Enact Holdings, Inc. (NASDAQ:ACT) Q4 2023 Earnings Call Transcript

Enact Holdings, Inc. (NASDAQ:ACT) Q4 2023 Earnings Call Transcript February 7, 2024

Enact Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to Enact’s Fourth Quarter Earnings Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker, Daniel Kohl, Vice President of Investor Relations. You may begin.

Daniel Kohl: Thank you, and good morning. Welcome to our fourth quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer; and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business performance and progress against our strategy. Dean will then discuss the details of our quarterly results before turning the call back to Rohit for closing remarks. We will then take your questions. The earnings materials we issued after market close yesterday contain our financial results for the quarter, along with a comprehensive set of financial and operational metrics. These are available on the Investor Relations section of the company’s website at www.ir.enactmi.com.

Today’s call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections as of today’s date. Additionally, they are subject to risks and uncertainties, which may cause actual results to be materially different, and we undertake no obligation to update or revise such statements, as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today’s press release as well as in our filings with the SEC, which will be available on our website. Please keep in mind the earnings materials and management’s prepared remarks today include certain non-GAAP measures.

Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filing on our website. With that, I’ll turn the call over to Rohit.

Rohit Gupta: Thanks, Daniel. Good morning, everyone. We delivered very strong fourth quarter and full year 2023 results, including high quality growth in our insured portfolio, strong credit performance, increasing investment income, expense efficiency, and solid profitability in return, while also returning substantial capital to our shareholders. Driving this performance was a continued execution of our cycle tested growth and risk management strategy made possible by the hard work and talent of our employees. I’d like to thank them for their continued focus and commitment and for helping Enact deliver another successful year. Net income for the full year was $666 million or $4.11 per diluted share and return on equity was 15%.

We ended 2023 with record insurance in-force of $263 billion driven by new insurance written off $53 billion for the full year and persistency that reached 86% in the fourth quarter. In addition to our strong financial performance, we achieved several strategic milestones during 2023 that will help position us to perform over the long term and across market cycles. First, we delivered important enhancements to our customer and technology platforms. These enhancements have improved the customer experience and are demonstrative of our commitment to deliver a high caliber, seamless, and efficient experience to our lender partners and have helped us add over 150 new customers in 2023 in a market that saw the number of lenders contract. We also made significant progress in extending our platform into compelling adjacency.

During the second quarter, we launched Enact Re to pursue opportunities in the mortgage reinsurance market. Enact Re continues to provide high-quality and attractive GSE risk share business and we have participated in all seven of the GSE deals that have come to market since its launch. And today, I’m pleased to announce that Enact Re has entered into our first international reinsurance deal with a leading mortgage insurance provider in the Australian market. We are excited to be participating in a familiar, mature, and scaled mortgage insurance market where we can leverage our previous experience. When we launched Enact Re, I discussed our view of the opportunities for compelling returns and we continue to be pleased with the strong underwriting and attractive risk-adjusted returns we have seen since its launch.

Going forward, we continue to see Enact Re as a long-term capital and expense-efficient growth opportunity. Aligned with this view, during the quarter, EMICO contributed an additional $250 million to Enact Re, which will support a 12.5% quota share of our in-force business, up from previously announced quota share of 7.5%, as well as new insurance written and new business opportunities, primarily consisting of GSE credit risk transfer. Based on our current view, we believe that with this infusion, we have sufficiently funded Enact Re to support its growth for the foreseeable future and will continue to keep the market apprised of progress through time. Importantly, we executed on these opportunities while driving expenses below our target for the year and exceeding our target for capital returns to our shareholders.

Both Dean and I will have more to say on these topics shortly. I’m very pleased with our operating performance and the strategic progress we achieved in 2023. In 2024, we will continue to maximize value and efficiencies in our core MI business while also pursuing disciplined growth. After a strong 2023, I’m confident that we are well-positioned for continued success as we enter 2024. I will now turn to the operating environment and our results. The economy remains resilient, supported by a strong labor market and healthy household balance sheet, while macro factors such as geopolitical conflicts, higher interest rates, and continued economic uncertainty post potential risks. Delinquency rates for prime mortgage borrowers are consistent with pre-pandemic levels and our manufacturing quality continues to be strong.

Even as originations have slowed amid higher borrowing costs, we are encouraged by the pent-up demand amongst first-time homebuyers, the long-term outlook for housing, and the attractive opportunity we see in the private mortgage insurance market. Home prices continue to be supported by low housing inventory and strong demand, and mortgage insurance will remain an important tool to help buyers qualify for a mortgage. While higher interest rates have affected mortgage originations, elevated persistency has continued to support insurance-in-force growth. As of December 31, only 4% of the mortgages in our portfolio had rates at least 50 basis points above the prevailing market rate. Also, as mortgage rates have come down following a peak of more than 8% in the fourth quarter, recent data has pointed to an uptick in housing activity which may provide a tailwind heading into the spring selling season.

Our overall expectations based on current information is for 2024 MI market size to be similar to that in 2023. The credit quality of our insured portfolio remains strong with a weighted average FICO score of 744 and a weighted average loan-to-value ratio of 93% in the fourth quarter and layered risk in our portfolio was 1.3%. Pricing overall was constructive during the quarter and underwriting standards remained rigorous. We increased our price on NIW in certain cohorts and geographies in response to potential macroeconomic risks. Our dynamic pricing rate engine enables us to deliver our best price to customers while targeting appropriate risk-adjusted returns in real time, ensuring we onboard a prudent mix of business while managing expected returns.

Our delinquency rate in the fourth quarter was 2.1%, up 13 basis points sequentially, relatively flat year-over-year, and consistent with our expectations and pre-pandemic levels. Strong credit performance continued during the quarter and our loss mitigation efforts helped drive strong cure activity. As a result, we released $53 million of reserves and the loss ratio was 10%. We believe we remain well reserved for a range of scenarios. We continue to operate from a position of financial strength with strong balance sheet principles and liquidity. At year-end 2023, our PMIERs sufficiency was a strong 161% or $1.9 billion of sufficiency and approximately 90% of our risk in-force was subject to credit risk transfers. Since last quarter, we have completed an ILN, a quota share, and an excess of loss reinsurance transaction, providing capital efficiency and loss volatility protection that Dean will detail later.

As a proof point to our continued financial strength and liquidity, EMICO received multiple upgrades to its insurer financial strength rating by three different rating agencies in 2023. And as previously announced, S&P upgraded EMICO to A minus in January. With that upgrade, EMICO is rated A minus or equivalent across four different rating agencies and our holding company is rated investment grade across four different rating agencies also. Additionally, the upgrades in 2023 drove Enact’s senior debt rating to investment grade. The strength and flexibility of our capital position allowed us to deploy capital to support new business and grow our insurance in-force, while also meeting our commitment to return capital to our shareholders. In 2023, we returned over $300 million to shareholders in the form of dividends and share repurchases, including a 14% increase in the quarterly dividend beginning in the second quarter and a special dividend of $113 million during the fourth quarter.

Additionally, we completed our first share buyback program of $75 million and authorized a second program of $100 million. Going forward, we remain committed to maximizing shareholder value through our balanced approach to capital allocation. As we enter 2024, we will continue to prudently invest in the growth opportunities we see for the business while also maintaining strong liquidity levels and our commitment to return capital to our shareholders. On that front, for 2024, we expect total capital return will be similar to what we delivered in 2023, and given the compelling valuation we have seen in our stock through late 2023 and early 2024, we expect to increase our share repurchase activity. We had a strong quarter and I’m very pleased with our performance in 2023.

We look forward to continuing to serve our customers and their borrowers and delivering on our opportunity to drive value for our shareholders. With that, I will now turn the call over to Dean.

Dean Mitchell: Thanks, Rohit. Good morning, everyone. We again delivered strong results for the fourth quarter of 2023. GAAP net income for the fourth quarter was $157 million or $0.98 per diluted share as compared to $0.88 per diluted share in the same period last year, and $1.02 per diluted share in the third quarter of 2023. Return on equity was 14%. Adjusted operating income was $158 million or $0.98 per diluted share as compared to $0.90 per diluted share in the same period last year. And a $1.02 per diluted share in the third quarter of 2023. Adjusted operating return on equity was 14%. For the full year, GAAP net income was $666 million or $4.11 per diluted share, compared to $704 million or $4.31 per diluted share in 2022.

Adjusted operating income for 2023 totaled $676 million or $4.18 per diluted share compared to $708 million or $4.34 per diluted share in 2022. Turning to revenue drivers, primary insurance in-force increased in the fourth quarter to a new record of $263 billion, up $1 billion sequentially and up $15 billion or 6% year-over-year. New insurance written of $10 billion was down $4 billion or 27% sequentially and down $5 billion or 31% year-over-year. These declines were primarily driven by a lower estimated private mortgage insurance market in the fourth quarter. Persistency was 86% in the fourth quarter, up two percentage points sequentially and flat year-over-year. As Rohit mentioned, just 4% of the mortgages in our portfolio had rates at least 50 basis points above the prevailing market rate.

While rates remain elevated, we anticipate elevated persistency which will help offset lower production from the impact of higher mortgage rates. Net premiums earned were $240 million were down $3 million or 1% sequentially and up $7 million or 3% year-over-year. The decrease in net premiums earned sequentially was primarily driven by the lapse of older, higher-price policies and higher ceded premiums, driven by the successful execution of our CRT program and partially offset by insurance in-force growth. The year-over-year increase was driven by insurance in-force growth, partially offset by higher ceded premiums and the lapse of older higher-price policies. Our base premium rate of 40.1 basis points was down 0.1 basis points sequentially and 0.9 basis points year-to-date.

Remember that our base premium rate is impacted by a variety of factors and tends to modestly fluctuate from quarter to quarter. Premium yields for the full year 2023 were in line with our expectations and we expect yields to continue to stabilize around current levels in 2024. Our net earned premium rate was 36.4 basis points, down 0.9 basis points sequentially, primarily reflecting higher ceded premiums in the current quarter. Investment income in the fourth quarter was $56 million, up $1 million or 2% sequentially and up $11 million or 25% year-over-year. Higher interest rates have lifted yields in our investment portfolio and we expect and we expect our book yield will continue to increase overall as our portfolio continues to turn over and higher-yielding assets become an increasing proportion of the overall mix.

Our new money yield was over 5% and our portfolio book yield increased to 3.6% for the quarter. Turning to credit, losses in the quarter were $24 million as compared to $18 million last quarter and $18 million in the fourth quarter of 2022. Our loss ratio for the quarter was 10% compared to 7% last quarter and 8% in the fourth quarter of 2022. Our losses and loss ratio were driven by higher current quarter delinquencies, primarily driven by seasonal trends sequentially, in addition to the normal loss development of new books. This was partially offset by favorable cure performance, primarily from 2022 and earlier delinquencies that remained above our expectations, resulting in a $53 million reserve released in the quarter. New delinquencies increased sequentially to 11,700 from 11,100.

Our new delinquency rate for the quarter was 1.2% compared to 1.1% in the fourth quarter of 2022 reflective of ongoing positive credit trends and primarily driven by historical seasonality and the normal loss development of new large books. We continue to book new delinquencies at an approximate 10% claim rate, reflecting our prudent approach to reserving in a dynamic macroeconomic environment. Total delinquencies in the fourth quarter increased sequentially to 20,400 from 19,200. The primary delinquency rate increased 13 basis points sequentially to 2.1%, consistent with our expectations and in line with pre-pandemic levels. We continued to deliver expense discipline throughout 2023. Operating expenses for the full year of 2023 were $223 million compared to $239 million for the full year 2022, lowered by 7%, driven by our commitment to operational excellence and cost reduction initiatives.

Operating expenses for the fourth quarter were $59 million, up 7% sequentially, driven by the timing of premium tax expense recognition and incentive-based compensation, and down 6% year-over-year. The expense ratio for the quarter was 25%, up 2 percentage points sequentially and down 2 percentage points year-over-year. We remain focused on disciplined expense management and towards that end, for 2024, we expect expenses to be in the range of $220 million to $225 million or approximately flat year-over-year. Moving to capital, we continue to operate with a strong capital base and liquidity position. Our PMIERs efficiency was 161% or $1.9 billion above PMIERs requirements at the end of the fourth quarter. Additionally, 90% of our risk in-force is subject to credit risk transfers and our third-party CRT program provides $1.7 billion of PMIERs capital credit.

During the quarter, we completed our sixth ILN issuance, which saw strong interest from investors and reinforced our ability to access the capital markets. And subsequent to quarter end, we closed a new quota share and a new excess of loss reinsurance transaction, both with panels of highly rated reinsurers to provide forward protection for our 2024 business. Lastly, during the quarter, we added a strongly rated reinsurer partner to our 2023 quota share transaction, increasing our cede percentage from approximately 13% to approximately 16%. As this level of activity reflects, our credit risk transfer program remains a critical component of our enhanced business model, driving capital efficiency and volatility protection for unexpected losses.

Turning to capital allocation, we remain committed to our capital prioritization framework which balances maintaining a strong balance sheet, investing in our business, and returning capital to shareholders. We returned just over $300 million to shareholders in 2023 in the form of dividends and share repurchases. During the quarter, we paid out $26 million through our quarterly dividend and $113 million through our special cash dividend and we bought back 656,000 shares for a total of $18 million through our share repurchase program. During January, we repurchased an additional 133,000 shares for a total of $4 million. As of January 31, 2024, there was approximately $82 million remaining on our current share repurchase authorization. As we head into 2024, we will continue to balance investing in growth opportunities across the business with our commitment to return capital to shareholders.

We expect total 2024 capital return to be approximately $300 million, similar to what we delivered in 2023. As in the past, the final amount and form of capital returned to shareholders will ultimately depend on business performance, market conditions, and regulatory approvals. Shifting to Enact Re, as Rohit mentioned, Enact Re has continued to produce solid results since its launch. During the fourth quarter, EMICO contributed an additional $250 million of capital to Enact Re and subsequent to quarter end increased the affiliate quota share cede percentage from 7.5% to 12.5%. This capital contribution will support the increased quota share and for the foreseeable future will provide Runway for Enact Re’s new business opportunities, primarily consisting of GSE credit risk transfer.

We’re very pleased with all we accomplished in 2023 and I would like to thank all of our employees for driving this outstanding performance. We believe we are well-positioned heading into 2024 and remain focused on driving solid returns. Thank you. I will now turn the call back over to Rohit.

Rohit Gupta: Thanks, Dean. As we look ahead, we are encouraged by the significant long-term opportunities for mortgage insurance and believe that our strength and flexibility position us to continue to execute and deliver value for all our stakeholders. Our commitment to responsibly help more people become homeowners motivates everything we do and has never been stronger. Operator, we are now ready for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Bose George with KBW. Your line is open.

Unidentified Participant: Hey, good morning, everyone. This is actually Alex on for Bose. I just wanted to touch on the recent ratings upgrades first. Can you discuss how these upgrades could potentially impact the business? And then maybe just to go into a little bit more detail, what is the benefit of the higher rates for both Enact and the MI industry as a whole?

Rohit Gupta: Yeah. Good morning, Alex. This is Rohit. I’ll get started and I’ll have Dean add color to that. So I think from a business perspective, we are very happy with the ratings upgrade — rating upgrades we have received both in 2023 and 2024. As a reminder, in 2023, we received ratings upgrade from all rating agencies in early part of the year. And in addition to that, we also got A and best rating at A minus for our insurance company. And then in January, we received an upgrade from S&P that upgraded us to A minus at an insurance company level, and at an investment grade level for our holding company. So as I said in my prepared remarks, I think having A minus ratings for our insurance company is positions us very strongly in front of all counterparties, whether that’s GSEs, whether that’s depository institutions or for Enact Re, whether it’s third parties that we do business with.

And then from a holding company perspective, it also positions us well in terms of holding company being investment-grade rated across all rating agencies. So I think both from playing participation in the market, that’s an upside. And at the same time, hopefully, it helps our cost of capital over a period of time.

Dean Mitchell: Yeah, Alex. I’ll just pick up on that last point that Rohit made. I think with now the holding company being fully investment grade, coupled with the fact that we have $750 million of notes outstanding to mature in August of 2025, I really think that sets the table for better access to the investment grade market and ultimately tighter spreads when we ultimately do refinance the 2025 notes. So we think it’ll have a meaningful economic impact as we go forward towards that refinance activity.

Unidentified Participant: Great, that makes sense. And then just one more, maybe on the high or higher ceded premiums in the quarter. Is this — is the 4Q level something that will run rate moving forward?

Dean Mitchell: Yeah. Alex, a good question. Appreciate that. I think we were very active recently in the CRT market, so start with that. We talked about the execution of our first ILN transaction since 2021. We also added the highly rated reinsurer to our 2023 quota share transaction, which increased the cede commission from 13% to 16%. And then post to year end we added both a forward XoL and a quota share transaction on our 2024 NIW. So that activity isn’t fully baked into our Q4 run rate. So I would say the $25 million probably is not the right run rate as we head into Q1 when we fully bake in a full quarter of the ILN. In addition to that, start baking in the forward XoL and forward quota shares, I think you’re going to see a run rate closer to $28 million, $29 million entering in Q1, just taking into account those transactions.

I think it’s important to remember with those latter two transactions, those are forward transactions on our 2024 NIW. So those will continue to increase over the course of the year as we continue to produce more NIW and the coverage continues to expand. There is some obviously potential for lapse offset in that run rate, but lapse has been incredibly slow in our CRT program, given the high degree of persistency that we’ve experienced in the current quarter. So, I think hopefully the $28 million, $29 million gives you a run rate heading into Q1. And then just consider that those 24 coverages will continue to increase protection and increase ceded premiums over the course of the remainder of the year.

Rohit Gupta: So Alex, just one or two things to add to Dean’s points. First thing, from an overall operating leverage perspective, we have messaged before that we want our operating leverage to be in mid-30s and we are building up to that. So this is part of the build and an important aspect of that is our participation in quota share transaction where our peer group probably has a higher percentage of quota share transactions where you actually see the higher level of premium upfront. So you see an increase in ceded premium, but part of that premium comes back in your ceding commission and offsets your expense ratio. So that’s new for us. This is our second quota share transaction, so just important to point out that balance in P&L.

And then the last thing I would say just to kind of wrap this up is from a ceded premium perspective, having those forward quota share and excess of lost transactions done on 2024 new originations, new insurance written gives us a capital return confidence that Dean talked about in our prepared remarks. So being able to give that capital return guidance early in the year is also based on that fourth quarter activity in CRT space.

Unidentified Participant: Got it. That makes sense. Thanks so much for taking the questions.

Rohit Gupta: Thank you.

Dean Mitchell: Thanks, Alex.

Operator: Thank you. And our next question is coming from the line of Rick Shane with JPMorgan. Your line is open.

Richard Shane: Thanks for taking my questions this morning, guys. Look, we’re in a unique environment where disproportionately volumes are purchase-driven versus refi-driven. But we’re also in an environment where purchase activity is quelled by lack of supply. I’m curious, strategically — both tactically and strategically, how you approach that market. Is it — are there short-term things that you do? And then when you think about taking that risk on that may be slightly different between purchase and refi, and owning that risk for five years, how do you think about the differences there as well?

Rohit Gupta: Yeah. Good morning, Rick. So I will get started and Dean can add color on this. So definitely we have been operating in a very dynamic and complex market. And I think in recent months we have even seen more factors in play between higher mortgage rates that actually went above 8%. In second half of 2023, we have seasonality in play and then also some weather events. But I think the combined effect of that has had an impact on purchase originations volume in Q4 and as a result on MI market size too. I think from a volume perspective, those are the factors kind of we take into account in terms of what MI market size is and the market we are playing in. From a risk perspective, as we have stated in the past, we have very granular and very deep models that are based on our own data that is kind of with us for the last 40 years.

And that gives us a lot of confidence that once we come up with our view of the market and the range of outcomes around that base case, then we can actually pivot our participation based on risk categories, based on risk attributes, and our risk-based pricing engines allow us to deploy that strategy down to an MSA level from a geography perspective, and then down to any risk attributes that we choose to. So I think that’s how I would think about it. More broadly, it’s tough to talk about our commercial strategy in terms of risk attributes that are in play in different cycles. But hopefully, that gives you our mindset and the tools that we have at our disposal to deploy our pricing and risk management mindset. And that has kind of delivered results that you see over the last few years for us,

Dean Mitchell: Yeah. The two aspects that Rohit didn’t cover that I’ll pick up on probably don’t change as much, to be honest with you. One is expense management. Obviously, we’re always focused on making sure that our economic footprint is in relation to our — into the market size and the market realities. But I think quite frankly, whether a big market or a small market, we’re focused across the business on prudent expense management. So I don’t know that anything changes there, but it does highlight our focus. We may get more scrutiny on expense management in a smaller market. And then CRT, and again, not much change here. I think our business objectives with our CRT is driving efficient capital as a capital source, and traditionally we think about that in the PMIERs context and then lost volatility protection.

So we still want to go out and secure CRT for those two purposes. Obviously, the quantum might change given the amount of new business, but I think the objectives of the CRT and the use of CRT are programmatic and remain in place.

Richard Shane: Got it. Okay. And if I may ask one follow-up, the existing book is probably more barbell than at any time in the history of the industry where you have a couple of cohorts that are benefiting from huge HPA, incredibly low underlying rates, and so the quality there is going to be extremely high, your more recent cohorts, less HPA, higher coupon, presumably more credit risk. When we look to a more dovish fed, is the opportunity to modestly derisk the book? Yes, persistency will go down on those more recent cohorts, but presumably, that will drive some HPA and borrowers’ opportunity to step down in rates. Is that how we should look at things? Is that the favorable opportunity ahead?

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.

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.

Dean Mitchell: Yeah. So, Jake, thanks for the question. I think on the XOL, we’ve identified that as approximately $250 million. I think it was $255 million of PMIERs credit. And then a little bit to Geoff’s point earlier — Geoff’s question earlier, the quota share will be predicated. It’s a 21% session on our 2024 NIW. So it’s going to be predicated on the NIW levels that we produce over the course of the coming year. So harder to give you a discrete number at this point in time that’ll be firmed up as our NIW numbers or levels crystallize over the course of 2024.

Jake Fuller: Got you. All right. Thank you, guys.

Rohit Gupta: Thank you.

Dean Mitchell: Thank you.

Operator: Thank you. And our next question coming from the line of Arren Cyganovich with Citi. Your line is open.

Arren Cyganovich: Thanks. I was wondering if you could talk a little bit about the expectations for insurance in-force growth for the year. You mentioned that your production or the industry production might be kind of flattish with year-over-year, but you saw some pretty nice insurance in-force growth this year, even while your production slowed. Just wondering if you’ll see kind of similar dynamics given the high persistency?

Rohit Gupta: Good morning, Arren. So I will take an attempt at that. I think — so obviously, the piece parts are the amount of NIW we can add in 2024 and what lasts to be seen in our existing book. Given our guidance on MI market size, you can actually range-bound our new insurance written for 2024 based on that number. And obviously, 2023 full market size is not yet known because we — only two of the companies have reported for Q4, but I think that’s a narrow range. So that gives you an idea on insurance in-force growth driven by NIW. I think the big question becomes on lapse, and lapse is highly dependent on interest rates in the market. I think the confidence we have and Dean mentioned this in our prepared remarks, that as we talk about lapse in our books, the fact that only 4% of our book — 4% of policies have a 50 basis points threshold for a refinance incentive right now, or they’re within the 50 basis point threshold, gives you an idea on the refinance exposure.

But as interest rates change in the market, which is both driven by 10-year treasury yield and the spread, I think that can change that number. So I’m not kind of giving you a straight answer, but we can see an increase in our insurance in-force growth based on those dynamics. But I would say if the market size is small, that growth is going to be kind of subdued by that factor itself.

Arren Cyganovich: Okay. Got it. That’s helpful. And the follow-up to that would be on the persistency. I looked at the risk or the insurance in-force that you have laid out with the mortgage rates. And really, it’s only the 2023 vintage, which is about 20% of the book, and that’s currently kind of at current mortgage rates. So would you have to see mortgage rates kind of fall by 50 basis points or more to really see a notable decline in the persistency?

Dean Mitchell: Yeah. I think that’s right. So you lay out on page 10 of our earnings presentation, we give the if by book year and the associated average mortgage rate. And you’re exactly correct that really the only cohort that is really, on average, near the current prevailing mortgage interest rate is 2023. And that is about 20% of our overall insurance in-force portfolio. You need to see a meaningful change in rate to economically incent the 2023 borrowers to refinance and quite frankly, the earlier vintages, it takes a much bigger change in mortgage rates for that economic incentive to emerge.

Arren Cyganovich: Okay. Thank you.

Dean Mitchell: Thanks, Arren.

Operator: Thank you. And that’s all the time we have for the Q&A session. I will now turn the call back over to Mr. Rohit Gupta for any closing remarks.

Rohit Gupta: Thanks, Livia. Thank you, everyone. We appreciate your interest in Enact and I look forward to seeing some of you in Florida at the Bank of America Financial Services conference. Thank you,

Operator: Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.