Rohit Gupta: Yeah. I would say maybe starting back with construction of the books and how we think about onboarding risk. So I think your point is right in terms of our book construction, that when we originated ’20 and ’21, I’m not sure if we knew the HPA that was going to come in subsequent years. So our view on pricing and book composition was driven by our risk view and our environment view at that point. So we basically priced those books with significant pricing in mind. You might remember, May of 2020, we started increasing our price pretty significantly. We did three price increases in five weeks as COVID started. So there was some good pricing on that 2020 book, and it benefited from HPA and low interest rates, so a good amount of equity built in.
But I would also say that as we approached 2022, and we were pretty vocal on this point, in our calls, in middle of 2022, we actually started stabilizing our price and we started increasing our price earlier than others in third quarter of ’22. So while ’22 and ’23 books have lower HPA — embedded HPA than prior books, they still have overall good returns because that’s how we constructed the books. And just kind of thinking about current construct in the market, the HPA right now is still in November at 6.6%. So those books, depending on where you are in the country, are still building good embedded HPA even in this slower HPA growth environment. But there is still positive growth. Now, coming to the last part of your question, in terms of interest rate decline, I agree with your point that late ’22 and most of ’23 book has higher rates, higher mortgage rates in it, and we have a schedule in our earnings presentation that shows interest rates by book year.
So, yes, if interest rates do drop, those books would have the higher propensity to refinance. I would say, from our perspective, persistency in good economic environments and good credit environments is actually something that we look for. Higher persistency is good for our business. So I wouldn’t say we are looking to refinance that part of the book, but on a relative basis, yes, if there was a portion of the book that gets refinanced in that interest rate environment, it is that late ’22 and kind of most of ’23.
Richard Shane: Perfect. Thank you guys very much.
Rohit Gupta: Absolutely. Thank you.
Dean Mitchell: Thanks, Rick.
Operator: Thank you. And our next question coming from the line of Mihir Bhatia with Bank of America. Your line is now open.
Mihir Bhatia: Good morning. Thank you for taking my questions. I wanted to start on the claim rate for a second, if that’s okay. Just wanted to make sure I’m understanding. The 10% claim rate that you mentioned, that’s the initial gross default to claim to, deep to, I guess, claim assumption. That’s right? Like I’m not misunderstanding that 10%, right?
Dean Mitchell: Yeah. You can think about it as a frequency. You can think about it as a rate to claim, the probability of going to claim for any delinquency.
Mihir Bhatia: Got it. So like, I guess on that 10%, right? I mean, you’ve talked about the strength of the book. I think Rohit was just talking about like improving pricing, but also like the tight underwriting. Your actual credit performance has been quite strong, right? I mean, you’ve been having some pretty decent-sized reserve releases, and I’m just trying. Can you put that 10% in a little bit of historical context for us? Is that — I mean, I know it’s a little — I know it’s above like what you had a couple of years ago, but is it — is the 10% like — I mean, I guess, where is the 10% coming from? Is there something in the macro that you’re seeing that’s making you hesitant because it’s higher than peers, right? So just trying to understand what is driving that.
Dean Mitchell: Yeah. Mihir, When we put the 10% claim rate in place, we talked about the fact that we hadn’t seen any performance deterioration that was driving that assumption. It was more born out of the presence of economic uncertainty. And we thought that was heightened heading into 2022. And we started increasing the probability of those delinquencies ultimately going to claim. Now, what’s happened since then is that uncertainty hasn’t materialized in any performance deterioration. And we’ve started to release some of those reserves on 2022 accident year delinquencies. And in fact, this quarter, out of the $53 million of reserve releases, a majority of that was on 2022 accident year delinquencies. We still have a view that there is macroeconomic uncertainty present.
Obviously, the narrative continues to evolve, and I think the probability of a soft landing has become more in line with the consensus view. And really, our thinking about that 10% claim rate really comes down to our forward view of the macroeconomic conditions and whether we align with the soft landing and the elimination of that macroeconomic uncertainty and/or just the continued experience that credit continued to perform well. I mean, those will be the triggers for us reevaluating that 10% claim rate. But it is truly not born out of anything we’ve seen from an experience perspective and more just a view that there’s a presence of heightened economic uncertainty in the market. And we — it’s really in line with our belief and our philosophy on a prudent and measured approach to reserving.
Rohit Gupta: And Mihir, just to add to Dean’s point, I agree with everything Dean said. I would just say we are operating in an uncertain and kind of different environment. If you think about the presence of COVID forbearance in our data from 2020 onwards in all our delinquencies to claim both roll rate and timing, there’s a significant influence by that program where consumers were not reported delinquent to credit bureaus. And that is something that was not normal. So it’s difficult for us to just take last few years of roll rate and extrapolate that. I think we recognize that at some point of time that will correct to a more historical norm. And that’s how we made the determination that in this environment, it’s better for us to be prudent and actually make those assumptions.
I believe it’s January-February data when we’ll finally start seeing a transition from COVID forbearance to non-COVID forbearance in our delinquency data. So as we actually build confidence, in addition to Dean’s point on the economic environment, as we get more data that is normalized roll rate, we will use that to actually assess our assumptions.
Mihir Bhatia: Okay. No, that makes sense. Maybe just switching gears a little bit, I wanted to just touch base on this Australia transaction. Look, I understand it’s small, I understand it’s a proof point. You’re leveraging your mortgage credit experience there. But I was curious, why Australia? Why add that at this time? Are there other markets you’re looking at, right? I mean, it does — I mean, depending on the size it gets to, it could obviously add a little fair amount of complexity to the business. So just your thoughts on that transaction.
Rohit Gupta: Absolutely, Mihir, and thank you for the questions. So I would just say I’ll start off by just kind of as a reminder on an Enact Re, we watched the GSE CRT space and launched Enact Re to expand our access to new business opportunities. And we did that while keeping in mind that Enact Re is going to operate in adjacent markets by leveraging our core competencies, which means our technical expertise, our knowledge of mortgage credit, and obviously disciplined approach to risk management that we have shown for a long period of time. In addition to that, we were setting up Enact Re in a very efficient way, efficient from a capital perspective, efficient from an expense perspective, and efficient from a ratings perspective.
So when you think about Enact Re’s journey, I’ll start off at GSE credit risk transfers. We did some transactions back in 2018. We monitored the performance of those transactions, monitored the market, and then set up Enact Re to primarily participate in the GSE CRT transaction. And as I said in my prepared remarks, we have participated in every GSE CRT transaction since the entity was set up. And we find the returns attractive on a risk-adjusted basis, and we find the underwriting guidelines and underwriting constructs very good. I think Australia is a similar story. At this point of time, it’s a proof point for us, but it’s a business that we are very familiar with. We actually used to reinsure Australian business a while ago, so we have some experience in our data, in our entity.
At the same time, we also have management and employee experience with the Australian market. So we have been monitoring the market for a period of time and we use that experience to kind of make a call that we’ll use a small proof point where the risk-adjusted returns available in the market are good. The market is mature, it’s scaled, it’s familiar for us, and we use that to basically say we are getting paid well for it, it’s accretive to our shareholder value, and the risk in these transactions is very remote. So I think that’s how we think about kind of the construct of how we approach opportunities for Enact Re and they’re going to be measured and limited in terms of how we actually use those screens, if you will, to qualify those opportunities.
But that’s a construct I will give you. And our intent is to use Enact Re in that way to actually grow that adjacent opportunity here. But primarily the focus is going to be GSE CRT.
Mihir Bhatia: Understood. Okay. And then just my last question, just real big picture, maybe taking a step back. Like you mentioned, a little bit of a unique time for the MI business. That said, credit has been exceptionally good. Maybe you have a little bit of weakness on NIW, but that seems to be getting nicely offset by persistency. So my question to you is, is this as good as it gets? What are some of the like big key risks that you’re worried about? Like, maybe even just anything away from the macro specific to Enact that you can point to. But just trying to understand, like, is this as good as it gets? What is — what are you most focused on from a risk perspective? Thank you.
