Q2 2022 Enact Holdings Inc Earnings Call

August 2, 2022

Good morning, and welcome to the enact second quarter 2022 earnings conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Daniel Cool. Please go ahead.

Thank you and good morning, welcome to our second 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 second quarter results before turning the call back to Rohit for closing remarks.

After prepared remarks, we will take your questions.

The earnings materials, we issued after market closed yesterday contained in <unk> financial results for the second quarter of 2022, 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 data.

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Under this section Mark quarterly results.

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 be materially different.

We undertake no obligation to update or revise any such statements as a result of new information.

For a discussion of these risks and uncertainties. Please review the cautionary language regarding forward looking statements in today's press release as well as in our filings with the SEC, which are available on our website.

So please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filing on our website.

With that I'll turn the call over to Rohit.

Thank you Daniel good morning, everyone and thank you for joining us.

The second quarter was another strong period of performance for an act.

Continued execution of our strategy combined with reserve releases due to elevated cure activity.

<unk> record adjusted net operating income of $205 million or dollars 26 per share up 54% from the same period last year and our return on equity of 20%.

I am proud of how we have continued to navigate this environment and would like to thank our team for all their great work.

During the quarter, we continued to enhance <unk> competitive differentiation, while maintaining strong capital levels and delivering attractive risk adjusted it to.

Beyond our record results Moodys recent decision to upgrade from <unk> to <unk>. One is additional evidence of our continued success.

This marks the second time since our IPO that we have received an upgrade from Moody's and we believe it reflects our execution financial performance and the strength and flexibility of our balance sheet.

The upgrade enhances our ability to compete in the market by creating additional opportunities for customer engagement to support our production goals.

On this front, we continue to win new business and expand relationships during the quarter delivering.

Delivering innovative technology, driven tools and solutions designed to meet the unique needs of our customers.

We wrote $17 billion of new insurance written in the quarter and a slowing housing market, while the persistency of our portfolio increased to 80%.

The recent and sudden rise in interest rates has affected overall mortgage origination volumes. However, our industry is highly correlated with the purchase market and thus we have not been meaningfully impacted by the significant decline in refinance activity.

We also benefit from increased persistency, which has been positively affected by the same rise in rates.

Importantly, 98% of our portfolio as mortgage rates at least 50 basis points below current market rates and we expect this to have a positive impact on persistency moving forward. These.

These factors combined to drive sequential growth in our insurance in force.

Which reached another record at 238 billion, demonstrating the resiliency of our business model.

Yeah.

I've spoken in the past about our commitment to pursuing high quality business that targets the right price for the right risk.

Pricing environment during the quarter remained competitive doll constructive.

Given the increased economic uncertainty, we kept our retention pricing relatively stable, while also making targeted changes to manage our overall risk.

This approach is aligned with our stated goal of pursuing disciplined growth and we remain confident in our ability to write new business that delivers attractive returns and creates value for our shareholders across economic scenarios.

We continue to prudently manage our risk and the credit quality of our portfolio remains strong.

Weighted average FICO score in the quarter was 743 and the average loan to value ratio was 93% and.

And thinking about portfolio risk going forward.

Note that we have written large 2020, and 2021 books that have experienced substantial increases in equity as a result of our strong home price appreciation trends a dynamic that should both support increased persistency and decrease risk.

This was evident in the second quarter as we saw a record 70% of our policies realized mark to market equity of at least 20%.

In addition, and as expected our layered risk concentration decreased sequentially from one 6% to one 5% of risk in force.

About $96 million reserve release in the quarter improved our loss ratio to negative 26% and was the result of our risk management and loss mitigation efforts.

Consumers and strong home price appreciation, leading to favorable resolution of long term forbearance plans.

Total delinquencies continue to decline on a year over year basis in the second quarter was the eighth consecutive quarter in which cures outpaced new delinquencies.

New delinquencies also improved sequentially in line with seasonal trends.

We ended the second quarter with 93% of our risk in force covered by credit risk transfers and our pmiers sufficiency ratio of 166% or $2 billion of sufficiency.

During the quarter, we further enhanced our financial strength and flexibility by entering a $200 million revolving credit facility at attractive terms.

Our strong regulatory capital levels robust balance sheet and access to capital puts us in an excellent position with enhanced financial flexibility.

Our P Myers performance speaks to our execution against another key aspect of our strategy.

Turning a strong balance sheet to support our existing policyholders, while also pursuing a balanced approach to capital allocation.

During the quarter, we paid our inaugural quarterly dividend with the next dividend expected to be paid in September subject to requisite approvals economic and market conditions and business performance.

In addition to our quarterly dividend, we expect to return additional capital to shareholders by the end of 2022 subject to requisite approvals and based on assessment of economic conditions market dynamics and business performance.

Dean will discuss this in more detail in a few minutes.

I'll now take a moment to discuss recent market dynamics.

We believe the market continues to be supportive for our industry. However, we recognize that the sudden and significant increase in rates and the potential impact of inflation along with the continued economic uncertainty will drive near term volatility.

Having said that there are also areas, where we see strength.

The labor market is robust household savings remains above pre pandemic levels and there has been homeowner equity built up through strong home price appreciation.

In addition recall that a major driver of current housing market dynamics. During this cycle has been the housing supply wild.

While there is evidence that the inventories have started to improve in some areas. They remain at low levels, providing an offset to the reduction in demand, we have seen from higher rates and affordability pressure.

Finally, the demographic trends driving demand haven't changed first time homebuyers will continue to provide a tailwind over the long term as a significant number of new potential homeowners reached peak age for home buying.

The dynamics affecting all of our markets remained multiple <unk> complex and we will continue to plan for all scenarios.

Two our credit risk transfer program and other initiatives we have.

Have significantly reduced the risk embedded in our portfolio, while also providing our balance sheet with additional production capacity that we will continue to utilize to drive prudent growth in our insurance in force.

For example, we have increased prices in certain geographies, we believe are potentially more vulnerable to weaker economic conditions should they develop.

And for loans with certain stock risk factors.

As part of our ongoing monitoring of consumer and housing metrics, we will continue to evaluate future actions.

To be clear we are taking these actions because we are committed to responsible growth not because of performance.

Overall, we are entering the second half of the year operating from a position of confidence with the right strategy.

Zillionth well positioned business.

<unk> balance sheet and substantial access to capital the long term drivers of our markets remains favorable despite near term dynamics that are creating the potential for multiple scenarios.

Our focus at <unk> is to ensure we are operating under a framework that allows us to continue to successfully execute in all of them and create value for our stakeholders.

With that I'll turn it over to deep.

Thanks, Rob Good morning, everyone. We delivered very strong financial results in the second quarter of 2022.

GAAP net income was $205 million or $1 25 per diluted share as compared to <unk> 80 per diluted share in the same period last year and $1 <unk> per diluted share in the first quarter of 2022.

Adjusted operating income in the quarter was also $205 million or $1 26 per diluted share as compared to 82 per diluted share in the same period last year and the dollar one cent per diluted share in the first quarter of 2022.

Adjusted operating return on equity was approximately 20%.

Turning to key revenue drivers New insurance written was 17 billion for the quarter down sequentially from 19 billion in the first quarter and down from 27 billion in the second quarter of 2021.

Driven by lower originations given the recent increase in interest rates.

As Rohit referenced while new insurance written is coming off historically high levels in 2020, and 2021, it remains robust and above pre pandemic levels for the quarter.

New insurance written for purchase transactions made up 96% of our total <unk> in the quarter up from 92% last quarter.

In addition monthly payment policies made up 93% of our quarterly new insurance written up from 91% last quarter.

With rising interest rates persistency increased again during the second quarter to 80% up from 76% last quarter and 63% in the second quarter of 2021.

In addition to rising mortgage rates the increase in persistency was driven by a continued decline in the percentage of our in force policies with mortgage rates above current market rates.

Given the rise in interest rates throughout the second quarter, we would expect persistency to improve prospectively.

Which is a positive for the embedded value of our in force insurance portfolio of which 87% is comprised of monthly policies.

Insurance in force reached a new record of 238 billion up 9% from the second quarter, a year ago and up 2% sequentially. The.

The year over year increase was driven by the combination of new insurance written and increased persistency.

As reflected on page 11 of our earnings presentation, our base premium rate of $42 five basis points was up two basis points sequentially and down $2 five basis points year over year.

As we've noted before changes the base premium rate can deviate from the long term trend in any given quarter driven by changes in new insurance written persistency, the purchase refi mix credit mix and premium refund estimates.

Our second quarter results were consistent with this and are not indicative of a sustained change in the trajectory of based premium rate for the remainder of the year.

As such we are maintaining our guidance of a four basis point decline in base premium rate for the full year 2022.

We will continue to monitor and revised guidance as necessary.

In addition to changes in base premium rate. Our net earned premium rate also reflected lower single premium cancellations and higher ceded premiums in the current quarter.

Net premiums earned were $237 million up 1% sequentially and down 2% year over year the sequential.

The increase in net earned premiums was primarily driven by growth of our insurance in force and the sequential improvement in base rate, partially offset by the lapsing of older higher priced policies as compared to our new insurance written lower single premium cancellations of $8 million in the current quarter and higher seeded premiums in the current quarter.

$20 million from the expanded use of our credit risk transfer program.

Investment income in the second quarter was $36 million up 2% sequentially and 3% year over year, primarily as our larger portfolio was offset by lower bond calls during the quarter and a rising interest rate environment.

Given the rise in rates are new money yields for the quarter increased to approximately four 4% as we invest in the higher rate environment.

In addition, the rise in rates has continued to increase the unrealized losses in our investment portfolio.

We do not however expect to realize these losses as we have the ability to hold these securities to maturity where market values trend at par value.

The average duration on our investment portfolio is less than four years. So the progression to par value occurs over a relatively short period of time.

Turning to credit losses in the quarter were a benefit of $62 million as compared to a benefit of $10 million last quarter and $30 million in the second quarter of 2021.

Our loss ratio for the quarter was a negative 26% as compared to a negative 4% last quarter and 12% in the second quarter of 2021.

The benefit in losses and loss ratio in the quarter was driven by favorable cure performance, primarily on 2020, Covid related delinquencies, which was above our prior expectations and resulted in a $96 million reserve release in the quarter.

Curious on Covid related delinquencies have been aided by favorable resolutions of forbearance programs home price appreciation in our loss mitigation efforts and as a result cumulative cure rates have continued to increase through time.

New delinquencies decreased sequentially to approximately 7800, but increase from year ago levels, driven by the higher new delinquencies from recent large books that have that are aging and going through their normal loss development pattern.

The decrease in new delinquencies from the prior quarter is in line with pre pandemic seasonality levels.

In addition, our new delinquency rate for the quarter was <unk>, 8% consistent with pre pandemic levels and reflects the continuation of positive credit trends.

Our claim rate estimate on new delinquencies for the quarter was approximately 8%.

Second quarter total delinquencies of approximately 19500 and the associated delinquency rate of two 1% represent ongoing improvement in both measures driven by the continuation of cures outpacing new delinquencies.

<unk> in the quarter of approximately 10800 decreased slightly as compared to the prior quarter and represented a cure ratio of 138%.

Additionally claims activity remained low with under 100 claims totaling approximately $5 million paid in the second quarter.

The embedded equity position of our delinquent policies remains substantial with approximately 97% of our delinquencies as of the end of the quarter, 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 of the frequency of claims and the potential future loss for delinquencies that ultimately progress to claim and we saw additional evidence of this trend during the quarter.

Turning to expenses operating expenses for the quarter were $61 million and the expense ratio was 26%.

As compared to $57 million and 24% respectively. In the first quarter of 2022, and $67 million and 27% respectively in the second quarter of 2021.

We still feel comfortable with our total year guidance of $240 million $240 million in expenses for 2022.

Moving to capital and liquidity, our Pmiers sufficiency remained very strong in the second quarter at 166% or approximately 2 billion above the published P Myers requirements compared to 176% or $2 3 billion in the first quarter of 2022.

This reflects the approximately $243 million distribution made by our flagship insurance subsidiary <unk> mortgage insurance Corporation in the quarter to our holding company.

At quarter end, we had approximately $1 5 billion of <unk> capital credit and approximately $1 7 billion of loss coverage provided by our credit risk transfer program.

Approximately 93% of our insurance in force is covered by our credit risk transfer program at quarter end.

During the quarter, we entered into a five year 200 million senior unsecured revolving credit facility, which further enhances our financial flexibility.

In addition, our conservative debt to capital ratio of 15% provides meaningful incremental borrowing capacity that we don't foresee meaningful change in our capital structure at this point.

Post quarter close we received an upgrade from Moody's to be double a one from <unk> to <unk>.

Pleased that the strength of our performance and the actions we've taken to enhance our financial position continue to be recognized in the marketplace.

As Rohit mentioned, we made our inaugural quarterly dividend payment during the quarter, which was $23 million on a full year basis, we remain committed to returning $250 million of capital to shareholders, which includes both quarterly dividends and return of excess capital subject to requisite approvals.

So to recap the quarter, we generated very strong results in a dynamic market and macroeconomic environment.

As we enter the second half of the year, we believe market conditions remain supportive overall and we remain focused on achieving our goals, while maintaining the flexibility to adapt to changes as necessary our.

Our strategy and competitive position combined with our balance sheet strength and financial flexibility position us to continue creating value for our shareholders.

With that I'll turn it back to Rohit.

Thanks, Dean at a time when home price appreciation and increases in the cost of living on pressuring people's ability to save for a down payment to purchase a home private mortgage insurance becomes an even more important tool for homebuyers seeking to qualify for a mortgage.

We play an important role in increasing the accessibility affordability and sustainability of homeownership and remain committed to providing an industry leading set of solutions to help consumers achieve this goal.

And the first six months of 2022, we have helped 105000 homebuyers qualify for a mortgage who otherwise might not have.

As we enter into an uncertain time, our industry is playing a vital role in supporting families and many other stakeholders in the housing sector.

And we'll continue to seek opportunities to contribute to the safety and soundness of the industry.

All in all it has been a very strong first half of the year and I'd like to again, thank Diana team for their contributions to our performance.

We believe we are well positioned for the second half of 2022 and beyond with record insurance enforced and a strong balance sheet. We are confident in our business and in our ability to achieve our goals.

We are now ready to take your questions operator.

<unk>.

We will now begin the question and answer session.

I ask a question you May press Star then one on your Touchtone.

Telephone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Mihir Bhatia from Bank of America. Please go ahead.

Good morning, and thank you for taking my questions I wanted to start with maybe just you mentioned that you'll have taken some pricing actions recently.

Just more generally I guess.

Is that like really the main lever you are using to prepare for the for a downturn or a slowdown in the economy just trying to understand what has changed that led you to think that is it changes in Europe and the consumer outlook consumer finance outlook is it changes in HPA.

<unk>.

What are you seeing that's prompting you to take some of those actions, which obviously everyone's very focused on most of them will there be a recession, how will that affect housing. So just trying to understand what you're seeing there. Thank you.

Yes. Good morning, there. So very good question, let me kind of start by saying as I stated in my remarks that we are still seeing a good balance in the housing market and a market that is constructive for our industry.

But at the same time, we are acknowledging the pressure that the consumer is facing a homebuyer is facing from sudden and sharp increase in mortgage rates home prices that have continued to go up and at the same time brought inflation on the other side, we continue to see consumers, having savings that are still higher than pre pandemic level.

We see a very strong labor market and a.

A big driver in the last 12 months 18 months has been a shortage of housing supply which continues to be at two six months.

Across the country. So I would say that's kind of how we see the housing market as it stands right now but at the same time, given the macroeconomic factors the geopolitical risks that the country and the world is facing we believe that we are in an environment that has more uncertainty moving forward.

So essentially our pricing action as you mentioned, both in terms of keeping our pricing and our risk base engine generally flat in the quarter and then beginning to increase pricing in certain stock risk factors and certain geographies was driven by the fact that those areas could be more vulnerable in the event that then.

Environment deteriorates to be very clear. This is not driven by performance concerns. This is driven by making sure that we are bringing our portfolio.

Closer to the core as we think about that portfolio of navigating through a variety of scenarios and that is just one tool. We have in here I think if you look at our broader portfolio.

As I mentioned and Dean mentioned, our insurance in force was written in a very good credit policy environment very good underwriting environment and our largest books in 2020 in 2021 have meaningful home equity built in front of them. So.

So 90% of our portfolio has 10% equity 70% of our portfolio has 20% equity for newer books I talked about the pricing actions.

We continue to use our credit risk transfer program, we did two transactions in the first half at attractive terms.

Which has driven 93% of our insurance in force being covered by our CRT program and lastly, Meir.

I don't want to forget the actions we are taking to also bolstered our balance sheet and our ratings.

So we got our second upgrade from Moody's since our IPO. We also put in place a credit facility recently that gives us additional flexibility and we continue to operate.

With a low financial leverage which gives us additional flexibility in the event we need it. So I think that's how we think about different factors.

On how to position our business for whatever scenario, playing through but from a consumer perspective, it's not that we are seeing anything in our performance I think we talked about our actual delinquency rates being at pre pandemic levels. The books. We are writing is kind of higher than 2019 levels. So thats, how we look at the environment.

Got it. Thank you that's very helpful. And then just maybe.

You mentioned.

Bolstering our balance sheet, Eric for more flexibility and of course the ratings upgrade so maybe just overall.

Our capital allocation priorities changed.

How are you thinking about capital return because it's so dividends and bolstered by a special dividend cuts around share buyback or although.

Investing in growth maybe beyond <unk>, just how are you thinking about all of those things.

Yes my questions. Thank you.

So let me just start by saying that the actions we.

We have taken a much more on how we think about our business long term so putting in place. The credit facility was something that was part of our journey post IPO. So we put that in place.

And we had also talked about keeping our financial leverage.

No.

As we think about our business. So those were just long term priorities and I would start by saying that we are not changing our capital allocation priorities and let me ask Dean to talk about the capital allocation priorities that we've shared in the past, yes, as Rohit mentioned the here.

Returning capital to shareholders balanced with growing our business and our risk management priorities kind of remains the key.

Key framework key priority for us as we look to drive shareholder value through time, we mentioned on the call that we're committed to returning $250 million of capital to shareholders. This year that includes both quarterly dividend as well as a return of excess capital.

Obviously, obviously subject to requisite approvals economic conditions and business performance.

If we if we think about.

Excess capital in the forms that that might take I think that we continue to believe that.

Special dividends and share buybacks are available to us as a future means to return capital to shareholders. I think we have to acknowledge that we do have a limited float constraint. So any share buyback program would need to be but I call it tailored to.

Our facts and circumstances, but we certainly believe that.

That's a possibility.

Tool in our toolbox so to speak.

So that's that's effectively how we are thinking about that and I guess, the last thing I should say our share buybacks obviously.

That needs to be considered in the context of intrinsic value and the current share price as we looked in the SaaS nature of and the benefits of potentially implementing a program like that so that's how we think about it here and hopefully that gets at your question.

Yeah no. Thank you thanks for taking my questions.

The next question here and the next question.

<unk> comes from Doug Harter from Credit Suisse. Please go ahead.

Hi, This is John Keller Chelsea on for Doug first question I, just kind of wanted to get your thoughts around reserve activity for the rest of 'twenty two given the favorable COVID-19 cures and HBA we've seen.

Yeah. So good question.

Much like you said in the current quarter.

We continue to see.

Cumulative cure rates, especially on 2020 COVID-19 related delinquencies exceed our original expectations coming into the quarter that was the primary driver of the $96 million reserve.

A reserve release in the quarter does.

That's your activities and largely driven by the favorable resolution forbearance loans in forbearance home price appreciation I think is also a mitigate and then our loss mitigation efforts.

Again, those things are the underpinning if you will of the.

The elevated share performance that we've seen relative to expectations.

In terms of the go forward perspective, much like at any quarter point, our reserves represent our best estimate.

Of ultimate claims on our existing delinquencies.

That said, if we continue to see favorable performance.

Relative to the expectations that underlie our reserves who will.

Consider that.

As we think about future reserve activities I think just stepping back and maybe elevating the discussion. The approach we've tried to take on from a reserving perspective is one of being measured one of being prudent.

One of really trying to ensure.

That any reserve actions, we're taking in the quarter don't get unwound in the future by the necessity of having to post reserves go forward. So that's the kind of overarching approach we're taking in the.

The one I expect us to continue to take go forward.

Alright, thank you.

The next question comes from Tom Amick joined from <unk>. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions here.

So you mentioned some increased pricing in certain geographies that might be more susceptible to perhaps correction in prices.

Any way to frame the magnitude or just even the percentage of geographies that those pricing changes might have applied to.

Yes, Tommy very good cushion, so I would say.

That is part of our commercial strategy. So it's a.

Something that we are not going to talk about on a public call I can't give you an idea that if you'd look at.

Just risk attributes that are more vulnerable.

The unfavorable economic environment, that's how I would frame kind of where we took actions both from a stock risk factors as well as.

From a geographic perspective, so on geography, an easy example would be Boise Idaho.

It's a small it's a very small portion of our insurance in force, but the dynamics in that area basically make that an area that has had very high appreciation in the last year or so and in the event that Glen Walter tone cannot be supported in terms of the local housing market.

So I would say if you look at our <unk>.

Disclosures in our quarterly financial supplement you'll be able to see concentration moving around those are driven by actions. We have taken in terms of moving pricing in the right places.

Okay, and with those price increases why wouldn't there be an impact on the full year based premium guide that you gave for where those either already kind of factored into the full year guide last quarter or maybe is there some offset that we're not thinking about.

Yes, so Tommy I would just think about the niwa right and the size of our insurance in force portfolio. So the premium guidance. We have given is on our entire insurance enforce.

Premium rate and the NSW, we wrote as an example in the most recent quarter was $17 5 billion. So just think about the impact of $17 $5 billion or the accumulated <unk> and the year on a portfolio that was $238 billion.

So it's not that it won't have an impact but that impact plays through over a period of time.

So we are still comfortable with the guidance, we gave on the base premium rate of four basis points.

Sure.

Walk from fourth quarter, 21% to fourth quarter 2002.

That makes sense. Thank you.

Okay.

Again, if you have a question. Please press Star then one.

Our next question comes from Geoffrey Dunn from Dowling and partners. Please go ahead.

Thanks, Good morning.

<unk>.

First question.

Are we ever going to see a material acceleration in paid claims as you know the forbearance plans truly go away or has it just been that successful where we're just going to see a gradual climb eventually.

Versus maybe what we would've thought a year ago.

Yeah, Jeff Good question, Thanks for it.

So obviously claim activity in the current quarter, a very de Minimis 90 claims a $5 million of claims paid I think in our discussions with Servicers.

There is still.

Adjusting to.

The elimination of the foreclosure moratorium working through the CFPB requirements for.

Yes.

For homeowners assistance and the types of solutions that they need to bring to bear prior to foreclosure.

I think when they think of what we've heard at least from Servicers is that that activity could start to pick up in.

In the beginning of 2023, maybe maybe at earliest fourth quarter this year, but more probably more likely.

The beginning of 2023.

The expectation for when claims to the extent they do develop are likely or more likely to develop.

Out of this COVID-19 period.

Okay.

And then I.

Wanted to ask a bigger picture question on reserving.

Your answer in that kind of feeds into obviously.

What we've seen with Covid.

No.

<unk>, which was a reaction to the great recession as a lot more proactive efforts, particularly on the political front to keep people in their homes forbearance plans et cetera.

In addition, if we're going in a recession.

You have a book of business and I'm not sure we've ever seen before 3% contract rates on the majority of the book.

Equity buildup, how do those factors feed into how you think about your reserving assumptions. When we eventually encounter. This next wave of credit pressure, it's not something you have historical trends for us. So how do you translate that into how you reserve incrementally over the next two three years.

Yes.

Over the next two three years, Okay. Let me answer it in the here and now real quick and then I'll pivot to the next two to three years. So much like I said, Jeff on the earlier question.

We're taking a measured approach to reserving what we believed to be a prudent approach.

With an eye towards making sure that any reserve actions are unwound later on by having to repost reserves and I do think that contemplates both.

The performance trends that we're seeing as well as the macroeconomic environment that we're operating in and that which we expect to operate in a prospectively.

So I think Thats, maybe you see some of that come through and.

The pace at which we're taking reserving actions today I think your question.

Prospectively.

Yeah.

I think go forward, we could see the potential for some competing dynamics affecting credit performance, where we have as rohit kind of described a very large well underwritten high quite high quality portfolio with meaningful embedded HPA, but that begin to age through.

A pretty complex at least as it stands now and potentially pressured macroeconomic environment and as you kind of laid out I think that could.

Produced multiple pads multiple scenarios.

For both the economy and portfolio credit performance overall.

And our focus has been less on predicting the discrete scenario.

And much more about taking actions now to position us.

Really put us in a position of strength for whatever scenario does come down the pike.

So I think the actions that really hit reference raising price, increasing our financial flexibility through revolver through programmatic CRT use through additional cash buffers through operational readiness I mean, those are all the things that we're focused on less about <unk>.

Prescriptive exactly what scenario and what credit performance is going to come in more about being prepared for again kind of whatever comes down the pike.

Okay. It sounds like if there is a prudent approach here, we might move into like a almost a property casualty type of reserving model, where prudent reserving has a stronger upfront, but all these changing dynamics, maybe create a more consistent possibility for development down the road.

That surprised us.

I think Jeff that's a good way to think about it.

Obviously, our reserving methodology relies on actual experience what we might have to do depending on the scenario that plays out is not rely on the cobot playbook because I think this was a unique environment and a unique prices.

But actually look at which previous downturns look similar to what we are going through and then to your point. There are so many mitigating both in our performing book in terms of good credit underwriting an embedded equity and then even in our delinquent book, we're 97% of our delinquencies have 10% equity in front of them.

So I think we will have to marry some approaches there to figure out what's the right reserving approach for us.

And Jeff I would say, we've always relied on both experience and judgment and establishing reserves. So I don't think thats going to be any different how thats applied may be different based on facts and circumstances.

Okay. Thank you.

Thank you.

The next question comes from Rick Shane from JP Morgan. Please go ahead.

Hey, guys. Thanks for taking my questions.

Youre going to see an interesting bifurcation in your portfolio.

Between vintages, we think about the 2020 'twenty one vintages that are likely to have incredibly high persistency and a lot of embedded.

Home price depreciation versus the 22 vintages, where ultimately there's going to be an opportunity.

All likelihood for refinance so shorter.

Operations, and obviously less HPA.

You've talked a little bit about tightening some of your programs, but I'm curious if there were other <unk>.

Strategic or tactical approach is when you think about our portfolio that sort of becomes.

Bar Belled in terms of.

Duration does it make sense for example to do more single premium in this environment where.

Knowing that the.

Knowing but with the possibility that those.

Policies are going to be a lot shorter it becomes a lot more economically attractive to do that.

Yes, good morning, Rick So very good question I would say.

While there is a bifurcation between 2000 22020 book 2021, both of them, having lower interest rates as well as more embedded equity in 2022, obviously being relatively new in terms of embedded equity I would start by saying that there are more similarities between books that they are all very well underwritten books in terms of quality of care.

And even for the first half of 2022.

The interest rates on that book.

We're still kind of below current market rates, just because theres a lag between market rates and when that loan closes then lands on our book.

So I think we think about those books performing in our expected cases in some.

Alternate cases, as they develop and to your point as we think about places where we find the right value. We do look at all of those factors that under different scenarios and for different books.

<unk> economic scenario can play out and where do we find the most value so without talking about our commercial strategy.

I would just say that we look at points, where we can maximize our value of new business, which is a representation of both returns as well as.

Kind of those returns being above our cost of capital and the volume we can get on those buckets. So the approaches exactly in concert with what we are talking about and then in addition to that our programmatic credit risk transfer program also makes sure that as we onboard books.

We are actually buying coverage on all books, whether they have embedded equity or they don't have to make sure that if one of the ultimate scenario plays out then we also have loss coverage that is off balance sheet.

Got it okay and with that in mind is there any difference in terms of.

How are you.

In terms of how you think about.

Alan or anything like that given the potentially lower persistency.

Yes, I think Rick we really think about our credit risk transfer program is programmatic so I think.

<unk> less variation.

As it relates to.

The potential weighted average life on the policy and more about getting programmatic coverage not having to pick winners and losers as it relates to book years simply getting coverage for IFF and potentially win a stress emerges. So I think thats, probably more on the CRT side the kind of.

We take.

Which maybe differs a little bit on the front end commercial side, where we're looking at the right rate risk for the right price.

Got it okay very helpful. Thank you guys.

Thank you Rick.

Again, if you're a question. Please press Star then one.

Our next question comes from Ryan Gilbert from <unk>. Please go ahead.

Yes.

Hi, Thanks, Good morning, and Dean I was hoping you could expand on your comment around market conditions remaining supportive overall youre talking about like the production volume that youre seeing coming through our credit performance any any additional color there would be helpful.

Good morning, Ryan This is Robert I'll take that one so I would just say that from a production perspective, we launched $17 $5 billion of new insurance written in the second quarter.

A slowing housing market, but.

But at the same time <unk> continues to be in line with our higher than pre pandemic levels, and obviously 2020, and 2021 saw elevated levels of originations and the entire mortgage market just with interest rates being historically low but as we compare our current production in the first half we have written $36 billion of new insured.

<unk> written for.

For the same time period in 2019 as an example, we wrote $25 billion in production.

So from a market rent perspective, we see the volumes returning to pre pandemic levels.

To a certain degree these are dependent on other factors. The production levels are dependent on other factors like mortgage rates. We saw mortgage rates go up pretty high towards the end of June in the last few weeks they have actually navigated down to five 3%, which has a direct impact on <unk>.

Consumer sentiment in terms of buying homes as well as the affordability index. So we are monitoring all of those factors and we do think that the volume in 2022 is trending to pre pandemic levels and that's normal to expect we couldnt have sustained the levels in 2020 in 2021 forever.

And I think what we are focused on as much more of the fundamental trends long term. So if you think about the factors we have talked about from a first time homebuyer perspective, we have a lot more Americans getting to the average first time home buying age in the next four years than there have been in the last decade, whether those consumers that are buying a home next month.

Next quarter or early 2023, that's tough to tell because that is dependent on the macro factors I described.

But the fundamental trend for the industry continue to be very strong and I think one benefit just to point out less related to new insurance written we have seen a benefit in our persistency within gross rates being higher our insurance in force, which is majority monthly policies is sticking around longer which gives us more stability in our premiums.

Okay, great. Thanks that was helpful.

My second question is on reinsurance as we move into the second half of the year do you feel like.

You have to reinsurance that you need for the full year in place or.

Would you like to add additional reinsurance in the second half and maybe you could just update us on.

Where you're seeing best execution between traditional reinsurance versus island markets. Thanks.

Yeah, Ryan good question so much like.

The prior answer I would just come back and reference that we're a programmatic.

User source or of.

<unk> credit risk transfer protection.

And so I would expect us to continue to access.

Either the traditional reinsurance market or the capital markets I think one of the benefits of our CRT design is we do have diversification of capital sources, which allow us to kind of point that engine towards.

The best execution, given the prevailing.

Market dynamics the capital markets have.

Previously gapped out a little bit I think they still remain pretty wide relative to <unk>.

Recent history and.

We'll find out as we enter into the traditional reinsurance market how competitive it is with the capital market, but my expectation just from historical is when there is any volatility or variation or disruption in the market. The capital markets are early on that disruption and probably gap out a little wider than the traditional.

Reinsurance markets stay.

Stay a little bit more stable.

I will give you some sense of probably where we're focused at least in the.

The here and now and the bigger point is we will continue to be.

Our programmatic user of our credit risk transfer program.

Okay. That's helpful. Thanks very much.

Thank you.

This concludes our question and answer session I would like to turn the conference back over to Rohit Gupta for any closing remarks.

Perfect. Thank you. Thank you all we appreciate your interest in <unk> and look forward to speaking with you throughout the year have a good day.

Conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good morning, and welcome to the enact second quarter 2022 earnings conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Daniel Cool. Please go ahead.

Rohit will provide an overview of our business our performance and progress against our strategy.

Dean will then discuss the details of our second quarter results before turning the call back to Rohit for closing remarks.

After prepared remarks, we will take your questions.

The earnings materials, we issued after market close yesterday contained in <unk> financial results for the second quarter of 2022.

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 Mark quarterly results.

We undertake no obligation to update or revise any such statements as a result of new information.

Also please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filing on our website.

With that I'll turn the call over to Rohit.

Thank you Daniel good morning, everyone and thank you for joining us.

Second quarter was another strong period of performance for an act.

Continued execution of our strategy combined with reserve releases due to elevated cure activity resulted in record adjusted net operating income of $205 million or $1 26 per share.

Up 54% from the same period last year and our return on equity of 20%.

I am proud of how we have continued to navigate this environment and would like to thank our team for all their great work.

During the quarter, we continued to enhance and act competitive differentiation, while maintaining strong capital levels and delivering attractive risk adjusted data.

Beyond our record results Moodys recent decision to upgrade and add from <unk> to <unk> one is.

Additional evidence of our continued success.

The upgrade enhances our ability to compete in the market by creating additional opportunities for customer engagement to support our production goals.

On this front, we continued to win new business and expand relationships during the quarter delivering.

Delivering innovative technology, driven tools and solutions designed to meet the unique needs of our customers.

We wrote $17 billion of new insurance written in the quarter and a slowing housing market, while the persistency of our portfolio increased to 80%.

We also benefit from increased persistency, which has been positively affected by the same rise in rates.

Importantly, 98% of our portfolio as mortgage rates at least 50 basis points below current market rates and we expect this to have a positive impact on persistency moving forward. These.

These factors combined to drive sequential growth in our insurance in force, which reached another record at $238 billion.

Demonstrating the resiliency of our business model.

I've spoken in the past about our commitment to pursuing high quality business that targets the right price for the right risk.

The pricing environment during the quarter remained competitive doll constructive give.

Given the increased economic uncertainty, we kept our rate engine pricing relatively stable, while also making targeted changes to manage our overall risk.

We continue to prudently manage our risk and the credit quality of our portfolio remains strong.

The weighted average FICO score in the quarter was 743 and the average loan to value ratio was 93%.

And thinking about portfolio risk going forward I would note that we have written large 2020 and 2021 books that have experienced substantial increases in equity as a result of strong home price appreciation trends a dynamic that should both support increased persistency and decrease risk.

Was evident in the second quarter as we saw a record 70% of our policies realized mark to market equity of at least 20%.

In addition, and as expected.

Our layered risk concentration decreased sequentially from one 6% to one 5% of risk in force.

Our $96 million reserve release in the quarter improved our loss ratio to negative 26% and was a result of our risk management and loss mitigation efforts.

Consumers and strong home price appreciation, leading to favorable resolution of long term forbearance plans.

Total delinquencies continue to decline on a year over year basis, and the second quarter was the eighth consecutive quarter in which <unk> outpaced new delinquencies.

New delinquencies also improved sequentially in line with seasonal trends.

We ended the second quarter with 93% of our risk in force covered by credit risk <unk> and P. Myers sufficiency ratio of 166% or $2 billion of sufficiency.

During the quarter, we further enhanced our financial strength and flexibility by entering a $200 million revolving credit facility at attractive terms.

Our strong regulatory capital levels robust balance sheet and access to capital puts us in an excellent position with enhanced financial flexibility.

Our <unk> performance speaks to our execution against another key aspect of our strategy.

Maintaining a strong balance sheet to support our existing policyholders, while also pursuing a balanced approach to capital allocation.

During the quarter, we paid our inaugural quarterly dividend with our next dividend expected to be paid in September subject to requisite approvals economic and market conditions and business performance.

Dean will discuss this in more detail in a few minutes.

I'll now take a moment to discuss recent market dynamics.

Having said that there are also areas, where we see strength.

The labor market is robust household savings remains above pre pandemic levels and there has been homeowner equity buildup through strong home price appreciation.

In addition recall that a major driver of current housing market dynamics during the cycle has been the housing supply.

Finally, the demographic trends driving demand Hasnt changed first time homebuyers will continue to provide a tailwind over the long term as a significant number of new potential homeowners reached peak age for homebuyers.

The dynamics affecting all of our markets remained multiple and complex and we will continue to plan for all scenarios too.

Two our credit risk transfer program and other initiatives, we have significantly reduced the risk embedded in our portfolio. While also providing our balance sheet with additional production capacity that we will continue to utilize to drive prudent growth in our insurance in force.

For example, we have increased prices in certain geographies, we believe are potentially more vulnerable to weaker economic conditions should they develop.

And for loans with certain stock risk factors.

As part of our ongoing monitoring of consumer and housing metrics, we will continue to evaluate future auctions to.

To be clear we are taking these actions because we are committed to responsible growth not because of performance.

Overall, we are entering the second half of the year operating from a position of confidence with the right strategy, a resilient well position business, a strong balance sheet and substantial access to capital.

The long term drivers of our markets remains favorable despite near term dynamics that are creating the potential for multiple scenarios and our focus at <unk> is to ensure we are operating under a framework that allows us to continue to successfully execute and all of them and create value for our stakeholders.

With that I'll turn it over to deep.

Thanks, Rob Good morning, everyone. We delivered very strong financial results in the second quarter of 2022.

GAAP net income was $205 million or $1 25 per diluted share as compared to <unk> 80 per diluted share in the same period last year and $1 <unk> per diluted share in the first quarter of 2022.

Adjusted operating income in the quarter was also $205 million or $1 26 per diluted share as compared to 82 per diluted share in the same period last year and $1 <unk> per diluted share in the first quarter of 2022.

Adjusted operating return on equity was approximately 20%.

Turning to key revenue drivers New insurance written was 17 billion for the quarter down sequentially from $19 billion in the first quarter and down from 27 billion in the second quarter of 2021.

Driven by lower originations given the recent increase in interest rates.

As Rohit referenced while new insurance written is coming off historically high levels in 2020 in 2021, it remains robust and above pre pandemic levels for the quarter.