last year. The loss ratio was 10% in the quarter, benefiting from $34 million of favorable loss reserve development in the quarter as we re-estimated ultimate losses on prior delinquencies. The loss reserve development primarily reflects better-than-expected cure activity on delinquency notices received in 2025 and the first quarter of 2026. For new delinquency notices received in the third quarter, we continued to apply our initial claim rate assumption of 7.5%. Our count-based delinquency rate ended the quarter at 2.52%, up 15 basis points from the prior quarter and 20 basis points from a year ago.
The trends in the quarter were consistent with the credit normalization we have been experiencing for the past three years. The in-force premium yield was 38 basis points in the quarter, down less than half a basis point compared with the third quarter last year. We expect the in-force premium yield to continue on a similar path to the past couple years. This outlook reflects our near-term expectations for consistent persistency and continued challenges to MI origination growth. Investment income totaled $61 million in the third quarter, and the book yield on our investment portfolio remains approximately 4%. During the quarter, reinvestment rates on our fixed income portfolio continued to exceed our book yield. However, our capital return activities have limited the growth in the investment portfolio and the resulting investment income.
Underwriting and other expenses in the quarter were $45 million, down from $50 million in the third quarter last year, as we remain focused on disciplined expense management. We now expect operating expenses for the full year will be slightly below the low end of the $190 million-$200 million range we previously shared. We have been very active in strengthening our reinsurance program while benefiting from the resulting financial flexibility. As previously announced, we executed a traditional excess of loss reinsurance transaction that provides up to $168 million of reinsurance coverage on eligible 2027 NIW. We also amended the terms of our quota share agreements covering 2023 NIW, which will reduce the ongoing cost of these agreements by approximately 35% beginning in 2027. More recently, we agreed to terms for a 40% quota share reinsurance transaction covering eligible 2028 NIW.
We also agreed to terms on a separate 20% quota share covering eligible 2029 NIW, which is the furthest forward we have secured coverage in the 13-plus years of our reinsurance program. With that, let me turn it back over to Tim.
Thanks, Nathan. Turning from our financial results to the borrowers our product serves, we are proud of the role mortgage insurance plays in addressing affordability. For many people, the down payment remains a key barrier to homeownership, and our product helps borrowers overcome that hurdle and purchase a home sooner. Monthly affordability is an important consideration, and our product is designed to help borrowers achieve homeownership while keeping the ongoing cost of mortgage insurance low. As you likely saw, a recent executive order issued by the President includes provisions for the FHFA to explore a pilot on MI cancellation. We support efforts that focus on lowering costs for new homeowners, and as always, we look forward to working with FHFA and the GSEs on ways to make homeownership more attainable. While business adapts and evolves over time, our focus remains consistent.
Our strong capital position gives us flexibility across market cycles and helps us manage to respond as conditions change. Just as importantly, it supports a consistent presence in the market and a daily focus on our customers. Together, our capital strength, experience, and disciplined approach give us confidence in our ability to continue delivering value to customers, home buyers, and our shareholders. With that, Janelle, let's take questions.
Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Terry Ma with Barclays. Your line is now open.
Hey, thank you. Good morning. Maybe just start off with credit. The delinquency rate was up about 20 basis points year-over-year, as you stated. But that rate, the year-over-year increase accelerated each of the last four quarters. Any underlying drivers you can kind of call out as we think about our models going forward? Is that a good jumping off point for next quarter in 2027?
Terry, it's Nathan. Thanks for the question. I think we do still view it broadly as just the normalization of credit performance coming off of the peak, kind of high-quality credit performance coming out of the COVID period. I think increasingly, too, the book is more concentrated in the 2022 and later vintages, which are performing, I'd say, a little bit better than we expected, but we did expect those to have ultimate loss ratios that were somewhat higher than we had in the 2020 and 2021 books. As the overall book is more concentrated in those vintages, we do expect that the general trend is going to be a slow increase in the delinquency rate, because the overall book is still benefited from the low delinquency rates from the 2020 and 2021 vintages.
Got it. Then maybe just on capital returns. You continue to generate excess capital while the environment remains relatively muted in terms of growth. Just how are you thinking about the pace of buybacks from here, and is there room to become more aggressive with the buyback if NIW remains around current levels? Thank you.
Yeah. Terry, it's Nathan. I'll take that one too. I think our approach really hasn't changed much over the last couple years. Tim said this in the prepared remarks, but our preference is to grow the core business organically, to reinvest capital back into that business. The market conditions really haven't supported that. So, in that environment, along with a robust reinsurance program, attractive reinsurance markets, business performing better than we expected, we've been able to support capital returns at or even above the level of net income that we're generating, and we've been comfortable with that. If those conditions persist, I think we could continue to do that. The other variable is obviously the share price and what we think the value of share repurchases versus other capital deployment opportunities are.
Throughout this period, we feel like the share price has supported long-term value creation via share repurchases. We still feel that way today. But if there became a price dislocation, we could get more aggressive. Or if prices got closer to our view of longer-term intrinsic value, then the pace might become a little bit more moderate. So we remain price-sensitive, and I think you see that a little bit in what we disclosed this quarter. The pace of third quarter buybacks was a little bit lower, but accelerated then in October as the share price got down closer to book value that period. So, we remain price-sensitive and, as always, are looking for ways to generate long-term value for shareholders.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Bose George from KBW. Your line is now open.
Hey, everyone. Good morning. Sticking to credit, can you talk about where the cure rates are relative to your default to claim assumption? The cure rates, I mean, are they just going to remain elevated until something changes in terms of HPA or unemployment or other variables there?
Bose, this is Nathan. I'll take that question. We've kept our initial ultimate claim rate assumption of 7.5% for some time, but I think we have been operating somewhat better than that, resulting in consistent favorable reserve development. I think underlying that, we do see, for close to fully developed new notice quarters, we have seen an increase in the ultimate claim rate on those, but it's coming off of very low levels. The lowest level in our recent history, actually in our company's history, is the second quarter of 2020, the kind of peak COVID dislocation, where ultimate claim rates were approximately 1%. We've been rising from there, but still have some cushion to that 7.5% ultimate claim rate that we're putting on. So, if credit performance remains good as it has been, we do expect that there's opportunity for favorable development in the quarter.
We think we are well reserved for a wide range of outcomes. If credit performance remains strong, that could certainly result. But we do see the underlying trends are that the ultimate loss rates are moving up into the, say, low single digits, call that 3%-4% on a fully developed basis, which again, is exceptional performance in the kind of longer-term, broader picture. But as compared to the peak COVID periods, it is increasing towards our initial estimates.
Okay, great. Thanks. On your expenses, the year-over-year number, is there a ceding commission benefit as well in that?
Yes, there is. The quota share program has gotten a little bit larger, so the amount of ceding commission is a little bit higher. I do not have that directly in front of me, but I think that is worth maybe a couple million dollars of the $5 million overall change. But I know in the 10-Q, we do have that disclosed, the ceding commission broken out, so you can get back to the kind of before ceding commission expenses.
Okay, great. Thank you.
Thank you. Our next question comes from Doug Harter with BTIG. Your line is now open.
Thank you. Hoping you could talk about the forward reinsurance you put on. What type of cost of capital are you seeing on that, and the ability to continue to add far out into the future?
I will maybe start and let Nathan chime in there, Doug. I think it is safe to say that we have been able to push out a little bit farther in the future on the quota share, and have done it on economic terms that we think are favorable, and I think on par with, if not better with, what we have seen historically. Otherwise, we would not have the need to necessarily go out that far. I think there remains a strong desire for reinsurers to have access to U.S. mortgage credit, and so we like to work with our partners. I think the other part too is ultimately they have thought about this as a long-term line of business that they are underwriting.
They are comfortable with the thought of going out multiple years, having seen our discipline in pricing through different environments, understanding our view on underwriting, pricing, all those different types of things. Again, I think it is a line of business that they have become much more comfortable with over time. Again, we started, our first deal was back in covering business in 2013. There are a lot of partners with us through that whole way, and a lot of partners have been with us for a better part of a decade at this point. Again, I think we view it as favorable from a cost of capital standpoint, and it is great that they are willing to partner with us as we look out farther. Nathan, I do not know if you want anything specific as far as exact costs or sort of view of how the transaction went itself.
Yeah, no, Tim, I definitely agree with all that. I think the other thing to keep in mind, Doug, is that even the agreements that cover, say, 2026, they are not just one-year agreements. They cover the next, say, 10 calendar years for that vintage. I think all reinsurers kind of understand that this is a very long tail business, so they have to get comfortable with being in this business for a long time, which makes it, I think for some of them, makes them a little more comfortable going out even further on a new underwriting basis. Ultimately, the risk and pricing environment and return environment in 2028 and 2029 will ultimately drive the cost. As we estimate it today, we would think about after-tax cost of capital for us around the 3% range.
Got it. How does that compare to the XOL that you executed in the third quarter, and just how you are thinking about the mix or the balance of your reinsurance?
Yeah, I would say.
The mix of your reinsurance.
Right. The XOL, obviously a little different structurally. We do place that on a forward basis, but not as far into the future because it is really just on the risk side, not as much on the corresponding premium side. If there is a more stressed scenario, the quota share deals can benefit from MI pricing adjustments, whereas the excess of loss deals don't. I think the cost of capital generally are slightly higher, but still quite attractive on the excess of loss deals. For us, we have for some time really tried to execute across all three major programs that we have related to reinsurance. That's the traditional markets with both excess of loss and quota share, and also the insurance-linked note market. It's varied over time, but think generically about a third, a third, a third.
The one thing I would say, it ends up being over on a The one-third that I just mentioned is more on a new underwriting year basis. Over time, the program becomes a little bit more concentrated in the quota share deals because they cover first dollar loss, so they're not really subject to the delevering that both the ILN and excess of loss deals cover, where the ceded layer runs away a little bit faster. I think overall, we've found great success in all three of those markets, and want to be active in all the markets where capital for mortgage credit risk is being traded and risk. Really no plans at this point to change the approach.
Great. Appreciate it. Thank you.
Thank you.
Thank you. Our next question comes from the line of Rowland Mayor with RBC Capital Markets. Your line is now open.
Hi, good morning. Thank you for taking my questions. I understand the regulatory proposals are forward-looking. We've had some questions from investors on whether EO could accelerate voluntary detachment due to home price appreciation. Could you maybe just walk me through how that process mechanically occurs and how much capital is unlocked when older policies do voluntarily detach?
Yeah. Rowland, it's Nathan. I think generically, the way it would work today, and maybe be specific to a GSE loan. We also insure a lot of non-GSE loans, and investors may have their own separate requirements. All loans that are at least borrower-paid primary residence, like the core of what we do, they're subject to the Homeowners Protection Act. So those loans are really automatically canceled once they reach an original 78 amortization based on the original loan amount. There is an opportunity, I think, for borrower to request earlier cancellation due to making additional payments, or at 80 LTV. I don't think we see a ton of evidence that that feature is used very much. But on the GSE space, where borrowers are requesting cancellation for current value, I think the process is that they would reach out to their servicer.
The servicer would let them know what the requirements are, which may involve getting an appraisal or a broker price opinion. The GSEs currently have LTV requirements based on current value and seasoning requirements, so not every loan would be eligible. Those are published in their servicing guides. The GSEs today also have pay history requirements, so there needs to be good pay history, which I think is defined based on number of, say, 30-day delinquencies in a time period or 60-day delinquencies in a longer time period. So, there's an eligibility aspect, and then if all of those requirements are met, then the servicer would initiate cancellation of the MI coverage. So, I think mechanically, maybe generically, that's how it works today.
I'm sure there are other ways that it could work, but they're really just following the published GSE guidelines for borrower-requested cancellation based on current value, whereas the Homeowners Protection Act is really focused on kind of original value.
Thank you. As my follow-up, would you ever lower that initial claims rate assumption? I know the ultimate is moving up, but it still seems like it's well below the initial pick.
Yeah. We've talked about it quite a bit internally. The questions come up on prior calls. I think for us, I think we understand we're setting an initial assumption today and really looking out into the future at a very wide range of possible outcomes. I think it is true that over the last three or four years, we've been down a particular path that's been quite constructive for mortgage credit performance, but that wasn't a given at any point along the way. I think what we said previously and what I continue to believe is that our next change to the new notice claim rate assumption is likely to be to increase it, not to decrease it. I think we feel very comfortable with where it is today, and that it represents the uncertainty that we face going forward.
If we continue to operate in a relatively low unemployment environment, a relatively stable home price environment, that it's entirely possible that that could continue to come out as too conservative. But I think that's certainly where we're comfortable and where we expect to stay.
Thank you for the answers.
Thank you.
Thank you. Our next question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.
Thank you. Good morning. Thank you for taking my questions. I had three questions, but maybe I will start with the net premium yield, if you will. As we think about 2027, some of the quota share changes you made, the 2023 quota share falls out, I guess, but other quota share becomes a larger part. Then you also have the new XOL. Just help us with that net premium yield. Are we looking at it being higher or lower in 2027? Any kind of quantitative metrics you could give us on that too? Thank you.
Yeah. Mihir, it is Nathan. I would say we have typically talked about the in-force premium yield. One of the challenges-
Right
with the net yield is based on the way the quota share agreements work, we get a profit commission that in low-loss environments like we have been operating in, it varies dollar for dollar with the amount of losses that we are ceding. Any guidance on the net yield is really kind of guidance on near-term losses, and that is not something that we have ever really done and would not feel comfortable doing just because we do not know what the future holds relative to losses. That is why we are holding so much capital. That is why we are trying to reserve prudently and conservatively. I think on the in-force yield, the top line of that, we do expect it has been, I would say, grinding lower over time. It has been coming down maybe tenths of a basis point.
We think that that is likely to continue, but no real change to the path or pace of the in-force yield. I would say the net yield, it will be much more impacted by loss expectations in 2027 or 2028 than it will the underlying cost of the reinsurance that we are buying.
Okay. I guess maybe then on the gross premium yield, I mean, do you expect that to just stay stable?
Yeah, I think we've said follow a similar path to the last couple years, which has been-
Okay
it's not coming down even a tenth a quarter, but I think if you look over the last couple years, it's down maybe a basis point in the last two years.
Right.
Maybe a little bit more than a basis point over the last three years. So, just kind of grinding a little bit lower. But again, we're disclosing this in tenths of a basis point. So, if we were disclosing this in full basis points, each of the last five quarters would be 38. So, again-
Right
it's quite stable.
Okay. Maybe just turning then to the housing EO and just the noise around potential consumer-driven cancellations. Let me ask a two-part question there. The first part is, how much consumer-driven cancellations are there happening currently? When I say consumer-driven, I mean not like the contractual HPA or the Homeowners Protection Act requirement or anything like that. I mean, just like the consumer calls their servicer and says, "Hey, I need to cancel my MI because the home price has increased." How much of that is happening currently? To the extent this pilot is implemented or starts being put in place where you have AVMs and automatic usage, what would MTG's response be? Do you have to adjust your pricing engine to reflect cancellation risk by loan, start accounting for that a little bit more?
Just trying to understand how shareholders are going to continue to earn this mid-teens return if we start seeing a lot more cancellations or shorter policy life.
Yeah, maybe I'll start and let Nathan maybe sort of fill in with maybe the first part of the question. Yeah, I think high level, it's too early to tell, right? We don't know any designs of a pilot. We're obviously highly supportive of the administration's focus on sort of future homeowners and being able to think about affordability. We talked through a little bit of the different levers that you can think about as far as the cancellation process that Nathan talked about earlier. It's tough to know where they might peg anything from a current LTV, seasoning requirements, pay history, all those things. So, it's really difficult to sort of work in that abstract to say what exactly the response would be.
I think it's safe to say that as FHFA looks at this and determines if they should do a pilot, and presumably working with the GSEs, that we'll hopefully share some of our thoughts on what some of those triggers should be, what some of those levers that they could pull, and sort of the resulting ramifications. It's really difficult, I'd say, to sit here and know what the exact response would be, because there's so many different things that could sort of be done or not done, quite frankly. Nathan, I don't know if you want to sort of chime in a little bit on some of the history we've seen.
Yeah, happy to. I think if you think about MI persistency, there's kind of two main categories. There's situations where the loan itself is going away. That could be due to a refinance or being paid in full for some other reason, someone's moving or something like that. Over the last, say, 10, 12 quarters, that's been about half of the reason for loans or policies lapsing. The other half is situations where the loan is persisting, but the MI coverage is canceling. That represents, say, ballpark about 8 percentage points. For our 1.1 million insured loans, you're talking about maybe 80,000 or 90,000 loans a year where the policy or the, I'm sorry, the loan is continuing, but the MI policy is canceling.
Within that group, it's about a 50/50 split as we can kind of best estimate between what would be kind of HOPA-related cancellations and what we infer as borrower requested. The way we think about that is, what is happening more than 180 days prior to the HOPA cancellation date? We're kind of inferring that that is borrower-requested activity. So, we're looking at, on our book, maybe 40,000 or 50,000 loans a year where that's happening, and then another maybe 40,000 loans where the HOPA cancellation is taking place. So, absent already the ability to cancel MI, we'd see persistency rates that look closer to prepayment rates in the broader market, north of or persistency rates in the broader loan market north of 90%. So, there's already quite a few ways to cancel loans, and that's already built into all of our models.
We don't just model prepay activity, but we're also modeling both the Homeowners Protection Act cancellations and the borrower behavior associated with borrower-requested cancellations. It's been that way for decades.
Got it. Thank you. Thank you for taking my question.
There are no further questions. I will now turn the call back over to management for closing remarks.
Thank you, Janelle. I just wanted to thank everyone for your interest in MGIC. Have a great rest of your week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.