Enact Holdings Inc

NASDAQ:ACT

Earnings Call Transcript 2021-Q3

[Operator]

00:02 Hello, and welcome to Enact's Thirdrd Quarter Earnings Call. Please be adviced that today conference is being recorded.

00:09 I would now like to turn the conference over to your first speaker today, Daniel Kohl, Vice President of Investor Relations, you may begin.

[Daniel Kohl, Vice President of Investor Relations]

00:18 Thank you, and good morning, everyone. Welcome to our first earnings call as a publicly traded company. 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, our performance in the quarter and progress against our strategy. Dean will then discuss the details of our third quarter performance before turning the call back to Rohit for some closing remarks. After prepared remarks, we will take your questions.

00:50 The press release we issued after market close yesterday contains Enact's financial results for the third quarter of twenty twenty one. This release and a comprehensive set of financial and operational metrics are available on the Investor Relations section of the company's website at www.ir.enactmi.com under the section marked Quarterly Results.

01:14 Before we begin, I would like to remind everyone that today's call is being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions as of today's date. That are subject to risks and uncertainties which may cause actual results to differ materially, and we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. 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 are also available on our website.

2:00 Also, please keep in mind that the press release, the quarterly financial supplement and management's prepared remarks today includes certain non-GAAP measures. Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our investor presentation and our upcoming quarterly filing on our website.

2:21 With that, I'll turn the call over to Rohit.

[Rohit Gupta, President and Chief Executive Officer]

02:24 Thanks. Daniel, and good morning everyone, I'm excited to welcome you to our first earnings call following our successful IPO in September. The IPO was a significant milestone for Enact, that provides a launching point as we aim to realize the full potential of our business. Enact started selling mortgage insurance in nineteen eighty one with a clear mission to help people buy houses and stay in their homes, and we have never wavered in that mission.

02:52 Through our strong relationships with mortgage lenders underwriting excellence and commitment to prudent risk and capital management. We have grown into one of the leading private mortgage insurance companies in the US operating in all fifty states and DCs.

03:07 Following our successful IPO in September, we are better positioned than ever, driven by a number of factors including, deep customer relationships, we serve over eighteen hundred active customers across the mortgage origination market, including all of the top twenty mortgage originators and provide them with a compelling value proposition, including competitive pricing and guidelines, a best-in-class underwriting platform and other tools and support to help them achieve their growth objectives.

03:36 We are prudent managers of risk, we utilize the proprietary approach that ensures the underlying credit quality of our insured mortgage portfolio is aligned with our risk and profitability framework. And we have further strengthened our risk management efforts through the actions we have taken to transfer risk from our balance sheet, which we believe will enhance our return profile and reduce volatility and losses over time.

04:02 Today over ninety percent of our risk in force as covered by our credit risk transfer program. Our Executive Team is second to none with an average of nearly thirty years of experience and a proven track record of delivering results through the cycle, complemented by the right combination of skills to drive our long-term success. Finally and importantly, dynamics in our market remains very strong as a combination of low interest rates, robust housing prices, demand for homeownership and favorable demographics create a favorable environment for purchase originations.

4:38 Despite the tight housing market, the number of first time homebuyers purchasing homes remained robust in the first half of twenty twenty one and they use high loan to value products more than eighty percent of the time when becoming homeowners. Over the next five years, an additional one point five million people above the existing brand are expected to reach peak first-time home buying age, which we believe will expand the first time homebuyer market even further. These dynamics were evident in the third quarter.

05:08 Mortgage origination activity remained robust, fueled by strong home sales and refinance activity. Total unsold inventory of single-family homes remains low at a two point six month supply as of August twenty twenty one. This continues to drive home prices higher, increasing our average loan amount on new insurance written. At the same time, historically low interest rates continue to serve as an offset to rising prices, which allows for continued affordability for borrowers.

05:39 Finally, refinance activity remained robust compared to second quarter of twenty twenty one, but decreased compared to the third quarter of twenty twenty. As a public company with an improved ratings profile, we are better positioned to both start doing business with new customers and defend and grow share within our long-standing customer relationships by leveraging our best-in-class underwriting platform, and customer service.

06:06 Going forward we will leverage our strengths to execute against a clear growth strategy designed to further differentiate Enact, generate strong returns for our shareholders and maximize value creation. This strategy is based on an informed cycle tested approach that has allowed Enact to outpaced industry average insurance in-force growth over time. We will have as our principal focus to continue to write profitable new business, supported by our differentiated value proposition and the ongoing positive market backdrop. We remain committed to deepening existing relationships and developing new ones by offering our customers a differentiated value proposition and an experience tailored to their needs.

06:53 As part of this, we plan to continue to invest in areas such as machine learning, modeling and data solutions that will increase our differentiation, drive greater efficiency and enhance our decision making. We will also continue to focus on protecting our balance sheet and earnings profile by maintaining strong capital levels, robust underwriting standards and managing risk via our proprietary risk assessment and pricing tools and our credit risk transfer program. We will also stay dedicated to maximizing value creation through a balanced capital allocation approach that supports our existing policyholders, invest to grow the business, as I just mentioned, and returns capital to shareholders.

07:39 Dean will provide more color on our current thoughts in this area shortly. Overall, our focus remains on balancing growth with generating strong return for our shareholders and we are very pleased with our production and performance.

07:55 Shifting now to the quarter. Dean will cover our results in more depth in a few minutes. Let me start with some highlights. This was another very strong quarter and we are proud of our performance, which was driven by a combination of our positioning in the market and competitive advantages, the successful execution of our strategy and ongoing favorable market dynamics.

08:18 Adjusted operating income was one hundred and thirty seven million dollars or zero point eight four dollars per diluted share, compared to one hundred and thirty eight million dollars or zero point eight six dollars per diluted share a year ago. Adjusting for twenty twenty debt issuance interest expense this is the highest adjusted operating income we have achieved since the beginning of the pandemic, reflecting growth in our insurance in-force as we continue to write sizable new books, lower delinquencies as a result of the ongoing economic recovery and prudent expense management, offset partially by lower premium rates.

08:55 Insurance-in-force rose to two twenty two billion dollars in the quarter, while new insurance written remains strong at twenty four billion dollars. We are committed to building our book with the right business that properly balances risk and reward, and continue to do so in the third quarter with business priced at low to mid-teen returns.

09:16 We continue to manage our risk and drive operational excellence resulting in a four hundred basis points reduction year-over-year in our loss ratio. Our risk management efforts have resulted in a high quality credit portfolio with a weighted average FICO of seven forty one and an average loan to value ratio of ninety three percent. We finished the quarter with a very strong balance sheet including a sufficiency to PMIERs published standards of two point three billion dollars or one hundred and eighty one percent. This is the highest level of sufficiency for our business since the inception of this standard and enhances the flexibility we have to pursue our capital allocation goals, including returning capital to shareholders via dividends as Dean will discuss shortly.

10:05 The increased strength of our business following our IPO was recognized by the credit rating agencies, and we received upgrades from Fitch, Moody's and S&P following the transaction. These will meaningfully enhance our ability to pursue new business from customers sensitive to credit ratings, and we have already begun to see new traction as a result that we expect will continue to build over time.

10:30 I'll now turn the call over to Dean to discuss drivers of our third quarter performance in more detail.

[Dean Mitchell, Chief Financial Officer and Treasurer]

10:39 Thanks, Rohit, and good morning, everyone. Let me begin by also taking the opportunity to welcome everyone to our first earnings conference call. This is a very exciting time for Enact, and I look forward to working with all of you going forward.

10:51 As Rohit mentioned, we delivered another very strong quarter of financial results. GAAP net income for the third quarter was one hundred and thirty seven million dollars or zero point eight four dollars per diluted share as compared to zero point eight zero dollars per diluted share in the second quarter of twenty twenty one and zero point eight five dollars per diluted share in the third quarter of twenty twenty.

11:11 Adjusted operating income was also one hundred and thirty seven million dollars or zero point eight four dollars per diluted share in the quarter, as compared to zero point eight two dollars per diluted share in the second quarter of twenty twenty one and zero point eight six dollars per diluted share in the third quarter of twenty twenty.

11:26 In terms of key revenue drivers, new insurance written was twenty four billion dollars during the quarter compared to twenty six point seven billion dollars in the second quarter of twenty twenty one and twenty six point six billion dollars in the third quarter of twenty twenty.

11:39 New insurance written for purchase transactions made up eighty eight percent of our total NIW in the quarter, up from seventy nine percent last quarter and seventy five percent in the third quarter of twenty twenty. In addition, monthly payment policies represented ninety percent of our new insurance written in the quarter, as compared to ninety three percent last quarter and eighty eight percent in the third quarter of twenty twenty.

12:02 Insurance-in-force of two twenty two billion dollars increased two percent from second quarter levels and ten percent from the third quarter a year ago. The year over year increase was primarily driven by new insurance written, partially offset by elevated lapse associated with the prevailing low interest rate environment.

12:20 As of the third quarter, our twenty twenty and twenty twenty one book years represented approximately two thirds of our total insurance-in-force, indicative of the large market opportunity and commercial success we've had in consecutive years. Risk in-force at quarter end was fifty five point nine billion dollars, up from fifty four point six billion dollars last quarter and up from fifty one point four billion dollars in the third quarter twenty twenty, primarily as a result of growing insurance portfolio.

12:48 Persistency for the quarter was sixty five percent, an increase from fifty seven percent last quarter and fifty nine percent in the third quarter of twenty twenty. The increase in persistency was primarily driven by a decline in the percentage of our in-force policies with mortgage rates above current rates.

13:04 Total revenues for the quarter were two eighty million dollars compared to two seventy six million dollars last quarter and two eighty four million dollars in the third quarter of twenty twenty. Net premiums earned were two forty three million dollars, flat to the prior quarter and down three percent compared to the third quarter of twenty twenty.

13:22 Our net premium rate of forty four basis points was modestly lower sequentially, driven primarily by lower single premium cancellations and was down six basis points year over year due to a combination of lower single premium cancellations, higher ceded premiums and the lapse of older higher priced policies as compared to our new insurance written. Importantly, the current market and underwriting conditions, including the mortgage insurance pricing environment is well within our risk adjusted return appetite, enabling us to write new business and attractive low to mid-teen returns.

13:58 Turning to losses. Losses were thirty four million dollars in the quarter as compared to thirty million dollars last quarter and forty four million dollars in the third quarter of twenty twenty. The sequential change in losses was driven by seasonally higher new delinquencies, while the year over year decline in losses were driven by lower new delinquencies as the economy continues to improve. This was partially offset by favorable IBNR development the third quarter of twenty twenty. Thirty six percent of new delinquencies in the quarter were subject to a forbearance plan, which reflects the lowest concentration of new delinquencies in forbearance plans since the start of COVID-nineteen. Our claim rate on new delinquencies for the quarter was eight percent, consistent with the claim rate for new delinquencies over the first half of twenty twenty one.

14:43 As reflected on slide twelve of our investor presentation, we reported approximately seven thousand four hundred new delinquencies in the quarter, which was less than half of the new delinquency levels seen a year ago. New delinquencies were up approximately eight percent sequentially, driven by seasonality. For the quarter, our new delinquency rate of zero point eight percent is consistent with pre-pandemic levels of development is indicative of the ongoing economic recovery. On the same slide, we've included a view into the ever-to-date care performance of COVID-nineteen new delinquencies or those new delinquencies since April of last year.

15:19 To date, approximately eighty six percent, eighty one percent and seventy six percent of delinquencies from the second, third and fourth quarter, respectively, have now cured. These cumulative cure rates have continued to increase through time and may accelerate as borrowers reach completion of their forbearance plan terms.

15:39 Our third quarter total delinquencies of approximately twenty nine thousand and the associated delinquency rate of three point one percent reflect the fifth consecutive quarter of improvement in both measures, driven by the continuation of cures outpacing new delinquencies. We made no changes in the third quarter to aggregate reserves on prior delinquencies.

15:59 We continue to assess the resolution of COVID-nineteen delinquencies with a focus on the approximately fifty six percent of our delinquencies subject to forbearance plans as we consider the appropriate of our loss reserves over time. At present, our loss reserves reflect our best estimate of ultimate claims on our total delinquencies.

16:19 Lastly, The embedded equity position of our delinquent policies is substantial with approximately ninety seven percent of our delinquencies, having an estimated ten percent or more mark to market equity using an index based house price assessment. We believe this embedded equity can serve as a potential mitigate, both to the frequency of claim as well as the potential future loss for delinquencies that ultimately progress the claim.

16:45 Turning to expenses. Operating expenses were fifty nine million dollars and the expense ratio was twenty four percent in the quarter, as compared to sixty seven million dollars and twenty seven percent respectively in the second quarter of twenty twenty one. This was driven primarily by lower corporate overhead associated with the execution of the shared services agreement with our parent, Genworth Financial and lower strategic transaction preparation cost and restructuring cost in the current quarter compared to the second quarter of twenty twenty one. Operating expenses were materially flat year over year.

17:17 In addition to operating expenses, the third quarter of twenty twenty reflected about half of the approximate thirteen million dollars quarterly interest expense given the timing of our debt raised in August of last year.

17:30 Turning to capital and liquidity, we are committed to maintaining a strong balance sheet aligned with our investment grade rating. As Rohit mentioned, our PMIERs sufficiency increased to one hundred and eighty one percent or approximately two point three billion dollars above the published PMIERs requirement, compared to one hundred and sixty five percent and one point nine billion dollars in the second quarter of twenty twenty one. The sequential improvement in PMIERs sufficiency was driven in part by the completion of an insurance linked notes transaction, which added approximately three seventy million dollars of PMIERs capital credit, as well as elevated lapse from prevailing low interest rates, strong business cash flows and lower delinquencies. These drivers were partially offset by the significant amount of NIW we wrote in the quarter, and the amortization of existing reinsurance transactions.

18:15 As of quarter end, we had approximately one point six billion dollars of PMIERs capital credit approximately one point eight billion dollars of loss coverage provided by our credit risk transfer program, which provides cost efficient PMIERs capital and reduces future volatility by ceding risk to both traditional reinsurers and the capital markets.

18:35 Our PMIERs Sufficiency includes the benefit from the thirty percent multiplier for COVID-nineteen related delinquencies, which reduce PMIERs required assets by approximately five seventy million dollars before giving effect to reinsurance benefits. The benefit from the thirty percent multiplier had declined over the past four quarters, as more COVID-nineteen related delinquencies resolved and cures.

18:57 Turning more broadly to our balance sheet. At quarter end, Our GAAP equity was four point two billion dollars, invested assets totaled approximately five point four billion dollars, cash and cash equivalents were approximately four fifty million dollars, long term debt was seven forty million dollars and our debt to capital ratio was a conservative fifteen percent. Combined with our PMIERs Sufficiency levels, these metrics demonstrate why we're confident in the strength of our balance sheet to support our business go forward and deliver value to shareholders.

19:29 Our insurance financial strength ratings were recently upgraded as a result of our successful IPO. Each of S&P, Moody's and Fitch upgraded the insurance financial strength rating of GMICO, our flagship mortgage insurer by one to two notches in recognition of the enhanced governance and access to capital we now possess. Each rating agencies rating and outlook is reflected on slide fourteen of the investor presentation.

19:55 In regards to our capital allocation strategy, we will continue to pursue a balanced approach that maintains a strong balance sheet, pursue investments to enhance our business prospects and returns excess capital to shareholders. As it relates to a potential twenty twenty one dividend, we're continuing to assess the economic and business conditions, including the resolution of forbearance related delinquencies in support of distributing a fourth quarter dividend to shareholders.

20:21 To date, this review has been supported. If this remains the case, we intend to recommend a two hundred million dollars twenty twenty one dividend during the fourth quarter to the Board for its approval.

20:33 I'll now turn the call back over to Rohit for closing remarks.

[Rohit Gupta, President and Chief Executive Officer]

20:37 Thanks, Dean. Before turning it over for your questions, I'd like to provide some thoughts on the current regulatory environment in Washington, DC. We continue to advocate for the expanded use of private mortgage insurance among policy makers in Washington. We actively work with Capital Hill, the administration, regulators, housing finance trade groups and consumer advocates to develop solutions that achieve the shared goal of increasing the accessibility, affordability and sustainable of home ownership. We have found a great deal of consensus around these principles and are encouraged by the recognition of the role we play, particularly for the first time homebuyers in the housing finance economy.

21:18 At Enact, we are proud of the big role we play in helping families achieve their dreams of owning a home and create and creating a path for them to build wealth through homeowners. Let me leave you with few key takeaways on slide sixteen.

21:35 We are very pleased with our performance, driven by our strong execution and against a market backdrop that remains favorable, Enact produced another very strong quarter. We are a market leader with the right solutions and a highly experienced management team and we are successfully executing against a strategy that will drive growth, manage risk and generate strong returns. None of this would have been possible without the hard work and dedication of our employees, and I want to thank them for their continued commitment.

22:04 Working together, we believe that we are well positioned for continued growth and value creation as we fulfill our vital role in helping people achieve their home ownership goals.

22:14 I'll now turn the call back to the operator to take us into Q&A. Operator?

[Operator]

22:21 [Operator Instructions] Your first question comes from the line of Rick Shane with JP Morgan.

[Rick Shane, JP Morgan]

22:35 Thanks guys for taking my questions this morning. Look, I think the interesting thing that's occurring right now is the migration through default to payment. And I'm curious when you look at the metrics and we're sort of in this unprecedented time and the impact of forbearance. Is it -- do you think at this point that payments are -- losses are simply being deferred or is there increasing indication that we're going to see much lower migration and that losses are actually going to be inverted?

[Dean Mitchell, Chief Financial Officer and Treasurer]

23:17 Yes, Rick. Hey, it's Dean. Thank you very much for the question. Good question. Let me just start with kind of the trends that we are seeing and dovetail that into a little bit of the forbearance. First of all, our forbearance trends show that newly reported forbearance continue to decline and that's really happening as the economy continues to improve. And then to your perspective, total delinquencies and including delinquencies and forbearance that are declining as cures continue to outpace new delinquencies.

23:50 Our view has been pretty consistent through this that we believe delinquencies in forbearance and that represents over half of our total delinquent inventory, they make cure at an elevated rate, and they may do that for really two reasons. I think forbearance gives borrowers time, time to reestablish their financial footing. In addition, forbearance gives borrowers more options to cure. And that includes payment deferral. And our experience to date is payment deferral, which is really a new loss mitigation tool as part of the pandemic. It's accounted for most of the forbearance exits that we've seen to date. And it's running at about a four times clip relative to workouts.

24:39 I think we continue to kind of assess how those remaining forbearance are going to play out as they progress towards their term completion rather, as we assess really the most likely of outcomes. But to date, our assessment has been really consistent with our initial assessment when we applied a claim rate expectation at the initial delinquency. And again, much like I said, I think that's an important assessment as it relates to forbearance because of the high concentration that they represent in our overall delinquent population.

25:16 So, I kind of go back to the comments we made at the beginning of this pandemic that we do expect those to resolve at an elevated cure rate and that remains the case today.

[Rick Shane, JP Morgan]

25:31 Terrific. And if I could just ask one last quick question. Can you just sort of walk through the persistency on a monthly basis because we've seen a lot of fluctuations in interest rates, you can talk about sort of what you saw during the third quarter or perhaps even an update as we enter the fourth quarter and we are month ahead.

[Dean Mitchell, Chief Financial Officer and Treasurer]

25:53 Yes. Our persistency ticked up much like you saw as -- and I think interest rates quite frankly remained pretty depressed throughout the quarter. They only really ticked up above three percent at the end of September. So we attribute the uptick in persistency really as a reduction lowering of the amount of opportunities for refinance. So fewer and fewer of our in-force policies have interest rates that are above the prevailing market rates. That's come down pretty meaningfully year over year.

26:37 And so, I think that's really the driver of persistency changes, both year on year and quarter over quarter basis, I think what you saw was a little bit of a mixed bag throughout the quarter itself. So July persistency was probably at its highest and it marginally came down August through September, but you're really in pretty small numbers. The range is pretty tight. There's about three points of persistency difference within the quarter -- within the months within the quarter. So, not a -- while there is some variation, not a wide variation month to month to month within the quarter.

[Rohit Gupta, President and Chief Executive Officer]

27:23 Yes, Rick. This is Rohit. The one thing that I would add to Dean’s first comment on persistency is that, there is a direct correlation with the opportunity in our portfolio going down in terms of number of consumers who still have mortgages, let's say, about fifty basis points about the prevailing market rate. In addition to that, the recent interest rate increase at least in the month of October would lead to a higher persistency. So that historical correlation to exist.

[Rick Shane, JP Morgan]

27:54 Great. Hey guys, thank you for taking my questions. And I just want to acknowledge, there's been a tremendous amount of work to get you guys to this point where we're all having this conversation and look forward to continuing going forward.

[Rohit Gupta, President and Chief Executive Officer]

28:08 Thanks, Rick.

[Operator]

28:11 Your next question comes from the line of Bose George with KBW.

[Bose George, KBW]

28:16 Hey, guys. Good morning. Also my congratulations on your first quarter as a public company.

28:21 Actually I wanted to first ask just about the dividend, just wanted to explore that a little more. Right now, like the end of the second quarter your surplus looks like it's over two hundred million dollars, so it allows for the dividend this year. But can you talk about how you think the surplus will trend in twenty twenty two? And are you likely to need to request a special dividend to if you want to keep the dividend distribution similar next year? Is the plan to try and maintain a similar run rate assuming market conditions permit that.

[Rohit Gupta, President and Chief Executive Officer]

28:55 Hi Bose. This is Rohit. Thanks for your question. Great questions. So, I'll start off by just saying, as I said in my prepared remarks, we look at a balanced capital allocation approach that supports our existing policy holders, invest to grow the business and then returns capital to shareholders. So capital return to shareholders is going to be a key aspect of disciplined capital allocation strategy. And I'm going to ask Dean to just give you more color on both the fourth quarter dividend and the way we think about longer term return of capital?

[Dean Mitchell, Chief Financial Officer and Treasurer]

29:25 Yes. So, Bose, appreciate the question. I think you rightly point out, our unassigned surplus stands at just over two hundred million dollars at the end of the third quarter. Our total policyholder surplus is in excess of one point five billion dollars. So after the two hundred million dollars dividend, assuming we execute that in the fourth quarter for the moment, unassigned surplus does come down. I would expect that we would be working collaboratively with North Carolina Department of Insurance, our [indiscernible] regulator on any future capital returns. And it's likely after a two hundred million dollars dividend that unassigned requires to go back and seek their approval for dividends beyond twenty twenty one.

[Bose George, KBW]

30:20 Okay, great. That's helpful. But the expectation or what you would like to do sort of maintain at that level going forward, assuming you can -- the market conditions allow and you can work the regulators on that?

[Rohit Gupta, President and Chief Executive Officer]

30:33 Yes, I think, look, near term we're focused on the fourth quarter dividend. Our assessment has really focused on the resolution of forbearance and making sure that they are resolving in line with our original expectations, that assessment has been supported to date of a fourth quarter dividend. And if that remains the case, we would expect that we'll be making a recommendation to the Board for a two hundred million dollars twenty twenty one dividend later this quarter. I think really, honestly, our focus on the medium term is really around the potential initiation of some dividend policy. As you know, we launched our IPO without a stated dividend policy, but we gave guidance that assuming business and economic conditions remain on the current trajectory that we could initiate regular common dividend as early as twenty twenty two.

31:33 So, we're continuing to make that assessment on business trajectory as well as economic recovery and that's been kind of more of our focus in the medium term. I would say, we're not going to give dividend guidance on this call. think maybe giving you some historical perspective on what we've done dividend wise could just let you -- give you -- inform your view on how we thought about this in the past. So if you look back to our twenty nineteen dividend, which was obviously done on a pre-pandemic basis, we dividend it about two fifty million dollars and if you look at that on a dividend payout ratio, I think that would probably take you upwards to forty five to high forty percent dividend payout ratio. I think that just gives you some historical context on how we've thought about dividends in the past if you want to -- if that might help to mention our kind of perspectives looking backwards.

[Bose George, KBW]

32:36 Okay, great. That's very helpful. Thanks. And then just one other quick one. Just on the operating expenses going forward, should that be more like a low fifty million dollars number if we pull out some of those unusual items?

[Dean Mitchell, Chief Financial Officer and Treasurer]

32:50 Yes. So, I think we had expenses of fifty nine million dollars and an expense ratio of twenty four in the quarter. I think we talked about the favorable variance prior quarter being driven largely by corporate overhead, reduction in corporate overhead as a result of the execution of shared services agreement. And then we called out specifically three million dollars lower of strategic transaction, preparation costs as well as restructuring costs. So, I'd say, taking the fifty nine million dollars down that gets you to fifty six million dollars if you simply exclude the three million dollars of – again, strategic transaction and restructuring.

33:31 I think, as you think about that on a go forward basis, we haven't provided expense or premium guidance. So I'm not going to get into specific pro form expense dollars or ratios, but I do think we can talk in terms of expense drivers to give us a directional sense.

33:51 First of all, we're not going to have the cost associated with those two things. The transaction preparation cost as well as restructuring beyond twenty twenty one. So that's going to decrease the run rate heading into twenty twenty two. But we're also still in the process of standing up public company activities and that is going to have costs associated with it. That's going to serve to increase our run rate on expenses really especially in the short term.

34:18 And then lastly, like we've talked about, the shared services agreement does cap corporate overhead and codifies a reduction in that corporate overhead beginning in twenty twenty three. It's about a five million dollars reduction annually twenty twenty three through twenty twenty five. And that's going to serve to decrease our kind of run rate of expenses over the medium to longer term.

34:42 So I hope that provide some context on expense drivers and where that might go go forward.

[Bose George, KBW]

34:49 Okay, great. That's very helpful. Thanks a lot guys.

[Rohit Gupta, President and Chief Executive Officer]

34:53 Thanks, Bose.

[Operator]

34:53 Your next question comes from the line of Doug Harter with Credit Suisse.

[Doug Harter, Credit Suisse]

35:00 Thanks. I was hoping you could talk about the competitive dynamics in the industry during the quarter and kind of how you view relative price competition today?

[Rohit Gupta, President and Chief Executive Officer]

35:13 Thanks, Doug. Very good question. So, we believe overall the MI market is competitive, yet constructive and our returns remain within our risk adjusted return appetite. The healthy MI industry dynamics have also enabled us to continue to write new business in a large market at attractive low to mid-teen returns in third quarter of twenty twenty one. And at the end of the day, we are an experienced underwriting company and we are going to focus on charging the right price for the right risk to drive value for our shareholders and put qualified borrowers into homes. So we find the general narrative constructive as we think about our participation in the market.

[Doug Harter, Credit Suisse]

35:51 And I guess as we look forward to twenty twenty two and as the total size of the market is likely to be smaller. I guess, how do you think that that factors into the relative competitiveness of the market?

[Rohit Gupta, President and Chief Executive Officer]

36:10 Yes. So, Doug, very good question. As we think about originations market, one thing I would point to just looking back is, there has been a transition in the origination market this year itself. So, if you think about market dynamics that in play is low interest rates, robust home prices and then, obviously, that driving some balance in housing affordability, while we continue to see a shortage of housing supply. But we believe that third quarter origination market was still over one trillion dollars and this was the fifth quarter of origination market being at that number. But within the one trillion dollars of originations, we did start seeing a transition to purchase originations in twenty twenty one compared to twenty twenty.

36:53 So that is a good dynamic for our industry that even though origination market might be declining, given the penetration private mortgage insurance industry has in purchase market relative to refinance market, which is almost four times. So out of every one hundred purchase loans, we get four times more private MI loans than hundred refinanced loans, that is going to be supportive even moving forward. So, difficult to provide a guidance on origination market size at this point, because that's partially tied to interest rates, interest rate projections in future, but I would say given the strength of originations market and within that purchase market and first time homebuyers fueling that increase, we are optimistic about the size of MI market being very strong in the foreseeable future.

[Doug Harter, Credit Suisse]

37:43 Great. Thank you.

[Operator]

37:47 Your next question comes from the line of Jeffrey Dawn with [indiscernible] and Partners.

[Unidentified Analyst]

37:52 Thanks. Good morning. Dean, you referenced the relative new notices around eighty basis points this quarter. I wanted to see what your thoughts are and how to think about notice development going forward as forbearance on a notice basis is increasingly behind us. But as you noted, two thirds of your book is twenty twenty one and you're going to start hitting that peak season in maybe kind of twenty two, twenty three, at least on the twenty book.

38:21 Coming into COVID, it looked like something in the range of sixty eighty basis points might have been “Normalized”. But how do you think about development from here given such a young concentration and considering the credit environment that we've been experiencing, not just this year, but for the past several years?

[Dean Mitchell, Chief Financial Officer and Treasurer]

38:42 Yes, Jeff. Thanks for the question. Good question. I would characterize credit performance is really continuing to trend favorably. Lot of the things you just kind of pointed out. But let's just start with the quarter. Losses up to thirty four million dollars versus thirty million dollars prior quarter, that was really driven by a seasonal increase in new delinquencies. We think typically about the transition from the second to third quarter is somewhere in the ten percent to fifteen percent increase in new notices. We saw eight percent VPQ and so generally in line, may modestly favorable to normal seasonality.

39:26 I think it's important as well to reference that the new [indiscernible] rate is at pre pandemic levels, the zero point eight percent that you referenced, I think that does reflect the overall economic recovery that's underway. In addition to that, cures continue to outpace new delinquencies, this is the fifth quarter in a row where that's happened.

39:50 And then lastly, new delinquencies subject to forbearance are at their lowest level since the start of the pandemic. And again, I think that's another sign of the ongoing economic recovery. The last thing, I'll point to Jeff as we just think about the trends and what could impact them go forward it is, given the rise in HPA, ninety seven percent of our delinquencies have an estimated ten percent or more mark to market equity. We think that is in terms of the resolution of our existing delinquencies, we believe that can service as a potential mitigate to both the frequency and severity of claim.

40:31 So, I think when you put all that together and I know I combined new notices and the resolution of existing delinquencies, but I think it all adds up to credit trends that are heading in the right direction as we transition into the Q4 timeframe.

[Rohit Gupta, President and Chief Executive Officer]

40:48 Just one other thing Jeff I’ll add to Dean’s list on new notices is, in the current environment as we have seen over the last eighteen months, the forbearance program that was designed for this pandemic has been unique and has its own impact on new notices, because from a consumer perspective there is a very -- there's very little downside and actually participating in that program. So as that program comes to an end, you will start seeing a normal behavior from consumers in terms of they go delinquent when they are in financial stress of some kind, whereas during the pandemic, some of those numbers have had noise in them because we saw performing consumers going to the forbearance and then keep making payments. So that's another dynamic that will be in transition as we come out of the pandemic.

[Unidentified Analyst]

41:36 Okay. Thanks.

[Operator]

41:39 Your next question comes from the line of Ryan Nash with Goldman Sachs.

[Ryan Nash, Goldman Sachs]

41:45 Hey, good morning guys. And I echo the others comments and congratulations on a successful IPO.

[Rohit Gupta, President and Chief Executive Officer]

41:53 Thanks, Ryan.

[Ryan Nash, Goldman Sachs]

41:54 Maybe just to start, Rohit, you talked in the slides about the ratings upgrade should continue to enhance your competitive position. Can you maybe just expand on those comments? How you think this could potentially support new business wins and market share gains over time?

[Rohit Gupta, President and Chief Executive Officer]

42:13 Yes. Ryan, thank you for your question. Verygood question. So as we talked about this during our IPO, we have operated on somewhat of a un-level playing field in the past, especially with customers who are sensitive to credit ratings. So think about these customers being depository institutions typically that put portion of their loans in their portfolio. So all the way from national banks, regional banks, community banks and credit unions. And either for governance reasons or for ratings reasons, our share in that segment of the market has been depressed over the past four years or so.

42:48 So since our IPO and since we got ratings upgrades from Fitch, Moody's and S&P, we have had very constructive discussions with that segment of the market with those specific customers and we continue to make very good progress. And we would anticipate that in coming time in the next few quarters, we will start seeing the benefit of that in our production run rate. So we are seeing progress in line with our expectations, and I would say that is heading in the right direction.

[Ryan Nash, Goldman Sachs]

43:18 Got it. Maybe as a follow-up one of the questions that was asked before. You mentioned several times the percentage of the portfolio that have policies above current rates, just any sense for how that has trended over the last couple of quarters? Where it stands? And what could that mean for the go forward persistency, particularly as we continue to see interest rates rising in the coming quarters? Thanks.

[Rohit Gupta, President and Chief Executive Officer]

43:42 Absolutely, Ryan. So I think the dynamic that Dean talked about was simply that, in our insurance in-force as policies have lapse, the policies that are now filled in the money in terms of being able to refinance has continue to be lower as well as we are writing new books as you noticed in third quarter with interest rates hovering below three percent, So that just -- that puts less portion of our policies exposed to higher chances of lapse. And I would say, as that continues to happen, you will just see persistency pickup in our portfolio as long as the prevailing interest rates in the market are higher than what our consumers in our portfolio have on their policy. So phenomenon will play out just like it plays out historically.

[Ryan Nash, Goldman Sachs]

44:30 Got it. Thanks for taking my questions.

[Rohit Gupta, President and Chief Executive Officer]

44:33 Thank you.

[Operator]

44:35 Your next question comes from the line of Ryan Gilbert with BTIG.

[Ryan Gilbert, BTIG]

44:42 Hi, thanks everyone. Good morning. My first question actually was on the payout ratio. And Dean, I appreciate your commentary there. Just broadly is it fair to think about a I guess maybe a forty percent to fifty percent payout ratio, as the sort of number that this business can support in an overall good housing market?

[Dean Mitchell, Chief Financial Officer and Treasurer]

45:08 Yes, Ryan, thanks for your question. Yes. So again, I didn't give that twenty nineteen historical experience as per se guidance, I wanted to give it as context for how we previously thought about dividends in a more stable economic environment, which differs than how we're thinking about dividends in the fourth quarter of this year. So, I would just -- I just want to make that distinction from that perspective.

[Rohit Gupta, President and Chief Executive Officer]

45:41 Yes. So, Ryan, one thing I'll add to Dean’s comment. I absolutely agree that we were pointing to twenty nineteen dividends as having mid-forties payout ratio, if you look at two hundred million dollars potential dividend in fourth quarter twenty one compared to our first three quarters of income run rate, you would come up with high thirties payout ratio, which reflects kind of where we are in the cycle in terms of recovery from the pandemic.

46:06 Two considerations that we would give in terms of sizing for future instead of providing a quantitative guidance. First thing, we would want to make sure that we have a high degree of confidence in the sustainability of regular common dividend. As Dean mentioned, we would think about kind of putting a regular common dividend policy as early as twenty twenty two. So think about that aspect of capital return having a high confidence from a management and Board perspective.

46:32 Second, in addition to that, we will look at industry landscape at that point of time and where peer dividend yields are at the time and that will help us kind of quantify what portion of our dividend is a regular common dividend as well as kind of special capital return, either in terms of special dividend or share buyback.

[Ryan Gilbert, BTIG]

46:55 Okay, that's great. Really helpful. Thank you. My second question is on forbearance exits. I think we see in some of the surveys that there is some percentage of borrowers who are exiting forbearance had a loss mitigation plan in place. So I'm wondering if you had any insight or color into what you're seeing in your own delinquency book is, is it a function of the borrower not qualifying for forbearance? Or have they not -- just not been in touch with the servicer or any insight would be really helpful.

[Rohit Gupta, President and Chief Executive Officer]

47:29 Yeah. Good question, Ryan. So, from a forbearance perspective, we've had about one hundred thousand forbearance in our insured portfolio. Not all of those have been delinquent, about -- in rough estimates, about a third of those have remained current through time and the remaining have gone delinquent. We've seen forbearance exits happened in a lot of different ways, about a third of those forbearance have canceled therefore have actually canceled there forbearance, the others have exited through either a payment deferral, which again represents the vast majority of our exits to date.

48:24 Retention workouts, self-cures. And then to your point, there is -- there are some level of forbearance exiting without workout, that represents a pretty small percentage of our overall forbearance exits, that's about two point five percent of total of those total forbearance. I think the causation is, we're still doing assessments on causation, whether that's a timing issue or whether that's lack of an ability to continue to service the loan. And that really goes into what we were talking about as the forbearance assessment in advance of supporting a fourth quarter dividend. It’s those types of details that we're working with to get underneath the hood a little bit more working with servicer to understand what is the causation of exiting without workouts and what is therefore the likelihood of that potentially -- of those loans potentially going to client?

[Ryan Gilbert, BTIG]

49:30 Okay, great. Thanks very much.

[Rohit Gupta, President and Chief Executive Officer]

49:32 Thank you, Ryan.

[Operator]

49:34 Your next question comes from the line of [indiscernible] with Bank of America.

[Unidentified Analyst]

49:40 Hi, good morning and thank you for taking my questions. Also I'll add my congratulations in completing your first quarter as a public company.

49:49 Maybe to start, just -- I want to just make sure I understand what the capital return or or the dividend that you're speaking about. You're talking about the dividend of two hundred million dollar is going to go to the holdco, right? Does the holdco has any reason to hold on to that or is the idea that that entire two hundred million dollars would then get returned to shareholders.

50:11 And what I would love to hear a little bit more, it's just how you thinking of how that return would be. Is there any kind of corporate imperative to do a little -- because of general needs or whatever to do a little bit more weighted towards dividends versus a buyback?

[Dean Mitchell, Chief Financial Officer and Treasurer]

50:27 Yes. Good question. So, first of all, I would say. as it relates to -- I'll just answer your first -- your last question first. As it relates to dividends versus share buybacks, I think in the short term we're pre-disposed to dividends, over the longer term, I think, we'll continue to look at analytics like intrinsic value and where we see dislocation between the share price, and the prevailing market value, we could have a transition to a preference for share buybacks, noting we will have to be cognizant of the amount of flow we have in the market as well.

51:13 I think in terms of dividend. Yes, so I think you should expect the dividend is a pass through to shareholders. So, coming out of our operating subsidiary into the holdco and on to shareholders, that's clearly in line with our intent. And hopefully in line with our communication to date.

[Rohit Gupta, President and Chief Executive Officer]

51:32 And our holdco has two ninety million dollars of approximately of cash. So holdco doesn't have any reason to hold on to additional cash as this point, we have sufficient amount of resources to service our debt for the foreseeable future. I just want to make sure you are on that.

[Unidentified Analyst]

51:46 In terms of the claim rate for the quarter. I apologize, I may have missed it, but did you gave the claim rate that you are receiving for the quarter?

[Dean Mitchell, Chief Financial Officer and Treasurer]

51:58 Yes, the claim rate here is eight percent, consistent with the first half of the year as well.

[Unidentified Analyst]

52:06 Great. And then just the last question I had was just on the forbearances and I appreciate that cures are running higher than new delinquencies, obviously, heavily impacted by the COVID forbearances that are occurring. But maybe just talk about your expectations at the start of the pandemic for what the claim rate on those would be, just remind us of that? And then how this – where are we in that process. Like [Multiple Speaker] five percent. Thank you.

[Dean Mitchell, Chief Financial Officer and Treasurer]

52:36 Yes. Good question. We haven't differentiated the claim rate between forbearance and non-forbearance, we've talked in the aggregate. And through time, we've given the claim rate of at least through twenty twenty one of eight percent. So, again, that's the claim rate on both forbearance and non-forbearance. Through the assessment of forbearance that we're doing in part to continue to evaluate our loss reserve adequacy and in part in support of a fourth quarter dividend. What we've seen to date is that, forbearance performance is consistent with the original claim rate expectations that we set at the time of delinquency. So, that's really the assessment to date. We continue to -- that assessment is ongoing and we continue to evaluate, but that is the current view.

[Unidentified Analyst]

53:32 Understood. And then, does the fact that so many -- I mean, I guess maybe you expected a vast majority of the forbearances to cure using payment deferrals, is that right? And that can't be used for other delinquencies, right? It has to be only for a COVID -- like services you guys don't have any -- maybe you see great performance out of that and you say, hey, that's not a loss mitigation tool, but that's not actually an option right, for any non-forbearance delinquency?

[Dean Mitchell, Chief Financial Officer and Treasurer]

54:03 Payment deferral is limited to forbearances and payment deferral was a new kind of option, loss mitigation option created during the pandemic itself.

[Unidentified Analyst]

54:14 Got it. And expect – and the way it's being used is in line with your expectations.

[Dean Mitchell, Chief Financial Officer and Treasurer]

54:18 That's right.

[Unidentified Analyst]

54:20 Okay. Thank you. I'll stop there. Thanks.

[Rohit Gupta, President and Chief Executive Officer]

54:23 Thanks.

[Operator]

54:24 Your next question comes from the line of Arren Cyganovich with Citi.

[Arren Cyganovich, Citi]

54:30 Thanks. Just I would like to hear a little bit from the competitive dynamics around credit underwriting, it things as though that most folks were kind of managing their risk through higher pricing through the pandemic and in your credit stats from new insurance written look pretty steady over the past two years. Is there any signs of any of your competitors loosing credit standards at all?

[Rohit Gupta, President and Chief Executive Officer]

54:58 Hi, Arren. Very good question. So what I would say is, credit box has been pretty tight driven by the implementation of qualified mortgage rule back in twenty thirteen, twenty fourteen timeframe. GSE guidelines and on top of that our own credit policy. So no changes in the market that are meaningful. At certain times if we see an opportunity in a certain cohort to actually onboard risk at the right price and it's within our return appetite, we do that. So you might see some fluctuations in single dimension risk in our book or in our competitors books. But beyond that no expansion of credit box that we see at this point.

[Arren Cyganovich, Citi]

55:38 Thank you.

[Rohit Gupta, President and Chief Executive Officer]

55:42 Thank you.

[Operator]

55:43 At this at this time, there are no further questions. I would like to turn the call back over to Mr. Rohit Gupta for closing remarks.

[Rohit Gupta, President and Chief Executive Officer]

55:49 Thank you, Lisa, and thanks for everyone who joined today. This is certainly an exciting day for our company. We appreciate your interest in Enact and look forward to engaging with you and keeping you updated on our journey. With that, we'll wrap up the call.

[Operator]

56:04 This concludes today's conference. You may now disconnect.