Q3 2021 Enact Holdings Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Hello, and welcome to <unk>.
Third quarter earnings call. Please be advised that today's topic.
I would now like to turn the conference over to your first speaker today, Yeah, Nicole Vice President of Investor Relations.
May begin.
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 our prepared remarks.
We will take your questions.
Press release, we issued after market closed yesterday contains <unk> financial results for the third 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 Dot IR dot enact MRI dot com under the section marked quarterly results.
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 and are subject to risks and uncertainty, 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.
A discussion of these risks and uncertainties. Please review the cautionary language regarding forward looking statements.
Today's press release as well as in our filings with the SEC, which are also available on our website.
Also please keep in mind the press release quarterly financial supplement and management's prepared remarks today include certain non-GAAP measures.
Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our investor presentation, and our upcoming quarterly filing on our website.
With that I'll turn the call over to Rohit.
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 an act that provide the launching point as we aim to realize the full potential of our business.
<unk> started selling mortgage insurance and 1981 with a clear mission to help people buy houses and stay in their homes and we have never wavered in that mission.
<unk> 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 U S. Operating in all 50 States and D C.
Following our successful IPO in September we are better positioned than ever driven by a number of factors including.
<unk> customer relationships, we serve over 800 active customers across the mortgage origination market, including all of the top 20 mortgage originators and provide them with a compelling value proposition, including competitive pricing and guidelines.
Our best in class underwriting platform and other tools and support to help them achieve their growth objectives. We.
We are prudent managers of risk we utilize a proprietary approach that ensures the underlying credit quality up over insured mortgage portfolio is aligned with our risk and profitability framework and we have for those strengthen our risk management efforts to the actions we have taken to transfer risk from our balance sheet, which we believe will enhance.
And have a return profile and reduce volatility and losses over time.
Today over 90% of our risk in force is covered by our credit risk transfer program.
Our executive team is second to none with an average of nearly 30 years of experience and a proven track record of delivering results through the cycle complemented by the right combination of skills to drive over the long term success.
Finally, and importantly dynamics in our market remained very strong as a combination of low interest rates robust housing prices demand for homeownership and favorable demographics create a favorable environment for budgets originations.
Despite the tight housing market. The number of first time homebuyers purchasing homes remained robust in the first half of 2021 and they use high loan to value products more than 80% of the time when becoming homeowners.
Over the next five years, an additional $1 5 million people above the existing trend 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.
Mortgage origination activity remain robust fueled by strong home sales and refinance activity.
Total unsold inventory of single family homes remains low at two six months supply as of August 2021.
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.
<unk> refinance activity remained robust compared to second quarter of 2021, but decreased compared to the third quarter of 2020.
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.
Going forward, we will leverage our strengths to execute against a clear growth strategy designed to further differentiate and act generates strong returns for our shareholders and maximize value creation.
This strategy is based on an informed cycle tested approach that has allowed enact to outpace industry average insurance enforced 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.
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 to 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 risks wire or via our proprietary risk assessment and pricing tools and our credit risk transfer program.
We will also stay dedicated to maximizing value creation to our balanced capital allocation approach that supports our existing policyholders invest to grow the business as I, just mentioned and returns capital to shareholders Dean will provide more color on our current cost in this area shortly.
Overall, our focus remains on balancing growth with generating strong returns for our shareholders and we are very pleased with our production and performance.
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.
Adjusted operating income was $137 million or 84 cents per diluted share compared to $138 million or 86 cents per diluted share a year ago and.
Adjusting for 2020 debt issuance interest expense. This was 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 right sizable new books.
Your delinquencies as a result of the ongoing economic recovery and prudent expense management offset partially by lower premium rates.
Insurance enforce rose to $222 billion in the quarter, while new insurance written remained strong at $24 billion.
We are committed to building our book with the right business that rapidly balances risk and reward and continue to do so in the third quarter with business priced at low to mid teen returns.
We continue to manage our risk and drive operational excellence, resulting in a 400 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 741, and an average loan to value ratio up 93%.
We finished the quarter with a very strong balance sheet, including the sufficiency to P. Myers published standards of $2 3 billion or 181%.
This is the highest level of sufficiency part of 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.
The increased strength of our business falling our IPO was recognized by the credit rating agencies, and we received upgrades from Fitch Moodys 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.
I'll now turn the call over to Dean to discuss drivers of our third quarter performance in more detail.
Thanks, Rob 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 <unk> and I look forward to working with all of you going forward.
As Rohit mentioned, we delivered another very strong quarter of financial results.
GAAP net income for the third quarter was $137 million or <unk> 84 per diluted share as compared to <unk> 80 per diluted share in the second quarter of 2021, and <unk> 85 per diluted share in the third quarter of 2020.
Adjusted operating income was also a $137 million or <unk> 84 per diluted share in the quarter as compared to 82 per diluted share in the second quarter of 2021, and <unk> 86 per diluted share in the third quarter of 2020.
In terms of key revenue drivers new insurance written was $24 billion during the quarter compared to $26 7 billion in the second quarter of 2021, and $26 6 billion in the third quarter of 2020, new.
New insurance written for purchase transactions made up 88% of our total <unk> in the quarter up from 79% last quarter and 75% in the third quarter of 2020.
In addition monthly payment policies represented 90% of our new insurance written in the quarter as compared to 93% last quarter and 88% in the third quarter of 2020.
Insurance in force of 222 billion increased 2% from second quarter levels, and 10% 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.
As of the third quarter. Our 2020 in 2021 book years represented approximately two thirds of our total insurance enforce indicative of the large market opportunity and commercial success, we've had in consecutive years.
Risk in force at quarter end was $55 9 billion up from $54 6 billion last quarter and up from $51 4 billion in the third quarter 2020, primarily as a result of growing insurance portfolio.
Persistency for the quarter was 65% an increase from 57% last quarter and 59% in the third quarter 2020. The increase in persistency was primarily driven by a decline in the percentage of our in force policies with mortgage rates above current rates.
Total revenues for the quarter were $280 million compared to $276 million last quarter and $284 million in the third quarter of 2020.
Net premiums earned were $243 million flat to the prior quarter and down 3% compared to the third quarter of 2020.
Our net premium rate of 44 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.
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 at attractive low to mid teen returns.
Turning to losses losses were $34 million in the quarter as compared to $30 million last quarter and $44 million in the third quarter of 2020.
The sequential change in losses was driven by seasonally higher new delinquencies, while the year over year decline in losses was driven by lower new delinquencies as the economy continues to improve.
This was partially offset by favorable IBM our development in the third quarter of 2020.
36% 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-19.
Our claim rate on new delinquencies for the quarter was 8% consistent with the claim rate for new delinquencies over the first half of 2021.
As reflected on slide 12 of our Investor presentation, We reported approximately 7400, new delinquencies in the quarter, which was less than half of the new delinquency level seen a year ago.
New delinquencies were up approximately 8% sequentially driven by seasonality for.
For the quarter, our new delinquency rate of <unk>, 8% 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-19, new delinquencies or those new delinquencies since April of last year.
To date, approximately 86%, 81% and 76% of delinquencies from the second third and fourth quarter, respectively have now cured. These.
These cumulative cure rates have continued to increase through time and may accelerate as borrowers reach completion of their forbearance plan terms.
Our third quarter total delinquencies of approximately 29000 and the associated delinquency rate of three 1% reflect the fifth consecutive quarter of improvement in both measures driven by the continuation of curious outpacing new delinquencies.
We made no changes in the third quarter to aggregate reserves on prior delinquencies. We continue to assess the resolution of COVID-19, delinquencies with a focus on the approximately 56% of our delinquencies subject to forbearance plans as we consider the appropriateness of our loss reserves over time.
At present, our loss reserves reflect our best estimate of ultimate claims on our total delinquencies.
Lastly, the embedded equity position of our delinquent policies is substantial with approximately 97% of our delinquencies, having an estimated 10% or more mark to market equity using an index based house price assessments.
We believe this embedded equity conserve as a potential mitigate both to the frequency of claims as well as the potential future loss for delinquencies that ultimately progress to claim.
Turning to expenses operating expenses were $59 million and the expense ratio was 24% in the quarter as compared to $67 million and 27% respectively. In the second quarter of 2021.
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 costs and restructuring costs in the current quarter compared to the second quarter of 2021.
Operating expenses were materially flat year over year.
In addition to operating expenses the third quarter of 2020 reflected about half of the approximate $13 million quarterly interest expense given the timing of our debt raised in August of last year.
Turning to capital and liquidity, we are committed to maintaining a strong balance sheet aligned with our investment grade ratings as Rohit mentioned, our pmiers sufficiency increase to 181% or approximately $2 3 billion above the published P Myers requirements compared to 165% and $1 9 billion in the second quarter of 2021.
The sequential improvement in PMI sufficiency was driven in part by the completion of an insurance linked notes transaction, which added approximately $370 million of P. Myers 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 niwa wrote in the quarter and the amortization of existing reinsurance transactions.
As of quarter end, we had approximately $1 6 billion of P. Myers capital credit and approximately $1 8 billion of loss coverage provided by our credit risk transfer program, which provides cost efficient P Myers capital and reduces future loss love volatility by ceding risks to both traditional reinsurers and the capital markets.
Pinard sufficiency includes the benefit from the 30% multiplier for COVID-19 related delinquencies, which reduced P. Myers required assets by approximately $570 million before giving effect to reinsurance benefits the.
The benefit from the 30% multiplier has declined over the past four quarters is more COVID-19 related delinquencies resolving tiers.
Turning more broadly to our balance sheet at quarter end, our GAAP equity was $4 2 billion invested assets totaled approximately $5 4 billion cash and cash equivalents were approximately were approximately $450 million long term debt was $740 million and our debt to capital ratio was a conservative 15%.
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Combined with our Pmiers sufficiency levels. These metrics demonstrate why we are confident in the strength of our balance sheet to support our business go forward and deliver value to shareholders.
Our insurance financial strength ratings were recently operate created as a result of our successful IPO.
Each of S&P, Moody's and Fitch upgraded the insurance financial strength rating of <unk>, our flagship mortgage insurer by one to two notches and recognition of the enhanced governance and access to capital we now possess.
Each rating agencies' rating and outlook as reflected on slide 14 of the Investor presentation.
With regards to our capital allocation strategy, we will continue to pursue a balanced approach that maintains a strong balance sheet pursues investments to enhance our business prospects and returns excess capital to shareholders.
As it relates to a potential 2021 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 to date. This review has been supported if this remains the case, we intend to recommend a $200 million 2021.
Dividend during the fourth quarter to the board for its approval.
I'll now turn the call back over to Rohit for closing remarks.
Thanks, Steve before turning it over for your questions I'd like to provide some thoughts on the current regulatory environment in Washington D. C. We continue to advocate for the expanded use of private mortgage insurance among policymakers in Washington.
We actively work with Capitol Hill, the administration regulators housing finance, great groups and consumer advocates to develop solutions that achieved a shared goal of increasing the accessibility affordability and sustainability of homeownership.
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.
At <unk>, we are.
We're 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 world to homeownership.
Let me leave you with few get key takeaways on slide 16.
We are very pleased with our performance driven.
Driven by our strong execution and against a market backdrop that remains favorable and that 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 our strategy that will drive growth manage risk and generate strong returns.
None of this would've been possible without the hard work and dedication of our employees and I want to thank them for their continued commitment.
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 homeownership goals.
I'll now turn the call back to the operator to take us into Q&A operator.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one.
Thank you Pat.
Your first question comes from the line of Rick Shane with J P. Morgan.
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 pay.
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.
We're going to see much lower migration and that losses are actually going to be averted.
The rare case 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 a forbearance first of all <unk>.
Our forbearance trends show that newly reported forbearance has continued to decline and Thats really happening as the economy continues to improve and then to your perspective, total delinquencies and including delinquency and forbearance or are declining as cures continue to outpace new delinquencies.
Our view has been pretty.
Pretty consistent through this that we believe delinquencies in forbearance and that represents over half of our total.
Delinquent inventory.
They may care at an elevated rate and they may 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 in our.
Our experience to date has 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 forex clip relative to workouts.
Hi.
I think we continue to kind of assess how those remaining forbearance as theyre going to play out.
As they progress towards there.
<unk> completion 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 when we applied a claim rate expectation at the initial delinquency and again much like I said I think that's a that's an important assessment as it relates to forbearance because of the high concentration that.
Representing our overall delinquent population.
So I kind of go back to the comments, we made at the beginning of this pandemic that we do expect those too.
To resolve that at a elevated.
Pure rate.
And that remains the case today.
Terrific and if I could just ask one last quick question.
Can you just sort of walk through.
The persistent C 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 in newer markets.
Yeah.
Our persistency ticked up much like you saw.
And I think interest rates quite frankly remained pretty depressed throughout the quarter. They only really ticked up above 3% 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.
Half.
Interest rates that are above the prevailing market rates thats come down pretty meaningfully year over year, and so I think thats 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.
Is it marginally came down August through September, but you are really in pretty small numbers the.
The range is pretty tight theres about three points of persistency difference within the quarter within the months within the quarter. So.
Not a Y while there is some variation not a wide variation month to month to month within the quarter. Yes. This is really the one thing that I would add to beans 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 50 basis points above 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 continues to exist.
Great Hey, guys. Thank you for taking my questions and I just want to acknowledge there has 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.
Thanks, Rick.
Your next question comes from the line of Bose George with <unk>.
Hey, guys. Good morning also my congratulations on your first quarter as a public company.
Thanks, I wanted to first ask just about the <unk>.
Dividend just wanted to explore that a little more.
Right now like the end of the second quarter your surplus it.
It looks like it's over 200 million. So it allows for the dividend. This year, but can you talk about how you think the surplus will trend in 2022 and are you likely to need to request a special dividend too.
To keep the dividend distributions similar next year.
Plan to try and maintain a similar run rate assuming market conditions permit that.
Hi, Bose. This is Roy Thanks for your question Great question.
I'll start off by just saying as I said in my prepared remarks, we look at our balanced capital allocation approach that supports our existing policyholders invest to grow the business and then returning capital to shareholders. So capital return to shareholders is going to be a key aspect of our disciplined capital allocation strategy I'm going to ask Dean to just give you more color on.
Both the fourth quarter of dividend and the way, we think about longer term return of capital.
Yes so.
Bose I appreciate the question I think.
You rightly point out our unassigned surplus stands at just over $200 million at the end of the third quarter are our total policyholder surplus is in excess of $1 billion in the half so after the $200 million 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 domiciliary regulator.
On any future capital returns.
It's likely after a $200 million dividend that unassigned requires just to go back and seek their approval for dividends beyond 2021.
Okay, great that's helpful, but but the expectation or what you would like to do sort of maintain at that level going forward assuming you can.
If market conditions allow and you can work with the regulators on that.
Yes, I think look near term, we're focused on the fourth quarter dividend.
Our assessment has really focused on the resolution of forbearance is and making sure that they are resolving in line with our original expectations that assessment has been supported the data of a fourth quarter dividend and if that remains the case.
We would expect that we'd be making a recommendation to the board for a $200 million 2021 dividend later this quarter.
I think really honestly our focus.
Those 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.
Conditions remain on their current trajectory that we could initiate a regular common dividend as early as 2022.
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'd say were not going to give dividend guidance on this call I think maybe giving you.
Some historical perspective on what we've done.
Dividend wise could could just let us give you inform your view on how we thought about this in the past. So if you look back to our 2019 dividend, which was obviously done on a pre pandemic basis, we dividend at about $250 million and if you look at that on a dividend payout ratio I think.
That would probably take you upwards.
<unk> 45 to high 40% dividend payout ratio I think that just gives you some historical context on how we thought about dividends in the past if you want to.
That might help dimension.
Our perspectives looking backwards.
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 $50 million number if we pull out some of those unusual items.
Yes, so I think.
We had expenses of 59 million in expense ratio of 24 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 $3 million lower.
Strategic transaction preparation costs as well as restructuring costs. So I'd say take into $59 million down that gets you to $56 million if you simply exclude.
The $3 million of against strategic transaction and restructuring.
As you as you think about that on a.
A go forward basis, we haven't provided expense or premium guidance, so I'm not going to get into specific pro forma.
<unk> dollars are ratios, but I do think we can talk in terms of expense drivers to give us a directional sense.
First of all we're not going to have the costs associated with those two things the transaction preparation cost as well as restructuring beyond 2021, So that's going to decrease the run rate heading into 2022.
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 in the short term and then lastly, like we've talked about the shared services agreement does cap corporate overhead.
And codify a reduction in that corporate overhead beginning in 2023, it's about a $5 million reduction annually 2023 through 2025, and thats going to serve to decrease our kind of run rate of expenses over the medium to longer term.
I hope I hope that provides some context on expense drivers.
And where that might go go forward.
Okay, Great. That's very helpful. Thanks, a lot.
Okay.
Thanks both.
Your next question comes from the line of Doug Harter with Credit Suisse.
Thanks, I was hoping you could talk about that.
The competitive dynamics.
And the industry during the quarter and kind of how you view.
Relative price competition today.
Thanks, Doug very good question. So we believe overall market is competitive yet constructive and our returns remain within our risk adjusted return appetite.
The <unk> industry dynamics have also enabled us to continue to write new business in a large market at attractive low to mid teen returns and third quarter of 'twenty one.
And at the end of the day, we had an experience 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 manager of constructive as we think about our participation in the market.
And I guess as we look forward to 222 and is the total size of the.
The market.
It is likely to be smaller.
I guess, how do you think that that factors into into the relative competitiveness of the market.
Yes, so Doug very good cushion as well.
Think about originations market one thing I would point to just looking back is there has been a transition in the origin nation market. This year itself. So if you think about market dynamics that are in play as low interest rates robust home prices and then obviously.
That's driving some balance and housing affordability, while we continue to see a shortage of housing supply, but we believe that third quarter origination market was still over $1 billion and this was the fifth quarter of origination market being at that number but within the $1 billion of originations. We did start seeing a transition to purchase origination.
In 2021 compared to 2020, 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.
Purchase market relative to refinance market, which is almost four times.
Out of every 100 purchased loans, we get four times more private NII loan spend 100 refinance loans that is going to be supported even moving forward.
Difficult to provide a guidance on origination market size at this point, because thats, partially tied to <unk>.
<unk> 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 market being very strong in the foreseeable future.
Yeah.
Great. Thank you.
Yes.
Your next question comes from the line of Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
Dean you referenced.
The relative new notices around 80 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 2021, and Youre going to start hitting that peak season, maybe 'twenty two 'twenty three at least on the 'twenty block.
Coming into Covid, it looked like something in the range of 60 to 80 basis points.
Might've been quote unquote normalized.
But how do you think about development from here given such a young concentration.
Considering the credit environment that we've been experiencing not just this year, but for the past several years.
Yes, Jeff Thanks for the question good question.
I would characterize credit performance.
Really continuing to trend favorably a lot of the things you just kind of pointed out, but let's let's just start with the quarter.
Losses up.
The $34 million versus 30 million 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 10% to 15%.
The increase in new notices we saw 8% <unk> and so generally in line, maybe modestly favorable to normal seasonality I think it's important as well.
You referenced that the new new del <unk> is.
At pre pandemic levels, the 8% that you referenced I think that does reflect the overall economic recovery Thats underway. In addition to that cures continue to outpace new delinquencies. This is the fifth quarter in a row, where that's happened and then.
Lastly, new delinquency subject of 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 is.
Given the rise in HPA, 97% of our.
Delinquencies have an estimated 10% or more mark to market equity, we think that is.
In terms of the resolution of our existing delinquencies, we believe that.
Service of potential mitigate to both the frequency and severity of claims. 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.
Yes, just one other thing Jeff are allowed to Dean's lift on new notices in the current environment as we have seen over the last 18 months. The forbearance program that was designed for this pandemic has been unique and has its own impact on new notices that goes from a consumer perspective. There is a very there's very little downside and actually.
Hitting in that program. So as that program comes to an end you will start seeing a normal behavior from consumers in terms of the 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 go into the forbearance and then keep making payments.
So thats another dynamic that will be in transition as we come out of the pandemic.
Okay. Thanks.
Thank you. Our next question. Your next question comes from the line of Ryan Nash with Goldman Sachs.
Hey, good morning, guys.
The others' comments and congratulations on a successful IPO.
Yes.
Okay.
Maybe just to <unk>.
Robert 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.
Yes, Ryan. Thank you for your question very good question. So as we talked about this during our IPO. We have operated on somewhat of a unlevel playing field in the past, especially with customers who are sensitive to credit ratings.
About these customers being depository institutions typically that portion of the 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 so since our IPO and since we got ratings upgrades from Fitch Moodys and S&P. We have had very constructive discussions with that segment of the market with those specific customers and we can do.
To make very good progress and we would anticipate that 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.
Got it.
Follow up to 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.
We continue to see interest rates rising in the coming quarters. Thanks.
Absolutely Ryan So I think the dynamic that didn't talk about was simply that in our insurance in force as forces as policies had lapped the policies that are now in the money in terms of being able to refinance has continued to be lower as well as we are writing new books.
You noticed in third quarter with interest rates hovering below 3%. So that is just that puts less portion of our policies exposed to higher chances are flops and I would say as that continues to happen you will just the persistency tick up in our portfolio as long as the prevailing in growth rates in the market are higher.
Then what consumers in our portfolio have on their policies. So that phenomena will play out just like it plays out historically.
Got it thanks for taking my question.
Yes. Thank you.
Your next question comes from the line of Ryan Gilbert with <unk>.
Hi, Thanks, everyone. Good morning.
My first question actually was on the on the payout ratio and Dean I appreciate your commentary there.
Just broadly is it fair to think about a I guess, maybe a 40% to 50% payout ratio as the sort of number that that this business can support in a.
And overall.
Good housing housing market.
Yeah, Ryan Thanks for your question, Yeah, So again, I Wouldnt I didn't give that too.
2019 historical.
Experience as per Se guidance I wanted to give it at.
As context for how we previously thought about.
Dividend.
In a more stable economic environment, which differs then how we're thinking about.
Dividends in the fourth quarter of this year. So I would just I just want to make.
Make that distinction.
From that perspective.
Yeah. So Ryan one thing I'll add to Dean's comment absolutely agree that we were pointing to 2019 dividends as having mid forties payout ratio. If you look at $200 million potential dividend in fourth quarter 41, compared to our first three quarters of income run rate you would come up with Hyatt herpes payout ratio, which reflects.
Kind of where we are in the cycle in terms of recovery from the pandemic two configurations that we would give in terms of sizing for future.
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.
We would think about.
Putting our regular common dividend policy as early as 2022, so think about that all specced up capital return, having a high confidence from our management and board perspective second in addition to that we would look at industrial landscape at that point of time, and we're peer to peer dividend yields are at the time and that will help us kind of.
Quantify what portion of our dividend the regular common dividend as well as kind of special capital return either in terms of special dividend or share buyback.
Okay. That's great really helpful. Thank you.
My second question is on <unk>.
Forbearance exits I think we've seen some of the surveys that on.
There is some percentage of borrowers who are exiting forbearance that'll loss mitigation plan in place. So I'm wondering if you had any insight or color into what youre seeing in your own delinquency.
Book is it a function of the borrowers not qualifying for forbearance or they are not just not been in touch with the servicer or.
Any insight would be it would be really helpful.
Yeah. Good question Ryan so.
From a from a forbearance perspective, we've had about 100000.
Forbearance is.
Our insured portfolio not all of those have been delinquent.
About rough rough estimates about a third of those have remained current through.
Through through time.
And the remaining have gone delinquent we've seen.
Forbearance exits happened in a lot of different ways.
About.
About a third of those forbearance is.
<unk>.
Canceled therefore.
<unk> actually canceled.
Therefore, barents the others have exited through either a payment deferral, which again represents the vast majority of our exits to date.
Retention workouts self cures and then to your point. There is there are some some level of forbearance is exiting without workout that represents.
A pretty small percentage of our overall.
Forbearance exits that's about about two 5% of total of those total forbearance is I think the causation.
Is we're still doing assessments on causation.
Whether that's a timing issue or whether that lack of an ability to continue to service the loan.
That really goes into what we were talking about as the forbearance assessment in advance of.
Of supporting a fourth quarter dividend. It's those types of details that we're working with to get under underneath the hood, a little bit more working with servicers to understand what is the causation.
Exiting without workouts and what is therefore, the likelihood of that potentially of those loans potentially going to clients.
Okay, great. Thanks very much.
Thank you Ron.
Your next question comes from the line of Mihir Bhatia with Bank of America.
Hi, Good morning, and thank you for taking my questions also add my congratulations on completing your first quarter as a public company.
Maybe.
Start just.
I wanted to just make sure I understand.
The capital return.
Or the dividend that you're speaking about you talked about the dividend of $200 million going to go to the whole COVID-19 rate is there does the holdco have any reason to hold on to that is the idea that that entire $200 million would then get returned to shareholders.
And what I would love to hear a little bit more on just how you're thinking about how that we've done would be.
Any kind of corporate imperative can do a little because of general its needs or whatever to do a little bit more weighted towards dividends versus buyback.
Yes mihir.
Good question.
Yes 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 <unk>.
Dividends versus share buybacks I think in the short term.
We are predisposed 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.
In the prevailing market value.
We could have a transition to a preference for share buybacks.
Noting that we will have to be cognizant of the amount of float we have in the market as well.
Think in terms of.
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 clearly align with our intact.
And hopefully in line with our communication to date on our Holdco has $290 million approximately of cash. So holdco doesn't have any reason to hold on to additional cash at this point, we have sufficient amount of resources to service our debt for the foreseeable future.
Yes, I just wanted to make sure on that.
Great.
In terms of the claim rate for the quarter I apologize I may have missed it but did you give the team that you've assumed for the quarter.
The claim rate here is 8% consistent with the.
The first half of the year as well.
Great and then just the last question I had was just on the forbearance is and.
I appreciate that cause running higher than new.
New delinquencies obviously.
Heavily impacted by the Covid forbearance is that accurate, but maybe can you 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 how where are we in that process.
Yes.
5%, though okay, great. Thank you.
Yes, Sumit here. Good good question, we haven't differentiated the claim rate between forbearance is a non forbearance as we've talked in the aggregate and through time, we've given the claim rate.
At least through 2021 of 8%.
So again thats the claim rate on both forbearance and non forbearance through the assessment of.
Forbearance is 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 assessments ongoing and.
We continue to evaluate but that is the current the current view.
Understood and then does the fact that so many I mean, I guess, maybe you expected the vast majority of the forbearance to kill using payment deferrals.
<unk>.
Is that right and that's going to be used for other delinquencies right. It has to be only for a COVID-19 like service. Those are you guys don't have any like maybe you see great performance out of that and you say hey, that's a novel loss mitigation tool, but that's not actually an option right for any non forbearance delinquency.
They've been different is limited to forbearance and payment deferred was a new.
Sign up option loss mitigation option created during the pandemic itself.
Got it and then they expect and the way it's been used is in line with your expectations.
That's right.
Okay. Thank you I'll stop there thanks.
Thanks, Matt.
Your next question comes from the line of Erin <unk> with Citi.
Thanks.
We'd like to hear it from the competitive dynamics around credit underwriting.
As though that most folks were.
Managing their risks through higher pricing through the pandemic.
Our credit stats from new.
From new insurance written a pretty steady over the past two years is is there any signs of any of your competitors loosening credit standards at all.
Hiring very good question. So what I would say is the credit box has been pretty tight driven by the implementation of qualified mortgage rule back in 2013 14 timeframe.
<unk> guidelines and on top of that our own credit policy. So no changes in the market that are meaningful.
Certain times, if you see an opportunity in a certain cohort two 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.
Thank you.
Thank you.
At this time there are no further questions I would like to turn the call back over to Mr. Rohit Gupta for closing remarks.
Thank you Lisa and thanks to 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.
This concludes today's conference you may now disconnect.
Okay.
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