Good morning and welcome to the Enact's Third 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, Daniel Kohl, Vice President of Investor Relations. You may now begin.

Thank you and good morning. Welcome to our third 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 third 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 Enact's financial results for the third 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 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. 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. This was another solid quarter of performance for Enact, driven by continued execution of our cycle-tested growth and risk management strategy and reserve release from cure activity. Net income increased 40% year-over-year to $191 million, or $1.17 per diluted share and return on equity was approximately 19%. Our strong performance year-to-date has allowed us to continue delivering on our capital return commitments. And yesterday, we announced our second special cash dividend and our first share repurchase program both of which I will expand on in a few moments. As always, I would like to thank our team for their dedication and hard work as we continue to successfully operate through a complex environment. Insurance in-force for the quarter was a record $242 billion, driven by increased persistency which reached 82% for the third quarter and new insurance written of $15 billion. While the rise in interest rates has dampened mortgage origination volumes, it has increased persistency which has been a tailwind for our insurance in-force. We have spoken about this natural hedge in our business in the past. Persistency tends to increase when interest rates rise, as older mortgages with lower interest rates become economically favorable for consumers over those currently being offered. This counterbalancing dynamic supports IIF growth, even in an environment in which origination volume is lower. As of the end of third quarter, 99% of the mortgages in our portfolio have rated at least 50 basis points below current market rates, a slight increase from 98% at the end of the second quarter and we expect this dynamic to continue to benefit persistency going forward. A key aspect of our growth and risk management strategy is our commitment to pursue high-quality business priced to maximize…

Thanks, Rohit. Good morning, everyone. We delivered another solid quarter of performance in the third quarter of 2022. GAAP net income was $191 million or $1.17 per diluted share, up from $0.84 per diluted share in the same period last year and $1.25 per diluted share in the second quarter of 2022. Adjusted operating income was also $191 million or $1.17 per diluted share as compared to $0.84 per diluted share in the same period last year and $1.26 per diluted share in the second quarter of 2022. Adjusted operating return on equity was approximately 19%. Turning to key revenue drivers. New insurance written was $15 billion in the third quarter compared to $17 billion in the second quarter and $24 billion in the third quarter of 2021. The decline in NIW was driven by lower mortgage originations, resulting from the recent increase in interest rates. The overall credit risk profile of our new insurance written remains strong with loans that are underwritten to prudent market standards. New insurance written for purchase transactions made up 97% of our total NIW in the quarter, up from 96% last quarter. In addition, monthly payment policies made up 94% of our quarterly new insurance written, up from 93% last quarter. Rohit discussed the natural hedge that persistency provides in our business model. With rising interest rates, persistency increased again during the third quarter to 82%, up from 80% last quarter and 65% in the third quarter of 2021. Persistency rose during the quarter and reached 84% annualized in September. Given the continued rise in interest rates throughout the third quarter, we expect to see continued improvement in quarter-over-quarter persistency in the fourth quarter which is a positive for the embedded value of our insurance in-force portfolio, of which 87% is comprised of monthly…

Thanks, Dean. We have had a very strong first 9 months of the year and enter the fourth quarter operating from a position of strength. We will continue to write responsible new business that generates attractive risk-adjusted returns, invest to enhance Enact's competitive differentiation and pursue new growth opportunities and ensure we maintain a strong balance sheet and capital position that supports our existing policyholders. At a time when home price appreciation and increases in the cost of living are pressure in people's ability to save for a down payment to purchase a home. Private mortgage insurance is an important tool for homebuyers seeking to qualify for a mortgage. Before closing, I'd like to comment on the recent decisions by the FHFA and Director Thompson to eliminate upfront fees for certain borrowers and affordable mortgage borrowers. We agree that the pricing adjustments will promote more sustainable and equitable access to affordable housing and result in savings for many first-time homebuyers and lower income borrowers. The spirit of these changes is consistent with our mission at Enact, to help people responsibly achieve and maintain the dream of homeownership. We look forward to the FHFA continuing to support core mission borrowers and I'm encouraged by their ongoing review of GSE pricing frameworks to help further our shared goals. In closing, we are proud to play an important and valuable role in increasing the accessibility, affordability and sustainability of homeownership. While the market is facing some near-term headwinds, I believe we are well positioned to navigate this environment and achieve our goals. The fundamentals underpinning our business are strong and I'm confident in our ability to continue to create value for our shareholders. Operator, we are now ready for Q&A.

[Operator Instructions] The first question comes from Mihir Bhatia from Bank of America.

I wanted to start by maybe just talking a little bit more about just the competitive intensity. And what I was most interested in, you're continuing to take pricing actions. Are you seeing any impact on that -- on your NIW immediately after you take them? Just sticking with black box pricing, I imagine the impacts can be seen pretty immediately. And then what are competitors doing? Are they generally matching you? Are they going back down? Like just talk about competitive intensity and like how that's impacting, or what you're seeing as you take these pricing actions?

Yes, Mihir, thank you for your question. So I would say MI market remains dynamic and has been responsive to current economic conditions. As I said in my prepared remarks, during this quarter, we saw a higher frequency and a higher magnitude of price increases in industry pricing than what we have seen in previous quarters recently. From our perspective, our expected pricing returns remain attractive and they remain within our risk-adjusted return appetite and accretive to economic value. As I also said, we made selective price increases during the quarter and then we continued that over. So we find that constructive that in terms of pricing reflecting kind of the uncertain economic environment and industry pricing going up is generally aligned with our view. In terms of your first part of the question in terms of response function from the market, I would say that depends on the segment of customers. There are certain segments of customers that actually have an immediate response and they are more efficient on their price absorption. And then, there are other customers in the market that actually are slower to respond and might have more tolerances in terms of price variations between MI companies. So I would say, depending on the customer segment, there is a different response function but you're right, that as we make changes, we see response functions in the market play out.

Okay. And then just turning to loan performance and forbearance. And I was curious, it's been a -- we've now had a little bit of a couple of quarters at least in most cases of the forbearance periods ending and loans going back to performing. Are you seeing any differences in loan performance from the forbearance cohort versus -- the people who took forbearance and then have their mortgage payments come back on again? Are you seeing those that cohort perform any differently than like other performance? And maybe you can just compare that to other reperforming loans?

Yes Mihir, this is Dean. Thanks for the question. We try to give some details of that on Page 12 of our earnings presentation. I think the primary takeaway when I look at the cumulative cure rate through the COVID delinquencies, primarily focused on the 2020 and the 2021 vintages as you see cumulative cure rates that are favorable to our original expectations and performing very, very well. Enact covers both delinquencies in forbearance and delinquencies that never went into forbearance. One of the things we saw through this pandemic which is a little bit counterintuitive is the timing of those cures. We saw loans that weren't in forbearance cure at a much faster pace than loans in forbearance. I think while that might have been counterintuitive from the jump at the beginning of the pandemic, I think it's just a reflection of borrower behavior in forbearance. There's really no -- there might not be an incentive to come out of forbearance prior to the expiration of that forbearance period. And we kind of saw that in the timing of ultimate cure. But in terms of level or magnitude of cure, we see both of those group's forbearance and non-forbearance performing very well and very similarly.

Got it. And then just my last question, I'll jump back. Just on expenses. The -- you reiterated in your $240 million guidance. That implies a pretty big step up here in the fourth quarter. Is there something specific or seasonal in the fourth quarter that drives expenses higher?

Yes. So you see a variable incentive compensation typically be back-end loaded in the year. So I think our expenses aren't necessarily proportionate throughout the year. And I would say we plan for some uptick in variable incentive compensation. But primarily, that's what you might see when you're looking intra-year.

The next question comes from Bose George from KBW.

As you noted that you expect persistency to increase which obviously makes sense. Any way to quantify that? And also just in terms of the pay downs that you're seeing, can you tell if any of that is coming from cancellations? Is there a way to kind of break that out?

Yes Bose, it's Dean. Thanks for the question. So yes, I think just to recap, we had persistency at 82% in the quarter. It did rise in September, 84% annualized. And you're right, given the continuation of the rise in rates and the lag really between application and origination. A lot of the NIW in the third quarter is from the July, August time frame. It doesn't have the interest rate increases in September and October. We would expect to see a continuation in the improvement in quarter-over-quarter persistency heading into fourth quarter. Where that levels out, is a little harder to protect -- or rather predict. We have a combination of a large new books written at historically low interest rates, coupled with a rising interest rate environment that we really haven't seen very often in our history. What I would say is, even without the economic incentive to refinance, there is a level of housing activity that occurs kind of naturally as borrowers change jobs and upgrade their housing, kind of, et cetera. Maybe a place to bound it is looking contextually at where it's been historically. Our annualized persistency has never been higher than 90% for any quarter on a historical basis. So maybe that gives you an outer boundary at least based in an historical context. I think it's really kind of difficult to exactly predict where persistency levels out, despite having, I think, a good beat on believing there's some quarter-over-quarter improvement still to come. As it relates to -- I think your question, those was around borrower-initiated cancellations?

Yes, that's right.

Yes. So as it relates to borrower initiated, that can happen a couple of different ways. The borrower can request the servicer to cancel the MI either through the amortization down to 80% LTV or through an appraisal supporting a mark-to-market at a 78% LTV. The latter of those is subject to GSE seasoning requirements depending on the mark-to-market LTV threshold. I think it's 2-plus years for 75% mark-to-market LTV and 5-plus years for an 80% mark-to-market LTV. What I would say is what we've seen is borrower-initiated cancellations. They've grown over the past several quarters but that's off a really small base. It still represents a pretty small amount of insurance in-force, actually less than $2 billion of IIF lapsing relative to our $242 billion of insurance in-force. So it is on the uptick but off a very small base and having -- what I would still consider a pretty immaterial impact on the portfolio.

Okay, great. That's very helpful. And then just in terms of the FHFA actions which Rohit referred to, any thoughts about like quantifying the potential impact of that? And then just a related question is, with the FHFA annual report out in a couple of weeks, any thought where -- whether they might make changes there as well?

Bose, so I would say from an FHFA perspective, as I said in my prepared remarks, we applaud FHFA's action in terms of reviewing GSE pricing frameworks and reducing loan level price adjustments for first-time homebuyers as well as certain segments of borrowers below a median income of 100% or 120%. I would say from our perspective in terms of quantifying the impact to market size, we are still evaluating that, especially the first-time home buying side of it to figure out impact on MI market size competitiveness and against FHA and VA. But I would expect that impact to be somewhat material. But at this point of time, I don't have a range to provide but that's a positive for our market size. And I think on the FHA price cut, FHA is going to publish their actuarial report here in the coming weeks. And depending on the state of the fund and FHA's view on where the economy and housing is going, they would take pricing actions based on that. I do think that, that has an intersection with budget reconciliation, so might not happen as soon as folks have been expecting it, might be kind of closer to first quarter of 2023 versus in fourth quarter of 2022 but that's hard to predict. And that could offset some of the benefit from loan level price adjustments that we heard from FHFA.

The next question comes from Geoffrey Dunn from Dowling & Partners.

Dean, can you provide some detail on the latest XOL with respect to weighted average lifetime cost and the attachment detachment points? And maybe how they compare to what you were seeing earlier in the year?

Yes, Geoff, thanks for the question. So I think from a cost perspective and even from a structure perspective, the most recent XOL really kind of follows the structure that we've put in the market in the past. So we typically attach around a 3% attachment point and detach right below the upper bounds of the PMIERs tier which is typically around the 7% level. I'd say from a cost perspective, Geoff, we haven't given a prescriptive cost by structure but we've talked about cost being in the kind of low to mid-single-digit cost of capital in the past. I would say, given the current macroeconomic environment that Rohit, I think did a nice job describing. What we're seeing in the market is probably on the upper side of that range. Certainly, we still believe our execution in the traditional reinsurance market favors the capital markets and that's what we've kind of repointed our credit risk transfer engine towards traditional reinsurance market. We just think there's some better efficiencies, better economics that are -- that we're able to obtain via that channel but nonetheless, I think it's still coming within the range we've talked about in the past, just on the upper end of that range. And if you -- the structure itself, Geoff, just for more specificity, it's on Page 14 in our QFS under Column K.

Okay. The other question I have is with respect to managing capital. Obviously, when you think about ultimate claim exposure, there's a lot of protection from the underwriting and the bill-up equity of the book. But none of that necessarily protects you from delinquency upticks before things get resolved going to claim. So as you look out on '23, I guess, there's 2 questions. One, how do you think about upstreaming capital from a strong position at the underwriting company in face of economic uncertainty? And then number two, you have strong tail risk protection from your XOL covers but obviously, QSRs might be more helpful from a PMIERs impact from higher delinquencies. So how do you think about augmenting your reinsurance program with quota share as well?

Geoff, this is Rohit. So I'll start with the first question and then have Dean chime in on both parts of your question. So I think from a managing capital perspective, overall in the business, we have built a strong balance sheet since our IPO, that's also reflected by the rating's upgrades we got right after our IPO when the recent Moody's upgrade. Our PMIERs buffer -- sufficiency buffer was 174% this quarter or $2.2 billion of excess capital. And that gives us confidence announcing the capital actions we announced and obviously, most of them being 2022. But as we project forward in 2023, the capital return commitments that are in our existing messaging and announcement is our quarterly dividend which is approximately $100 million for a full year. And then in addition to that, in Dean's remarks, Dean talked about majority of the share buyback happening in 2023. So depending on our view of intrinsic value and where the stock is trading, that could also be part of capital return in 2023. So we feel that at the most macro level, those capital commitments, capital return commitments are definitely within our appetite from a capital management perspective. And we feel pretty good about how we are positioned from a capital and balance sheet perspective. I'll let Dean talk about different structures for reinsurance.

Yes. Rohit, I totally agree with your points. Just to piggyback off that in the first part. Our focus, Geoff, has been positioning us for -- putting us in a position of strength. When we think about that from a finance perspective, we're running multiple scenarios to make sure that we're well positioned with a strong balance sheet with enhanced financial flexibility. And I think Rohit's kind of laid out important steps that we've done to enhance our resiliency. We've increased price. We've enhanced the credit profile of our portfolio. And to your point, we further mitigated risk through our credit risk transfer program. So we're really trying to prepare ourselves for whatever comes down the pike, could be prepared to fund the growth for the business and ultimately balance that with returning capital to shareholders. I think on your second question, so XOL versus quota share to some degree. Look, we have focused on XOL so far because we believe it's the most efficient structure to meet our business objectives. And just as a reminder, our business objectives on our credit risk transfer program are really twofold. One, to deliver efficient capital. And when we think about that, it's typically in the PMIERs context. And then two, for loss volatility protection to protect our balance sheet against the unexpected. To date, we believe our structures -- our XOL structures have been the most efficient structures in the market to accomplish those 2 objectives. I guess the proof point there would be, if you look at our ceded premiums, you have the lowest ceded premiums relative to the capital credit, I think, across our industry. All that said, we continue to evaluate reinsurance structures are fit for use and we're not adverse to quota share. A quota share may have a place in our credit risk transfer program at some point in the future. Again, it's just balancing how well it meets those overarching business objectives, capital efficiency and loss volatility protection. We'll continue to monitor and evaluate a quota share against those objectives.

Are there any other questions in the queue? Okay. It seems like those are the questions we have at this point of time. So we are going to wrap up the call. With that, we appreciate your interest. Thanks, Faizan and thank you all. We appreciate your interest in Enact and look forward to continuing our story in future conversations.