Enact Holdings Inc

NASDAQ:ACT

Earnings Call Transcript 2021-Q4

[Operator]

00:03 Hello, and welcome to Enact's Fourth Quarter Earnings Call. Please be advised that today conference call is being recorded.

00:11 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]

00:31 Thank you, and good morning, everyone. 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, our performance and progress against our strategy. Dean will then discuss the details of our fourth quarter results before turning the call back to Rohit for some closing remarks. After prepared remarks, we will take your questions.

01:01 The press release we issued after market close yesterday contains Enact's financial results for the fourth quarter of 2021. 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.

01:25 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 assumptions, estimates, expectations and projections as of today's date that are subject to risks and uncertainties, which may cause actual results to differ materially. We undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise.

01:55 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.

02:08 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.

02:29 With that, I'll turn the call over to Rohit.

[Rohit Gupta, President and Chief Executive Officer]

02:32 Thanks. Daniel. Good morning everyone. Welcome to our fourth quarter earnings call. We delivered a very strong quarter and capped an excellent year for our company. 2021 was a transformational year for Enact, in which we achieved several significant milestones.

02:49 Most notable was our successful IPO in September, a major step forward that enhances multiple aspects of our business and will allow us to achieve our full potential as a company. We have already begun to see the benefits of this transaction in just a few months since its completion with much more to come.

03:10 It was also a year in which we continue to execute on our cycle tested growth strategy, which has consistently driven prudent market share growth for Enact. The result was some of the strongest performance in our history. Our ability to pursue new business with existing and new customers was further strengthened by the upgrades we received from all three rating agencies following our IPO.

03:35 During the quarter, we reactivated our relationship with a key customer and we continue to deepen existing relationships and develop new ones. We further differentiated our value proposition and invested in areas such as machine learning, data analytics, and modeling to ensure customers receive an experience tailored to their needs.

03:57 Balance sheet strength that enhances our financial flexibility has always been a hallmark of our strategy, and that remained the case in 2021. We continue to protect our balance sheet by maintaining high standards for new business that properly balance risk and reward and executing on our acquire-manage-distribute model.

04:19 As of the end of the year, 92% of our risk in force was covered by credit risk transfers, and we ended the year with one of the highest PMIERs buffers to publish standards in our history. We also took another significant step forward on this front with the announcement today of another approximately 300 million reinsurance transaction at attractive cost.

04:43 Additionally, we executed against our balanced capital allocation strategy, supporting our existing policy holders, investing in our growth, and returning capital to shareholders through the issuance of a special $200 million cash dividend in the fourth quarter, our first as a public company. Dean will have more to say about our future dividend plans in a few minutes.

05:08 Importantly, it was a year in which we once again fulfilled our mission of helping homebuyers achieve their homeownership dreams. In 2021, we enabled 317,000 families to get into homes through purchase or refinance transactions and helped another 35,000 families stay in their homes through the pandemic and its economic challenges.

05:32 We achieved these milestones in an environment that remains healthy and supportive. Robust demand for housing, a strong consumer balance sheet, and low unemployment drove strong Insurance-In-Force growth up 9% in 2021.

05:48 Mortgage origination activity remained robust, fueled by strong home sales and refinancing and home prices continue to climb increasing our average loan amount on new insurance written to 305,000 for the year.

06:04 Turning to some of the highlights for the year. Our performance against key metrics was the strongest in our history. We delivered adjusted operating income of $551 million or $3.38 per diluted share, compared to $373 million or $2.29 per diluted share in 2020.

06:26 Adjusting for interest expense related to our 2020 debt issuance, this is the highest adjusted operating income we have ever achieved, reflecting growth in our Insurance-In-Force as we continue to write large new books, as well as lower delinquencies as a result of the ongoing economic recovery and prudent expense management.

06:46 Insurance-In-Force for the year rose to a record $227 billion, while new insurance written was $97 billion. We are committed to building our book with high quality and prudently priced business. We did so throughout 2021 with new business pricing yielding low to mid-teens returns.

07:08 A key aspect of our success has been the continued execution of our risk management and pricing strategy and commitment to operational excellence, particularly throughout the pandemic.

07:19 Driven by higher cure rates and a delinquency rate that has improved from 5% at the end of 2020 to 2.6% today. Our loss ratio ended the year at 13%. We continue to maintain a high quality risk profile in our portfolio, with a weighted average FICO at year-end of 741, an average loan to value ratio of 93% and a declining layered risk concentration of 1.6%.

07:50 As I mentioned, maintaining the strength of our balance sheet is a key strategic priority. Driven by our credit risk transfer program, our sufficiency to PMIERs published standards was $2 billion or 165% at year-end, enhancing our flexibility to pursue our capital allocation goals, including returning capital to shareholders.

08:13 Before I turn it over to Dean, let me take a minute to speak about what we see for the business going forward. With record Insurance-In-Force and a strong balance sheet, we feel very good about our growth prospects in 2022 and beyond as we build on the success of 2021.

08:31 Demographic trends and industry fundamentals are strong tailwinds and we continue to see robust demand for housing. As an insurance provider with scaled Insurance-In-Force, we should benefit from modestly increasing interest rates and lower refinance activity as we expect the net result to be higher persistency offsetting any declines in new originations. This in turn should drive continued Insurance-In-Force growth.

08:58 Against this backdrop, we remain committed to executing against our growth strategy, writing new business above the cost of capital, further enhancing our relationships, protecting our balance sheet to the continued execution of our credit risk transfer strategy, investing in the solutions that provide differentiated value to our customers, and strengthen our competitive position and ultimately generating value for our shareholders.

09:24 And we will continue to take advantage of the benefits of our IPO, including a stronger competitive position realizing the full power of our brand and enhanced financial flexibility.

09:36 I will now turn the call over to Dean to discuss our fourth quarter and full-year performance in more detail.

[Dean Mitchell, Chief Financial Officer and Treasurer]

09:43 Thanks, Rohit, and good morning, everyone. As Rohit mentioned, we delivered another very strong quarter of financial results that concluded a strong 2021. GAAP net income for the fourth quarter was $154 million or $0.94 per diluted share, as compared to $0.84 per diluted share in the third quarter of 2021 and $0.56 per diluted share in the same period last year.

10:06 Adjusted operating income was $154 million or $0.94 per diluted share in the quarter, as compared to $0.84 per diluted share in the third quarter of 2021 and $0.57 per diluted share in the same period last year. For the full-year, GAAP net income was $547 million or $3.36 per diluted share, compared to $370 million or $2.27 per diluted share in 2020.

10:34 Adjusted operating income for 2021 totaled $551 million or $3.38 per diluted share, compared to $373 million or $2.29 per diluted share in 2020.

10:49 In terms of key revenue drivers, New insurance written was $21 billion for the quarter, down sequentially from $24 billion, driven by lower estimated mortgage originations. New insurance written for purchase transactions made up 90% of our total NIW in the quarter, up from 88% last quarter.

11:09 In addition, monthly payment policies represented 91% of our New insurance written in the quarter, as compared to 90% last quarter. Record Insurance-In-Force of $227 billion increased 2% from the third quarter levels and 9% from the fourth quarter a year ago. The year-over-year increase was primarily driven by New insurance written, partially offset by historically low persistency of 62%, which continues to improve as market conditions normalize.

11:40 As of the fourth quarter, our 2020 and 2021 book years represented over 70% of our total Insurance-In-Force, reflecting both the large market opportunity and the commercial success we've had in consecutive years. At the same time, these newest book years reflect a strong credit profile and attractive pricing, which we would expect to positively contribute to our future profitability and return profiles.

12:06 Risk in force at year end was 56.9 billion, up from 55.9 billion last quarter and up from 52.5 billion in the fourth quarter 2020, primarily as a result of our growing insurance portfolio.

12:21 Persistency for the quarter was 69%, up from 65% last quarter and 57% in the same period last year. The increase in persistency was primarily driven by an uptick in mortgage rates and a continued decline in the percentage of our in-force policies with mortgage rates above current market rates.

12:43 Total revenues for the year were up 1% year-over-year ending at approximately $1.1 billion for 2021. Revenues for the quarter were $273 million, compared to $280 million last quarter and $286 million in the same period last year.

13:01 Net premiums earned were $237 million, down 6% year-over-year and down 3% compared to the prior quarter, driven by lower single premium cancellations as persistency increased and single product concentration decreased to 13% of our portfolio, and the lapsing of older higher priced policies as compared to our new insurance written, which was partially offset by growth of our Insurance-In-Force.

13:28 In addition, the decrease in net premiums earned year-over-year was also driven by higher ceded premiums in the current quarter, from the expanded use of our credit risk transfer program.

13:37 Our net premium rate of 42.2 basis points was down 1.9 basis points sequentially and 6.6 basis points year-over-year driven primarily by the same combination of lower single premium cancellations, higher ceded premiums, and the lapsing of older higher priced policies as compared to our New insurance written.

13:58 Importantly, the current market conditions and underwriting conditions as well, including the mortgage insurance pricing environment is within our risk adjusted return appetite, enabling us to write new business at attractive low-to-mid teen returns.

14:15 Investment income for the fourth quarter was $35 million in-line with the year ago, primarily as the larger portfolio was offset by lower investment yields. For the year, investment income totaled $141 million.

14:30 Turning to losses, losses in the quarter were $6 million, as compared to $34 million last quarter, and $89 million in the fourth quarter of 2020. The sequential change in losses was driven by $32 million of favorable reserve development in the current quarter on pre-COVID-related delinquencies, partially offset by higher new delinquencies.

14:51 New delinquencies in the quarter of approximately 8,300 were up approximately 900 sequentially, from 7,400 last quarter and include an increase in delinquencies from natural disasters in FEMA-impacted areas in addition to new delinquencies from our new large books that are aging and going through their normal loss development pattern as expected.

15:15 The year-over-year decline in losses was driven by the current quarter favorable reserve development and approximately 30% lower new delinquencies as the economy continues to improve from the pandemic. Additionally, the fourth quarter of 2020 also included 37 million of reserve strengthening. For the year, losses were $125 million, compared to $380 million in 2020.

15:41 Our fourth quarter total delinquencies of approximately 24,800 and the associated delinquency rate of 2.6% reflects 6 consecutive quarters of improvement in both measures, driven by the continuation of cures outpacing new delinquencies. Cures in the quarter of approximately 11,900 increased modestly as compared to the prior quarter and represented 144% cure ratio, as compared to new delinquencies in the quarter.

16:10 This quarter, 29% of new delinquencies were subject to a forbearance plan, which continues to decline from the peak of approximately 80% last year as the economy recovers.

16:21 For the quarter, our new delinquency rate of 0.9% is consistent with pre-pandemic levels of development and indicative of the ongoing recovery. Our claim rate on new delinquencies for the quarter was 8% consistent with the claim rate for new delinquencies throughout 2021.

16:40 Turning to our [ever-to-date cure performance] [ph] of COVID-19 new delinquencies were those new delinquencies since April of 2020. To date, approximately 92%, 88%, 84% of delinquencies from the second, third, and fourth quarters of 2020 respectively have now cured. These cumulative cure rates have continued to increase through time as borrowers reach completion of their forbearance plan terms and are nearing their original estimated claim rate expectation.

17:11 We continue to assess the resolution of COVID-19 delinquencies with a focus on the approximately 41% of our delinquencies subject to a forbearance plan 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.

17:31 The embedded equity position of our delinquent policies remain substantial with approximately 98% of our delinquencies as of year-end having an estimated 10% or more mark to market equity using an index-based house price assessment. As I've noted in the past, this can serve as a potential mitigate, both to the frequency of claims and the potential future loss for delinquencies that ultimately progress to claim.

17:57 Turning to expenses, operating expenses for the quarter were $59 million and the expense ratio was 25% in the quarter as compared to $59 million and 24% respectively in the third quarter of 2021. Operating expenses were $246 million for the full-year, up 4% year-over-year and in-line with our expectations.

18:20 Now, let me take a minute to talk about how we're thinking about operating expenses in 2022 as there are few puts and takes. Our ongoing efforts to drive operational efficiency in our shared services agreement with Genworth should serve to decrease our costs, including corporate overhead over time.

18:38 In addition, our run rate will also benefit from the non-recurrence of costs related to the preparation of our IPO. At the same time, and as we've discussed previously, we will incur incremental expenses related to standing up public company activities. Taken together, we expect operating expenses to decline to approximately $240 million in 2022.

19:02 Turning to capital and liquidity, as Rohit mentioned, we are committed to maintaining a strong balance sheet aligned with our investment grade ratings. Our PMIERs sufficiency decreased sequentially to 165% or approximately 2 billion above the published PMIERs requirements. That compares to 181% or 2.3 billion in the third quarter of 2021. This decline was driven in large part by the execution of our 200 million dividend to shareholders in the quarter.

19:29 In addition, our PMIERs sufficiency decline was impacted by our significant level of NIW in the quarter, and the amortization of our existing reinsurance transactions, which were partially offset by elevated lapse from prevailing low interest rates, strong business cash flows, and lower delinquencies.

19:47 At year-end, we had approximately 1.4 billion of PMIERs capital credit and approximately 1.6 billion of loss coverage protection provided by our credit risk transfer program, which provides cost efficient PMIERs capital and reduces future loss volatility by ceding risk to traditional reinsurers and the capital markets.

20:06 Our PMIERs sufficiency includes the benefit of the 30% multiplier for COVID-19 related delinquencies, which reduced PMIERs sufficiency required assets by about 390 million before giving effect to reinsurance benefits. The benefit from the 30% multiplier has declined over time as more COVID-19 related delinquencies resolved in cure.

20:29 In addition, in January of this year, we executed an excessive loss reinsurance transaction with a panel of reinsurers, which provides approximately 300 million of forward reinsurance coverage on a portion of our mortgage insurance policies written during 2022.

20:46 Beyond bolstering our future PMIERs sufficiency at an attractive cost, this execution reflects our programmatic approach to the distribution of risk, diversification of sources of credit risk transfer program, and acquiring coverage in advance of the origination of our next book year.

21:02 For the year, we executed approximately 1.4 billion of incremental credit risk transfer transactions and since the program's inception in 2015, we've executed approximately 3.8 billion of aggregate credit risk transfer transactions, which provide both cost efficient capital and loss volatility protection.

21:24 Turning to our balance sheet more broadly, at year-end, our GAAP equity was 4.1 billion, invested assets totaled 5.3 billion, cash and cash equivalents were approximately 426 million, long term debt was 740 million, and our debt-to-capital ratio was a conservative 15%. Combined with our PMIERs sufficiency levels, these metrics continue to demonstrate while we're confident in the strength of our balance sheet to support our business.

21:55 Moving to capital allocation, we will continue to pursue a balanced approach that maintains a strong balance sheet, [pursues] [ph] investments to enhance our differentiation and growth potential and returns excess capital to shareholders. As I mentioned earlier, we delivered a key commitment and executed a special $200 million cash dividend to shareholders during the quarter.

22:17 Returning capital to shareholders, balanced with our gross and risk management priorities, remains a key commitment for Enact as we look to drive shareholder value through time. On this front, we're in the process of evaluating our capital return objectives for 2022, which includes an assessment of holding company liquidity and financial flexibility.

22:38 We expect a component of our capital return plan to include the initiation of a regular common dividend around mid-year this year. In addition to this dividend, we'll continue to evaluate the potential for an incremental return of capital later in 2022, based on our ongoing business performance and a review of the macroeconomic conditions and regulatory landscape.

23:00 With that, let me turn the call back over to Rohit.

[Rohit Gupta, President and Chief Executive Officer]

23:04 Thanks, Dean. All-in-all, a very strong finish to a transformational year. We executed on our strategy, took the next step in our growth journey through our successful IPO, and generated value for our shareholders.

23:18 I'd like to thank each and every member of the Enact team for their contributions to our great performance. We enter 2022 well positioned for continued success. The housing market remains strong, consumer credit remains healthy, and we continue to see solid demand, particularly among first time homebuyers.

23:39 We are incredibly proud of our role in helping families achieve homeownership and creating a path to build wealth. In 2021, we made it possible for 317,000 homebuyers who otherwise might not have to qualify for a mortgage to achieve their dreams of homeownership. At the same time, we worked hard to keep people in their homes, achieving cure and forbearance resolution rates that both reached record highs.

24:07 We remain committed to working with Capitol Hill, the administration, great groups, and consumer advocates to drive solutions that increase the accessibility, affordability, and sustainability of homeownership.

24:20 We are now ready to take your questions. Operator?

[Operator]

24:25 Thank you. [Operator Instructions] Our first question comes from Doug Harter with Credit Suisse. Your line is open.

[Doug Harter, Credit Suisse]

24:39 Thanks. Just hoping to get a little bit more on the premium yield. I guess, any color or clarity as to kind of where and when we might see some bottoming out of the premium yield?

[Dean Mitchell, Chief Financial Officer and Treasurer]

24:57 Hey Doug. Hey it’s Dean, thanks for the question. In terms of premium yield, I think the drivers of base in that premium rate are consistent to what we talked about last quarter. Quite honestly, if we focus on base premium rate, the decline of 1.2 basis points is impacted by the elevated lapsing of older higher priced policies relative to our New insurance written, which is at lower pricing, coupled with the fact that our most recent book years are becoming a bigger percentage of our overall portfolio, kind of focusing on the 2020 and 2021 book year concentration.

25:36 I do think it's important to know that when you think about base rate, it can fluctuate in the near-term. So, if you look at, specifically Slide 12 of our investor presentation and look at that table on the top right hand side, over the last six quarters, you're going to notice some lumpiness quarter-to-quarter, as the base rate is impacted by a lot of different factors: lapse, and which cohort is lapsing, New insurance written, the purchase refi mix, credit mix, and the like.

26:10 So, I do think in the short-term, we do see some lumpiness and I think it's exhibited on that time series on Slide 12. From an net premium rate perspective – go ahead Doug.

[Doug Harter, Credit Suisse]

26:23 Yes, I guess, just curious of any color you could give us as to kind of where the rate is on New insurance written, kind of for 2021 or the most recent quarter, how that would compare to the in-force yield? Just to get a sense as to kind of when or much more of that lapsing of higher cost policies there is to kind of to happen?

[Rohit Gupta, President and Chief Executive Officer]

26:48 Good morning, Doug. This is Rohit. So, I would say, it's difficult to provide guidance on premiums rate. On an NIW basis, we are in a competitive market and it's tough to provide guidance while we are executing on our strategy. I would just like to maybe add two things to what Dean said, first thing, when we look at our base premium rate or net premium rate, there is choppiness in that metric and it can fluctuate in the near term.

27:11 So, we do think about this metric on a longer-term basis. And we do believe that we work to ensure that we are driving compelling returns for our investors over time. If you look at our net premium rate in the fourth quarter of 2021, it generated a 14.8% return in the quarter and 13.8% return for the year, and our NIW pricing level as we have stated in the past remains attractive and consistent with low-to-mid teen returns as we have previously referenced.

27:39 Now coming back to your question on NIW pricing, I would say, we continue to see the pricing as constructive in the market. We did see some stabilizing of pricing in the market in fourth quarter, and one thing that I always like to remind our investors is, a healthy MI industry dynamic has enabled us to continue to write new business in a large market at attractive returns.

28:01 So, think about the $97 billion of New insurance written we added in 2021 at those healthy returns. Beyond that, it's tough to comment on any specific pricing levels.

[Doug Harter, Credit Suisse]

28:15 Thank you.

[Rohit Gupta, President and Chief Executive Officer]

28:18 Thank you.

[Operator]

28:20 Thank you. Our next question comes from Bose George with KBW. Your line is open.

[Bose George, KBW]

28:25 Yes. Good morning. Actually, first, just the percentage of NIW with DTI over 45% have increased, it looks like it's 23% now. So, it's back, kind of the highest pre-COVID. Just curious what's driving that and any changes in terms of your views on credit or just any other color on that would be great.

[Rohit Gupta, President and Chief Executive Officer]

28:44 Sure. Bose. This is Rohit. Good morning. There are a few things driving this. And I would say, to start off you're thinking about the shift in origination market that's happening as we continue to see a burn-out of refinance population, we saw that happen in 2021. For the entire year, I believe, the purchase portion of the market is up from 39% in 2020 to 43% in 2021. And purchased loans generally come with slightly higher risk attributes that means slightly higher debt-to-income ratios, higher loan to value, and also more mid- FICOs.

29:18 So that's kind of one macro factor driving debt-to-income ratios along with LTVs and FICOs. Second thing from our perspective, the mix and profitability of the business we are writing is in line with our expectations and our risk appetite.

29:34 We have mentioned this before that while we monitor single dimension risk elements, all these attributes, our focus is truly on managing layered risk. We also focus on the price we receive for the risk and evaluate it against expected and stress cases. So, based on that mindset, we are very comfortable with the risk-adjusted returns on the new production we are writing.

29:56 And I would point out that the level at which we are writing our mix is very aligned with the last purchase market. So, think about 2018 to early 2020, and the amount of layered risk in our business is extremely low. We actually disclosed our layered risk in one of our earnings presentation slides, I believe it’s Slide 10. And layered risk is at 1.6% and you might remember that this number was higher than this in first quarter and second quarter of 2021. So, it's actually on a declining trend.

[Bose George, KBW]

30:27 Okay, great. That's very helpful. Thanks. And then actually just going back to the ROE discussion, how do you treat like a normalized PMIERs excess when you talk about ROEs? Obviously, right now, you've got a lot of PMIERs excess, so is there like a normalized number that you kind of think about when you think about that ROE range you're targeting?

[Rohit Gupta, President and Chief Executive Officer]

30:47 Yes. So, I think Bose, very good question. I think when we think about our pricing, when we are talking about mid-to-low-teen returns, that is our conditional pricing view on a gross basis, I would say. So that takes current and future market expectations into account from premiums, as well as lapse and losses. And then, when we get to the capital line, it actually takes PMIERs into accounts, and we do have a view of economic capital, which is our internal view and a lot more granular than PMIERs and we use that economic [capital view] [ph] to kind of almost think of that as an accelerator or a break in terms of certainty of delivering economic returns.

31:24 So from a gross capital perspective, we are not looking at PMIERs buffer, we are not looking at benefit of reinsurance or [indiscernible] transactions in terms of cost of capital. When we talk about our economic returns, obviously, our 165% PMIERs buffer, a cost of that buffer, the capital in our balance sheet is all aligned with that return.

31:46 And as we have stated in the past, we generally see currently the market expectations on that PMIERs buffer in that 140%, 150% range. In a pre-pandemic time that number was in that 143% to 149% range for Q4 2019 and Q1 2020. So, we still think that in the near term, that is the right expectation as we see cure activity from COVID delinquencies, as well as economy getting back to normal.

32:13 We would reevaluate that number and look at different considerations, including rating agencies, GSE expectations, customer expectations, and then make a determination on what's the right level for our business.

[Bose George, KBW]

32:28 Okay, great. Thank you.

[Rohit Gupta, President and Chief Executive Officer]

32:31 Thank you.

[Operator]

32:33 Thank you. Our next question comes from Geoffrey Dunn with Dowling & Partners. Your line is open.

[Geoffrey Dunn, Dowling & Partners]

32:38 Thanks. Good morning.

[Rohit Gupta, President and Chief Executive Officer]

32:41Good morning, Geoff.

[Geoffrey Dunn, Dowling & Partners]

32:42 Dean, I want to follow-up on your commentary on capital management. When you consider augmenting your plans for introducing a common dividend with special dividends, do you think special dividends will be an annual consideration or could that be a semi-annual review?

[Dean Mitchell, Chief Financial Officer and Treasurer]

33:00 It's a good question. Geoff, appreciate that. I think, obviously as we pivot to the initiation of a regular common dividend we're thinking about that on a quarterly basis. I think when we think in special dividend terms, it will be packed in circumstances driven.

33:22 I can see that being driven on a semi-annual basis if the business conditions, the microeconomic environment are accommodating for a semi-annual, I think at this point in time, specifically for 2022, we're thinking more on an annual basis than semi-annual basis. Again, being driven by what we see is the facts and circumstances of the ongoing recovery and with the lingering effects of the pandemic.

[Geoffrey Dunn, Dowling & Partners]

33:50 Okay, great. Thank you.

[Dean Mitchell, Chief Financial Officer and Treasurer]

33:52 You're welcome.

[Operator]

33:56 Thank you. Our next question comes from Mihir Bhatia with Bank of America. Your line is open.

[Rohit Gupta, President and Chief Executive Officer]

34:03 Good morning, Mihir.

[Mihir Bhatia, Bank of America]

34:04 Good morning. Hi, good morning. Thank you for taking my question. The first question, actually, maybe just going back to premium yield for a second, I understand the difficulty in forecasting it, but maybe just on the ceded premium line, given the [ILMs] [ph] that have just taken place. Maybe just help us with that one at least with the proportion and the cost of reinsurance materially or I guess, different than what it has been in the past, right? So, like, you know, it didn’t [indiscernible] about 3 million, it looks 3 basis points pullback on the – from gross to net, will that be increasing just given more of your business and being laid-off, which again could be a good thing, right, that you are laying off risk, but I just want to make sure from a forecasting standpoint point we – and a net premium yield standpoint, we think about that correctly?

[Dean Mitchell, Chief Financial Officer and Treasurer]

34:52 In here – thanks for the question. I think the cost of our CRT coverage is generally in the low-to-middle single-digits cost of capital from our perspective. I think cost is, again, kind of conditional in the reinsurance market. Certainly we saw an uptick in the cost of coverage at the height of the pandemic.

35:18 Since that time, there's been a general downward recovery in cost of capital. I think we're generally back to a normal functioning credit risk transfer market. And again, I think pricing is conditional based on business conditions at the time you're securing coverage. I think what we see now is our cost generally in line with our historical costs and kind of that low-to-mid single-digit cost of capital.

35:49 I do think, just one point, as you think about, so that's the rate side of the equation. On the volume side of the equation, we ended the quarter at a 31% operating leverage. So, the amount of CRT that's covering our required PMIERs – PMIERs requirements, I think we do target a higher level generally in the, kind of mid-30% level. So, you could see the leverage of credit risk transfer go up prospectively as we continue to optimize the use of our credit risk transfer program.

[Mihir Bhatia, Bank of America]

36:29 Understood. Thank you. Just maybe going back to Slide 13 for a second, I just want to make sure we are understanding this correctly. I guess the first question is, can you remind us, did you disclose your original claim rate estimation on, like you know, back in 2Q and 3Q 2020?

[Dean Mitchell, Chief Financial Officer and Treasurer]

36:48 Yes, we did Mihir. So, for calendar year 2020 we had a 7% claim rate expectation on COVID-related delinquencies. That did tick-up to 8% in calendar year 2021 as the mix between forbearance and non-forbearance shifted towards non-forbearance as you can kind of see on the right hand side of that chart.

[Mihir Bhatia, Bank of America]

37:15 Right. So, maybe – staying on that 2020 for a second, I just wanted to make sure we understand, like, you know the impact of this Cumulative cure rates of 92%. So, I guess 7% claim rate would imply [92%] [ph] cure rate, the largest bucket in 2020 and approaching that, is that the right way to think about timing of reserve releases is going to be in-part driven by making – you’ve also had good home prices appreciation, we're clearly seeing so good momentum. I think all those cure rates are up 6%, 7% quarter-over-quarter cumulative cure rates.

37:47 So, what I want to make sure I understand is, are we close to potentially and I understand your reserves today reflect your best view of losses of the portfolio, but if the part on cure rates continues and you continue to see improvement in those cumulative cure rates, is 93% some kind of magic trigger or something where like once you pass that 93% hurdle, you’re probably more likely to do some reserve releases are, [we’re thinking] [ph] about that wrong?

[Dean Mitchell, Chief Financial Officer and Treasurer]

38:16 No, I think you're in the right framework. I think, you know much like you indicated, we're encouraged by the cure rates on COVID-related delinquencies to date. I do think that needs to be tempered by, you know we do recognize the ongoing unpredictability of the pandemic. So, we do have, you know what I would consider kind of a prudent wait and see type approach to the ultimate resolution of forbearance-related delinquencies.

38:49 While on this page Mihir, we do show quarterly cohorts, and really as a demonstration of progress to date, we're managing reserves more in the aggregate. So, across the entire delinquent inventory. And so, in that, looking at through that lens, we think it's prudent to kind of take up that more wait and see approach for ultimate resolutions.

39:14 And so, I think you're right that if in aggregate, we progress on the 2020 cohort towards that 93% cure rate, that would be an important trigger for us, but I wouldn't think about it cohort by cohort, I’d think about it more across the entirety of that delinquent population.

[Rohit Gupta, President and Chief Executive Officer]

39:35 Yes. And Mihir I would just add to Dean’s point that as we think about these reserves, the traditional processes that we use to use for reserving are a little bit dislocated with the forbearance program, because traditionally, our reserves would be much more aligned with number of past payments due foreclosure starts. And as Dean said, all of those things were, kind of changed with 10 month forbearance program that triggers down to 12 months and then obviously foreclosure moratorium.

40:02 So as we think about reserves, we are trying to be prudent and confident that as we think about reserve adequacy we are confident in the cure activity. And we've seen that in this pandemic that we felt good in early part of 2021 and then we saw Delta variant and then we felt good again and then we saw Omicron. So, I think that's just connecting the dots for you that we are just looking for a little bit more certainty because the last thing we would want to do is get optimistic and then get a surprise in the market.

[Mihir Bhatia, Bank of America]

40:32 Right. That's fair. Thank you so much for taking the questions.

[Rohit Gupta, President and Chief Executive Officer]

40:36 Thanks, Mihir.

[Operator]

40:40 Thank you. Our next question comes from Rick Shane with JP Morgan. Your line is open.

[Rick Shane, JP Morgan]

40:45 Hey guys. Thanks for taking my questions this morning. Most have really been asked and answered, but just like to revisit the claims, and can you just talk a little bit about the interplay that you've seen in the last couple of quarters between frequency and severity? Because the severities have obviously been down fairly significantly in the second half of the year. What the implications are for 2022 and how that impacts your reserves?

[Dean Mitchell, Chief Financial Officer and Treasurer]

41:21 Yes, I think – thanks Rick for the question, but I think what you see in our claims experience is really the disruption that Rohit referenced in the last question and answer. Certainly, cure activity from our perspective has been disrupted by the prevalence of forbearance that allows borrowers to remain, kind of in a delinquent state without any negative consequences from a credit reporting perspective for up to 18 months. And again, like we talked about last quarter, that 18 months can be extended as borrowers make certain of their payments even in forbearance and certain payments are considered inside or outside of forbearance.

42:05 So, you're seeing kind of even an elongation of that forbearance period beyond 18 months. And then in addition to that, you have the foreclosure moratorium that has really prevented any of these delinquencies going to claims. So, I think it's more a function of the disruption of what is a normal functioning delinquency process, delinquent to claim process.

42:33 Now, as that resolves Rick, I think then you'll start to see, from our perspective influx of cure activity, our belief still remains that forbearance allows borrowers to reestablish their financial footing and we'll cure at an elevated rate, but you will also see the ones that that progress ultimately through foreclosure and to claims start to pick up probably another 6 months to 12 months after that disruption unwinds.

[Rohit Gupta, President and Chief Executive Officer]

43:10 Yes. And just two things to add there Rick. One thing on our quarterly financial supplement, when you look at our average claim paid, it does have a footnote that that claim paid number for third quarter and fourth quarter includes non-performing loan deals, which means we actually didn’t pay actual claims, it was a settlement with one of the GSE.

43:30 So that kind of artificially is pulling down the claim number. I would not read too much into that. And then second thing, on Dean’s point in terms of – he made this point in his prepared remarks that we do have the benefit of home prices in front of our delinquencies, 98% of our delinquencies at the end of fourth quarter had at least 10% equity.

43:52 So, while that is not something that we are seeing in claims because we don't have that many claims, we are encouraged by that amount of equity on price appreciation in front of our delinquency base.

[Rick Shane, JP Morgan]

44:05 Okay, great. Lot of additional information there. It's very helpful. One other thing, in looking at the investment portfolio, you had about 64 million of unrealized losses in the quarter, which is $0.35 to $0.40 of impact on book value. Obviously, when we look at the portfolio, sort of dive into a little bit it looks like your [long in duration] [ph], I am curious is there any thought of hedging some of that risk out as we enter a period of a much more [hawkish] [ph] there?

[Dean Mitchell, Chief Financial Officer and Treasurer]

44:49 Yeah, Rick, so our unrealized gains came down quarter-over-quarter around the amount you talked about, about $60 million to $106 million at the end of the year. We have not discussed hedging uptick in interest rates and a potential corresponding decline in unrealized gains. That's not something that's been necessarily on our radar. We think more, we think more about our investment portfolio is maintaining a conservative position in our assets under management, maintaining liquidity, preserving capital, and ultimately in the, kind of tertiary pursuing optimal risk-adjusted returns on the portfolio, not necessarily protecting or locking in the unrealized gain position.

[Rohit Gupta, President and Chief Executive Officer]

45:47 And I would say the duration of our portfolio is actually not that long. If you actually compare duration of our portfolio to our [peer set] [ph], we are more in line with our kind of liability matching under stress scenario. So, that is something that we definitely look at it Rick on a regular basis that are we getting paid for extending that duration, and if we have not, then we do not take that additional risk.

[Rick Shane, JP Morgan]

46:12 Okay, great. Thank you guys.

[Operator]

46:16 Thank you. Our next question comes from Ryan Gilbert with BTIG. Your line is open.

[Ryan Gilbert, BTIG]

46:22 Hi, thanks. Good morning everyone. Thanks for taking my questions. First one is on NIW, the number came in better than I expected in the quarter. And I'm wondering if you could break out to the extent that it's possible. Your NIW performance in the quarter between, as you said, reactivating a relationship with a key customer, doubling up with existing customers versus just the overall market. So, any details would be helpful?

[Rohit Gupta, President and Chief Executive Officer]

46:55 Thank you, Ryan. So, I would say given the confidentiality of our customer relationships, we would probably give too much information about the customer, but we believe that the reactivation of that key account after five years pause due to ratings sensitivity was a strong example that we are competing effectively in the market and unlocking our true value as a business, post ratings, post our IPO.

47:21 We have previously shared that that is a potential upside for us in terms of post-IPO competitiveness in the marketplace and having a full value proposition. As an example, we shared that key customer account reactivation, but in addition to that, we have reactivated and expanded a lot more than that relationship. And we thought it was helpful to disclose that relationship specifically because we had talked about that during our IPO.

47:50 Broadly speaking, I would say from a market share perspective, it's tough to comment because we are the first MI company reporting at this point, but we feel very good about our market position, and we are very confident in our long-term strategy to drive competitive position through our strong relationships, our differentiated solutions, and the increased strength of our competitive position post-IPO.

48:12 And I would also comment on the market side, which has less to do with market share, but given the shift in purchase –towards the purchase market, in 2021 and seems like that even in early 2022 that is very good for our business that while interest rates are rising, it seems like first-time home buyer demand is still very strong and that actually gives us some good tailwinds going into 2022 because MI industry is much more closely aligned to purchase market because out of every 100 purchase loans, we received 26 loans to 27 loans as MI might industry, whereas out of every 100 refi loans, we received 3 to 4.

48:52 So, our refi concentration was already at 10% in 2021 and that could decline further, but the purchase market continues to be strong. So, when we look at NIW potential, we are still optimistic about 2022 and beyond.

[Ryan Gilbert, BTIG]

49:09 Okay, that's great. Thank you. My second question is on new delinquencies. It looks like they ticked up as a percentage of – on an absolute basis and as a percentage of policies in-force and I'm just wondering is that – do you think that's primarily just seasonality? Do you think that the new DQs are being driven by a new COVID variant or anything else that you want to call out on the new delinquency side?

[Dean Mitchell, Chief Financial Officer and Treasurer]

49:37 Yeah, Ryan, new delinquencies are up about 900 quarter-over-quarter. So, I think it's important to frame the story, we're still talking about relatively small numbers, but we did give some attribution in the prepared remarks that the increase was driven by in-part increase from delinquencies from natural disaster, natural disasters in FEMA-impacted areas. So, think about Hurricane Ida in the Louisiana, think about California wildfires through August, September, and October.

50:14 And then in addition to those, we had more new delinquencies from our newest books. So, think 2020 and 2021 that are starting to begin their normal progression of the loss curve. These books are continuing to perform very well. In fact they're performing better than pre-pandemic books at the same time and their aging, but they will continue to experience delinquency development as they age through their normal loss development pattern as expected.

50:42 So, those are really the two drivers of the 12% increase, but I think it’s important to note that that 12% increase is associated with just 900 new delinquencies. So, again, pretty small numbers.

[Ryan Gilbert, BTIG]

50:58 Right. Absolutely. Thanks very much for the time. I appreciate it.

[Dean Mitchell, Chief Financial Officer and Treasurer]

51:01 Thanks, Ryan.

[Operator]

51:05 Thank you. We have a follow-up from Geoffrey Dunn with Dowling & Partners. Your line is open.

[Geoffrey Dunn, Dowling & Partners]

51:10 Thanks. Dean, I wanted to go back to the premium rate and think about the future volatility. Right now about 80% of your risk in force is from 2019 and after. So, this mix shift issue should decline as that keeps going towards 100%, but you also mentioned, obviously there’s product mix shifts quarter-to-quarter for everybody. So, historically, have you done the work where you see how much your base rate shifts any given quarter from product mix? Is there a range around that? And as we think about the vintage mix shift changing, at roughly what level of 2019 and after does the quarter-to-quarter development become more about what you're writing in that given quarter versus this big vintage shift we've been dealing with for the last three, four years?

[Dean Mitchell, Chief Financial Officer and Treasurer]

52:03 Yeah Geoff. Good question. I think it's extremely difficult for the reasons that we mentioned earlier to, kind of provide really specific guidance on base rate changes given the fact that it's – there's a lot of market driven items embedded in that metric, purchase refi mix credit composition, lapsing, the timing quantum and where that lapse is happening. So, I think from that perspective, we're not providing guidance given all the various market drivers embedded in that.

52:42 I do agree with the hypothesis that over 70% of our portfolio is now comprised of the 2020 and 2021 book years, that leaves much less subject to lapse-driven rate dilution or the lapsing of older books, it’s just simply less older books to lapse today than there has been through the course of the last two years.

53:11 So, I think that is true that the book is starting to get to a position where lapse-driven rate dilution will start to [decay, burn-out] [ph] and have a lesser impact on changes in base premium rate prospectively.

[Geoffrey Dunn, Dowling & Partners]

53:31 All right. So, ignoring guidance, but historically, obviously, we can't see it on apples-to-apples basis because there’s always been the rate card evolution and pricing changes, but on an apples-to-apples basis on the base rate, can simple product mix cause more than 100 basis point, 200 basis point move quarter to quarter?

[Dean Mitchell, Chief Financial Officer and Treasurer]

53:51 I don't know that I can [dimension] [ph] it for you. I think it has a varied impact quarter-to-quarter. I think through time, dimensioning that would be a challenge at this point in time, but we'll take a look at that through time. Again, I think quarter-to-quarter, that is maybe more variation due to the lump, due to all the various market drivers are embedded in that, but let us take a look through time and see if we can dimension that for you.

[Rohit Gupta, President and Chief Executive Officer]

54:36 I think Geoff your question is in the right direction, and I don't think we have a quantitative answer to give, but I think, if you look at our previously disclosed numbers, you do see that volatility in our base rate quarters where it goes up and then it goes down while you would expect, like if everything was going based on just lapse driven dilution that it would go in one direction.

54:57 So, there is some volatility in that number, and if you just look at percentages, looking at third quarter 2020 onwards, it is like 140 basis points, 70 basis points in terms of base rate up down going in different directions. So, we will come back to you offline and see if we can find some rule of thumb looking at history.

[Dean Mitchell, Chief Financial Officer and Treasurer]

55:16 Yeah, my concern with the rule of thumb will be, some of the potential changes in the market prospectively, so, I think with the up-tick in interest rates, we would expect persistency to increase prospectively. That's going to have an effect on the magnitude of the changes. You're going to have a transition from a refi market to a purchase market. That's going to have an effect on the transition.

55:41 So, my concern is, there isn't a rule of thumb per se. And as we look historically, I'm not sure that we'll be able to translate what has happened in the past to projected go forward, Geoff, but let us take a look and see [what would] [ph] come back with.

[Geoffrey Dunn, Dowling & Partners]

56:00 Yes, that would be [helpful] [ph]. I mean, again, it's, I think the rule of thumb is dangerous, I agree with you. But I think we're still dominated by the vintage mix shift, because if you look at this quarter, if for example, we saw your rate drop this quarter, we're talking about vintage. Well, that would be contrary to seeing your 95 plus go up, your 45 DTI go up, and your singles coming down a little bit, and not necessarily getting as much of that first quarter amortization, but we're eventually going to get into that environment. And so directionally, we can assess the move in your rate.

56:32 And just trying to figure out where we get to that inflection point where it becomes about the business written in the quarter rather than this vintage-mix shift.

[Dean Mitchell, Chief Financial Officer and Treasurer]

56:42 Appreciate the question. We don't – as Rohit mentioned, don't have a quantitative answer, but we’ll go back and take a look and go back and take a look to see, is it applicable prospectively, which I think is also an open question.

[Geoffrey Dunn, Dowling & Partners]

56:55 Great. Thanks.

[Dean Mitchell, Chief Financial Officer and Treasurer]

56:57 Thanks Geoff.

[Rohit Gupta, President and Chief Executive Officer]

56:58 Thank you.

[Operator]

57:00 Thank you. And I'm showing no other questions in the queue. I’d like to turn the call back to Rohit Gupta for closing remarks.

[Rohit Gupta, President and Chief Executive Officer]

57:07 Thank you, [Catherine] [ph], and thank you all. We appreciate your interest in Enact, and we look forward to working with you throughout this year. Thank you. We'll wrap up the call here.

[Operator]

57:17 This concludes today's conference call. Thank you for participating. You may now disconnect.