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

Welcome to our first 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 first quarter results before turning the call back to Rohit for some closing remarks. After prepared remarks, we will take your questions. The earnings materials we issued after market closed yesterday contains Enact's financial results for the first 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.ir.enactmi.com. under the section marked 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 materially differ. 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 Web site. Also, please keep in mind the earnings materials and management's prepared remarks today will 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 Web site. With that, I'll turn the call over to Rohit.

Thank you, Daniel. Good morning, everyone, and welcome to our first quarter earnings call. The first quarter marked an excellent start to 2022 for Enact. We grew our portfolio 10% year-over-year; initiated a quarterly dividend program; and generated strong operating and financial results, including adjusted operating income of $165 million or $1.01 per share and return on equity of 16.2%. Importantly, we achieved these results while also maintaining our commitment to balance sheet strength and strong risk management. We continue to execute on our strategy in a dynamic market environment. We strengthened and deepened relationships with customers, providing them with innovative solutions and prudently pursued opportunities to win new business. We also continued to prioritize a strong balance sheet that provides financial flexibility to support our existing policyholders, invest for growth and return capital to shareholders. We have said that one of the key benefits of our IPO would be the ability to strengthen and expand our client relationships as a result of our enhanced financial strength and independence. And last quarter, we noted that we had reactivated our relationship with a key customer. We've seen this momentum continue in the first quarter as we have either deepened or activated relationships with a substantial number of targeted customers. This progress contributed to our strong insurance in force performance in the first quarter of 2022, up 10% from a year ago to record levels as we continue to write profitable new business. We have told you that we are committed to pursuing high-quality business as we target the right price for the right risk with new business pricing yielding low to mid-teen returns in 2022. During the quarter, we saw pricing on new insurance written continue to stabilize with fewer and lower magnitude of pricing moves in the market. The high…

Thanks, Rohit. Good morning, everyone. We delivered very strong financial results in the first quarter of 2022. GAAP net income was $165 million or $1.01 per diluted share as compared to $0.77 per diluted share in the same period last year and $0.94 per diluted share in the fourth quarter of 2021. Adjusted operating income was also $165 million or $1.01 per diluted share in the quarter as compared to $0.77 per diluted share in the same period last year and $0.94 per diluted share in the fourth quarter of 2021. Turning to key revenue drivers. New insurance written was $19 billion for the quarter, in line with our expectations and down sequentially from $21 billion, primarily driven by seasonally lower purchase originations. New insurance written for purchase transactions made up 92% of our total NIW for the quarter, up from 90% last quarter. In addition, monthly payment policies remained at 91% of our quarterly new insurance written consistent with last quarter. Insurance in force reached a new record of $232 billion, up 10% from the first quarter a year ago and up 2% sequentially. The year-over-year increase was primarily driven by strong new insurance written and increased persistency. Risk in force at quarter end was $58.3 billion, up from $56.9 billion at year-end and $52.9 billion in the first quarter of 2021, primarily driven by our growing insurance portfolio. With increasing interest rates, we saw an increase in persistency during the first quarter. Persistency for the period improved to 76%, up from 69% last quarter and 56% in the first 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. Revenues for the quarter were $270…

Thanks, Dean. All in all, a very strong start to the year. I'd like to thank each and every member of the Enact team for their contributions to our performance. Our company is well positioned for 2022 and beyond as we continue to build on the momentum we have generated. With record insurance in force and a strong balance sheet, we are confident in our business and in our ability to successfully navigate this dynamic market. Our role in helping families achieve their dreams of homeownership has become even more important in today's market environment. In the first quarter, we made it possible for 55,000 home buyers to qualify for a mortgage who otherwise might not have while also working hard to keep others in their homes through loan modifications. We are very excited by and proud of the role we play in this market and remain committed to working with Capitol Hill, the administration, trade groups and consumer advocates to drive solutions that increase the accessibility, affordability and sustainability of homeownership. We are now ready to take your questions. Operator?

[Operator Instructions] Our first question will come from the line of Rick Shane from JPMorgan.

Look, as we see the market evolving in terms of greater competition for originators as market -- as volumes fall, Curious if you're seeing any distortions either in terms of pushback on pricing or more importantly in terms of more aggressive loan structures.

So I would say having seen some competition in the market in the origination market space in the last 4 months as interest rates have gone up by almost 200 basis points, we have not seen an impact of that coming over to the MI industry, either in terms of asking for more pricing competition on the MI price or in terms of credit policy or loan structuring. So at this point of time, we believe that those dynamics continue to remain similar to what we have seen in the past.

And when you think of sort of analogs historically, where do you think we are? What is the most comparable time frame to think about in terms of the competitive landscape and the evolving environment?

And Rick, when you say competitive landscape, you are referring to MI industry or origination at broad similar to your first question?

Actually, probably both. I hadn't bifurcated it in the way that you're describing. But I think it's important to consider both.

So on the origination market, it's probably not our place to comment on what the competition dynamics are and what can it be comparable to. I would say in the MI marketplace, as I said in my prepared remarks, we continue to see stabilization in pricing. We saw fewer and lower magnitude of pricing moves in the market in the first quarter. So that gives us confidence that we are approaching that point of stabilization. And in terms of finding a comparable point historically, I would just say the macro conditions are so different than many of the times we have gone through in the last 2 decades in the industry, that it's difficult to compare the current dynamics to any of the prior economic or kind of industry dynamic time.

Rohit, I appreciate the last comment. I agree with you. I think we're grasping at straws in terms of understanding this environment as well. It's part of what drives the question.

Our next question will come from the line of Doug Harter from Credit Suisse.

Understanding that, as you just said, the environment is different. But how do you think about persistency in particular, the potential for policyholders to cancel their policy given the strong home price appreciation that we've seen?

I'll start off talking about persistency in general. I'll turn it over to Rohit to talk about borrower behavior as it relates to borrower initiated cancels. So just to recap, persistency was up to 76%, up 7 points sequentially and 20 points year-over-year, driven primarily by higher interest rates. I think given the loan origination process and time from borrower qualification on loan closing, there's still about a month or 2 lag between persistency results and really current market conditions. So our Q1 persistency of 76% really doesn't include the recent runoff of mortgage rates that took place throughout February and March. And as a result of that, I think we'd expect future persistency to continue to increase above Q1 levels as we make our way out of the quarter and into the remainder of the year. Rohit, I'll turn it over to you for a borrower.

So Doug, I would just add to Dean's question, one extra point on persistency and then borrowers. I think on persistency, bigger picture, we expect persistency to be a tailwind in our ability to grow our portfolio as our $232 billion of insurance in force stays longer. And it gives us an ability to also hedge against any pressure on market originations just from higher interest rates and higher home prices. Now on borrower-initiated cancels, we believe that it's at least driven by 2 factors and there might be more. First one for borrower-initiated cancels, which is essentially borrower goes out, gets an appraisal, submits that appraisal to their servicer to request a cancellation under HOPA. GSEs have a seasoning requirement, which is a combination of number of years and current loan-to-value requirements. That applies to borrowers to cancel MI based on updated appraisal and updated home price. Second thing is it requires an action on borrower's behalf to spend money, get an appraisal and submit it to their servicer to see if they qualify. So they have to spend anywhere from $200 to $400 on an appraisal, take that initiative and then not have the certainty of that cancellation. So that's how we think about the considerations in terms of actual trends of borrower cancellations. We have seen some volatility in that number recently and in the past, even going back 2.5 years ago. It's a very small portion of our [Indiscernible], and we are keeping an eye on it. So nothing meaningful to report at this point of time outside of that comment.

I guess what is the seasoning requirement just so I'm aware of that.

So Doug, first seasoning requirement is a minimum of 2 years. And between -- if the loan is seasoned and I'm talking about GSE loans, so that would apply to a significant portion of our portfolio. So 2 years minimum. After 2 years but before 5 years, the updated current loan-to-value needs to be 75% for cancellation and then beyond 5 years that drops to 80% current loan-to-value based on appraised value. And given that, just to kind of connect the dots there, if you think about our insurance in-force concentration, the last 2 vintages, '20 and '21 make up 66% of our book, you add 2022 to it. That's another 8 points. So that portion of our book kind of doesn't meet that seasoning requirement or barely meets a seasoning requirements. So that tells you how you think about in-the-money risk on borrower-initiated cancels.

Our next question comes from the line of Bose George from KBW.

Actually, first, just one on the dividend. When we look out into kind of 2023, are we likely to see the dividend more in the form of just a regular dividend or is this the plan to have kind of a base dividend and then sort of a special each year?

I think as you look forward out into 2023, you should expect our return of capital plan to have multiple components, the quarterly dividend that we announced earlier last -- or later last week as well as some other form of return of capital, whether that be a special dividend, a share buyback or a combination of the two.

And then just switching to underwriting. Just given the continued very strong home price appreciation, are you doing anything differently in terms of underwriting more -- the newer loans? Or are loss expectations changing just given strong home price appreciation that's continuing?

We so thanks for the question. I would say we are doing the same things that we do normally in terms of monitoring the market and adjusting our pricing and credit policy actions in alignment with our view of the market, not only at a national level but also at a geographic level and as a reminder, one of the benefits of our approach with risk-based pricing is that we are able to make changes on a much more agile basis as we see market conditions evolve. And as a reminder, in 2020, April and May, within a matter of 5 weeks, we made 3 pricing changes, increasing our price by 20% as we saw the pandemic kind of start to expand in the country and shut down portions of the country. So I would say that's how we think about our agility given the fact that we operate in our opaque, risk-based pricing environment, I'm not going to specifically comment on pricing actions. But I would say from an underwriting perspective, both in mortgage insurance industry and broadly in mortgage finance industry from a qualified mortgage definition perspective as well as regulatory rules the boundaries are much, much better than they used to be pre-global financial crisis. So we have seen credit quality, manufacturing quality still stay at very good levels. And as you saw from our risk metrics, we also continue to see strong portfolio quality from -- whether you look at the FICO score, whether you're looking at debt-to-income ratio. And the metric we published in our earnings presentation is also our layered risk, which continues to be at 1.6% for total risk in force, which is a level we believe can be sustained. And on new insurance written basis, that layered risk metric was actually 0.8%, so even lower than our aggregate risk in force metric. So that gives us confidence that we are putting on the right books with a macro view in mind.

Our next question will come from the line of Geoffrey Dunn from Dowling & Partners.

Just a couple of, I guess, a number of questions to start. Dean, first, is there a possible consideration for another dividend up from the [Indiscernible] this year given your current expectations for how the results can play out?

I think that's I think that would be part of our capital plan for 2022 is some additional potential distribution or dividend, but just proceeds coming from the operating company to the holding company.

And then I've seen some actuarial suggestions out there with respect to where cancellation rates could go or persistency. And I'm curious if you think -- I think it has to go all the way back to 2000, if you exclude the -- Great Recession years to see persistency solidly above 80%, given where we're coming off of rates and the size of the books put on of those rates, does your analysis suggest that we could actually see persistency improved something more like the mid-80s versus kind of that maybe historical norm of 78%, 80%?

It's a little harder to predict that, Geoff. For the reasons you just described, we have the combination of large, newer books written at historically low interest rates coupled with a rising interest rate environment, both of which are reasonably new trends to the industry. I would say just looking at Q1 results of 76% persistency and not having the full weight of interest rates from March -- from February and March embedded in them, I think we could see certainly progression back to the long run normal of 80%. But I think it's fair to think that, that can go above an 80% long-run historical persistency rate.

Just, Geoff, one prospective to add to that. I think the one difference would also be I agree with these comments. The embedded equity in homes is -- or in people's against their mortgages is another thing that is different with that much embedded equity. Do you see people paying off loans more. And we haven't seen that trend in the past, but have seen that in the last 2 years. That consumer savings are up significantly over pre-pandemic time period. The numbers we have seen is close to $2.5 trillion of total consumer savings being higher than pre-pandemic times. And you add home equity to that, does that create some level of prepayments. But I would generally agree with Dean that from what we see in Q1 and the interest rate trend in Q2, we can see these numbers go higher.

And then last, a big picture question on credit. When you think about the ultimate drivers of ultimate credit performance, what is more important, unemployment or home price appreciation? And I'm trying to think of this in terms of where we are today with the buildup of equity relative to concerns about a possible recessionary pressure. What is the bigger factor in the loss models?

Yes, Geoff, I would say the way you asked the question, I think you're implying that if we were to think about not delinquencies but eventual claims and losses. Right?

Yes, just credit, call it, credit at the end of the day, the ultimate economic credit loss, what is a more important factor?

So I would say from what we have seen in the recent cycle, if you just extrapolate that, that unemployment went up, we saw a significant increase in delinquencies, and we've been reserving against those delinquencies. But given the home price appreciation that Dean mentioned in his prepared remarks that 97% of our delinquencies have at least 10% equity in front of them, that has been a good mitigant for both frequency and severity. So I would say, if you were looking at delinquency development, unemployment is more important. But if you are thinking about a mitigation to eventual claim and eventual loss to our book, a significant rise in home prices acts as a meaningful mitigant to eventual loss. And I'll just ask our Chief Risk Officer, Michael Derstine to see if he has any additional perspective to add.

I would concur with those remarks. Home price appreciation is definitely viewed in our modeling considerations as an important mitigant. I think we've also seen in this environment much less equity extraction in the form of second lien. So we believe that, that mitigant is stable through time. So we do believe that, that is an important way to think about ultimate credit losses. Home price appreciation will have a benefit to that.

Our next question will come from the line of Mihir Bhatia from Bank of America.

I guess maybe to start. Just wanted to make sure I understand. Just in terms of what you've seen recently, maybe on either NIW applications, whatever in April. Like has there been any impact from higher rates on the demand for purchase mortgage originations. I can't understand on the refi side and things like that. But [Indiscernible] purchase mortgage originations, has there been any impact from the higher rates that you've seen yet?

I would say when you look at our Q1 results and the general indication of where Q1 origination market is trending based on current estimates, you would see Q1 as a strong market both on the origination front as well as on the mortgage insurance side and that's kind of driven by a purchase market going down by about 12%, purchase originations in aggregate and refi market obviously going down much more than that. That quarter was -- at least from our perspective, more aligned with the 3.8% 30-year mortgage fix rate. As we think about early development in second quarter, interest rates have now risen in the last 4 weeks closer to 5.4%. So we are keeping an eye on early indicators. And I would say these are just early indicators, not any hard numbers. But if you look at the MBA purchase applications, purchase applications for MBA right now on a 4-week moving average are down 6% from a month ago. Refinance applications are down way more than that. So it's too early to say where the origination trends go long term. Our perspective is that as we think about our persistency in our business model, that is a strong mitigant, a strong hedge against any pressure on mortgage originations. So when we are thinking about our top line growth and our insurance in force growth, we look at a combination of how interest rates are trending in the market. And as a result of that, does our existing insurance in force trend at a better level in terms of stickiness and then obviously, the subsequent impact on new originations. But I would say too early to give an indication on how that [Indiscernible] in the market in terms of higher interest rates impacting consumer. And I would repeat my comments that we do see this cycle and this economic environment being different that while we see impact of higher interest rates and higher home price appreciation on consumer affordability, we see that offset by higher consumer savings, a very strong labor market, very low housing inventory as being kind of an offset in terms of that balance between supply and demand.

No, that's fair. And then just wanted to confirm on the expense. I think your guidance for the full year was around $240 million. Obviously, $57 million, a little bit light on that. Any update to that, or should we still think of $240 million for the full year?

No. Our costs are not linear throughout the year and tend to increase in later quarters as a result of drivers such as performance-based incentive compensation and others. In addition to that, I'd just call out that we're not complete in our journey of standing up certain public company activities. And while we're well on our way, we still have a little bit more room to go. So I think the $240 million guidance that we provided last quarter remains intact. We'll obviously continue to evaluate that through time. But I think that's still a good number.

And then my last question, just wanted to ask about -- go back to the capital return discussion a little bit. I mean it feels like the discussion has been quite focused around dividends and I understand you just launched the quarterly dividend. But like in terms of the incremental capital return that you've talked about, whether in the dividend announcement or on today's announcement. Is there any scope for a buyback to be contemplated there? I mean, your shares are trading below book value. And I mean I understand the consideration around liquidity. But is there a way for you to work with parent to keep their stake steady as you buy back ratably or anything? Is that -- I guess I'm just trying to understand, is there -- what is the scope for a buyback in your future capital return plan? And how are you thinking about that versus just whether it's a special dividend or a higher quarterly dividend? Just trying to understand that, how you're thinking through that.

So absolutely, we are very happy with the results we have produced in terms of returning capital to shareholders at this point of time with our $1.23 dividend in December of last year and then initiating a quarterly dividend program with the first dividend to be paid out in May of $0.14 per share. And as Dean said in his prepared remarks, that we plan to return additional capital before year-end, and we are comfortable with our original expectations that we provided in the market. So that would be in quarterly dividend and a special return of capital combined to be in line with what we have shared before. In terms of your question about share buybacks, it's definitely something that we are considering. So we would go through kind of traditional finance 101 analysis in terms of where our shares are trading, how does that compare to our view of intrinsic value of our business. And then our unique situation, also taking into account our total float and what do we need to think about on that front before we decide what is the right form of capital return between special dividends or share buybacks or a combination of two. So that's definitely something that we are taking into account and discussing with our board as well as with our majority shareholder, Genworth Financial.

Our next question will come from Ryan Gilbert from BTIG.

First question, I wanted to go back to the comments on purchase originations. And I guess your expectations for robust purchase origination market in '22, scoring that up against the sharp increase in interest rates that you talked about, MBA purchase applications down 6%. I guess, is the basic idea that constrained inventory as well, which can limit unit volume, is the basic idea that home price appreciation is robust enough that it can offset any decline in unit volume that we might see? Is that how you're thinking about purchase originations for the balance of the year or do you think unit volume can be up as well?

Ryan, that's definitely part of our consideration. So very good question in terms of parsing through the purchase dollar volume. I think the market forecast we have seen on purchase originations estimates [Indiscernible] between Fannie Mae, MBA continue to be between $1.7 trillion to $1.9 trillion. But there is an element in those projections that part of that is driven by home price increase and average loan amount. Then on a unit basis, we continue to be optimistic in terms of the fundamental trend for homeownership has been very strong. We have shared numbers in the past on expected number of people that reach first time -- average first-time home buying age of 33 years old in the next 4 years, '22 through '26 as being higher than the previous 4 years. So we think that there are some fundamental trends that drive that demand. And even with interest rates moving up with consumer balance sheet being strong and labor market being strong, we think that there is a good balance in this environment. Now some of that still depends on what is the eventual 30-year mortgage rate for the rest of the year? And how does that compare with other factors like home price appreciation, inflation and rise in wages. But your point is absolutely correct that we could end up seeing a bigger market than 2021 purchase originations market, and part of that could be driven by HPA versus units.

My second question is on new DQs and I know the in 1Q, they're trending in line with I guess, normal loss patterns. And as we move into the rest of the year, just given higher levels of macroeconomic uncertainty, how are you thinking about the trend for new DQs and anything that we as analysts or that investors should be considering on that line?

I think we described the increase. We had about 400 more delinquencies sequentially, they're up about 5%, driven largely by the new large book years, the ones Rohit referenced 2020 and 2021, which represent a significant concentration in our overall portfolio. Those books continue to age and go through their normal kind of loss development pattern. Our expectation that, that doesn't stop in Q1. They're going to continue to generate delinquencies as they continue to age through that kind of peak part of loss curves, that probably doesn't peak until years 3, years 4, something along those lines. So I think there's probably still some room to go for those book years. I think it will be interesting to see how the combination of both those large books intersect with some of the smaller books that are producing fewer and fewer new delinquencies. So you have in the first quarter of 2019 in earlier books producing fewer new delinquencies. It's just simply the weight of those was overwhelmed by the concentration in the 2020 and 2021 book years. So I don't think there's anything that I could give you in terms of guidance on trend that's different than what we provided probably in our prepared remarks that we have large books. They're continuing to age through normal loss development pattern, that's probably going to continue as we head into the remainder of 2022.

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Rohit Gupta for any closing remarks.

Thank you, Victor, and thank you all. We appreciate your interest in Enact and look forward to speaking with you throughout the year. Have a good day. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.