Dean Mitchell: Yeah, Mihir. I’ll start, and Rohit can add. It may not be as good as it gets, but certainly, to your point, recent credit performance has definitely been very strong. I think there’s lots of reasons for that. Obviously, it’s a quality underwrite. We validate that through our QA results. We got strong credit quality. And when we think about that, we think about that through low layered risk, which we published in our earnings presentation. There’s a strong consumer, strong labor market. Home price appreciation has been meaningful. And then even for borrowers that have had some financial stress, the availability of loss mitigation options in this market has been significant. So all of that really provides a backdrop for strong credit and the elevated cure activity that we’ve seen.
And I guess implied in your question is the significant release of reserves that we’ve seen over the last, whatever, six to eight quarters, probably not sustainable. I think we would expect some reversion through time. However, as you mentioned, there are some potential offsets in that. You mentioned the smaller mortgage originations market. I would also talk about that from a capital perspective given the uncertainty we talked about on one of your earlier questions. We are holding what we would consider to be elevated PMIERs sufficiency levels, maybe versus what the industry is held up pre-pandemic if you go back to 2019. So is that as good as it gets? I think much like I said, there’s probably some reversion in there on a net basis. I think what’s possibly missed in that question though, Mihir, is that it’s — you got to couple out with the changes we’ve made to the business model, which have really derisked the mortgage insurance industry over the last decade-plus.
Those changes are things like QM, the introduction of PMIERs, capital standards, the risk-based pricing that we’ve introduced into the market, the ability to very quickly align price with risk, and of course, the mature CRT programs that Enact has, as well as the rest of the industry, all that’s positively impacted the volatility profile of the business. So even if this is as good as it gets and there’s some pullback in returns, we still believe there’s significant relative value in Enact and really across the MI industry overall, given the changes we’ve made to derisk the business model through time.
Rohit Gupta: Yeah. And I think, I agree with everything Dean said, Mihir. The only thing I’ll add is, if you think about NIW, there is definitely some upside in market size. We have talked about the pent-up first-time homebuyer demand that’s in the market. The demographics are very supportive of our industry. First-time homebuyers use private mortgage insurance 60% of the time to get into homes. So as we think about this big wave of folks getting to first-time home buying age of 33 years old all the way up to 2026, that can actually give us some serious upside on NIW. And I think from an expense and CRT perspective, which are kind of the cost of the business, we have started giving proof points to the market in terms of how we are showing efficiency in the market.
So we reduced our expenses year-over-year by 7%. We have given expense guidance for 2024 that’s relatively flat. So if the revenue line goes up, we can keep expenses kind of increasing at a slower pace than revenue, then that starts creating more margin in the business. And then from a capital perspective, I think back in 2019, pre-COVID the industry was closer to 145% PMIERs ratio. Given kind of the uncertainty in the market, industry has operated with higher capital. So at some point of time, there could be kind of some normalizing in that ratio and that could settle at a different level. But completely agree with Dean that when you think about that return against mortgage risk as an asset class, which has been significantly derisked after Dodd-Frank, whether it’s a definition of qualified mortgage, risk-based capital, risk-based pricing, as well as CRT and new master policies, I think it’s a much better industry and much more stable industry with very strong returns.
Mihir Bhatia: That makes sense. Thank you for taking my questions.
Rohit Gupta: Absolutely.
Dean Mitchell: Thanks, Mihir.
Operator: Thank you. And our next question coming from the line of Geoffrey Dunn with Dowling and Partners. Your line is open.
Geoffrey Dunn: Thanks. Good morning. I have two questions. First, a mechanical question on the forward XOLs. Do you set the quarterly cede or coverage rate at a rate that anticipates hitting your limit? And if that limit is kind of plus or minus going into the fourth quarter, do you have a true up true down to kind of max out your limit on those?
Dean Mitchell: Yeah. So we definitely set the limit with our production — our view of forward production in mind. And then if for whatever reason, production comes in lighter, it gets absorbed into the transaction heavier. We go back and we work with our reinsurers to modify the agreement and bring that back in line with our original intent, George — Geoff, excuse me. So that is — it’s a more mechanical or amendment type exercise if production comes in heavier than expectations. It’s not built into the contract, may be said differently.
Geoffrey Dunn: Got it. I want to ask a little bit more about the expectation for capital return. With over $1 billion of surplus and a lot of precedents for running that a lot lower in the industry regardless of your stated domicile, that doesn’t seem to be the restriction and alone would point to a bigger capital return opportunity than the $300 million or so you’re talking about. So is the read-through here that the more constraining factor is where you’re trying to target your PMIERs ratio?
Dean Mitchell: Yeah. I think right now, we’re early in the year. There’s obviously a lot of things that have to take place in terms of business performance, in terms of macroeconomic performance over the course of the year. I think as we look forward, and this is predicated in part what Rohit said, the progress we’ve made on our CRT program, the success we’ve had not only in covering the back book, but on the forward books we just talked about with 2024 quota share and XOL. That gives us — that effectively sets the table. It gives us the confidence to be able to provide the $300 million return of capital guidance on a full-year basis. And then much like I said, it’s going to be driven by ultimate — the ultimate return of capital will be influenced by how the business performs over the course of 2024, the macroeconomic environment that emerges, and we’ll continue to assess that through time.
And to the extent there is more opportunity, we’ll take that under advisement and come back and inform the market at that time.
Rohit Gupta: Yeah. I think, Geoff, I would just — I think Dean laid it out well. I would just kind of tie it back to the capital prioritization framework we have talked about. So the first priority is for capital to support our existing policyholders, followed by new business opportunity, new insurance written, and then any other adjacent opportunities, and finally, capital return. I would say from an economic perspective, just watching how Fed’s actions finally have an impact on the economy, we have seen that we changed several times over the last two years. So just being mindful that we need to have the right amount of capital for that economic uncertainty. And as that certainty presents itself, that will give us more confidence on how much capital we need to support our existing book.
And then from a new insurance written perspective, I think the answer I previously gave that there’s a lot of pent-up demand in the market at some point of time with the right mortgage rate in the market-right affordability equation do we actually get a bigger market size opportunity. So we would target that. And then I would just add a consideration that, we also keep the other constituents in mind. So rating agencies have their views on the right target for PMIERs, which is kind of where you started. So all those considerations kind of give us the current level of PMIERs we are targeting and the current capital return guidance we gave. But to Dean’s point, as our view continues to evolve through the year, then we will revisit that as we have done in prior years.
Operator: Thank you. And our next question coming from the line of Eric Hagen with BTIG. Your line is open.
Jake Fuller: Hey. Good morning. This is Jake on for Eric. Thank you for taking my questions. First one, can you share how the premium yield in the 2022 and 2023 vintages compares to the premium yield in the earlier pandemic vintages? Thanks.
Rohit Gupta: Good morning, Jake. So we have not historically shared our premium yield by vintage. As you can imagine, our risk-based pricing engines are opaque to the market, opaque to our peers, and the strategy we deploy in terms of risk selection and pricing is a competitive differentiator for us. So we generally provide pricing color on pricing actions. I would simply point you back to the disclosures we have made in prior earnings calls where we talked about stabilizing our price in the middle part of 2022 and then starting to increase price in the third quarter of 2022. And then I have since given updates on our pricing actions almost every quarter. So outside of providing that qualitative guidance in the direction of price changes, I would say it’s tough to provide any specific comparison between vintages.
Jake Fuller: Got you. Appreciate that color. And then my second one, can you talk about how much PMIERs credit that you expect to receive from the two CRT transactions you have in place for your 2024 production? Thanks.
