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, Daniel Kohl, Vice President of Investor Relations. You may begin.

Thank you and good morning. 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 closing remarks. And then we will take your questions. The earnings materials we issued after market closed yesterday contain our financial results for the first quarter of 2023 along with a comprehensive set of financial and operational metrics. These are available on the Investor Relations section of the company's website at www.ir.enactmi.com. 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 and are subject to risks and uncertainties which may cause actual results to be materially different. We undertake no obligation to update or revise such statements as a result of the 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 will be available on our website. 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 will turn the call over to Rohit.

Thank you, Daniel. Good morning, everyone. Thank you for joining us to discuss our first quarter 2023 results. The first quarter marked a strong start to 2023 for Enact. We delivered a 17% return on equity and net income of $176 million or $1.08 per diluted share, which was up 7% year-over-year. In a market that remained dynamic and volatile, we achieved these robust results by executing our strategy, maintaining our commitment to a strong balance sheet and continuing to prudently manage our risk. Insurance in-force in the quarter was a record $253 billion, driven by persistency of 85% and new insurance written of $13 billion as we continued to win new business. I have spoken in the past about our commitment to investing to further enhance and differentiate our product offerings. And we made additional progress here during the quarter, announcing integrations with several pricing and loan origination systems designed to increase connectivity, simplify and enhance the customer experience, and support the platform that was best for our customers. As higher interest rates have affected mortgage origination volumes and NIW, elevated persistency has continued to act as a counterbalance and support continued insurance in-force growth, as maintaining older mortgages with lower rates remains economically favorable to refinancing at current rates. As of the end of the quarter, 99% of the mortgages in our portfolio had rates at least 50 basis points below the prevailing market rate and we expect this dynamic to be a tailwind for persistency going forward. The pricing environment remained constructive during the quarter with pricing across the industry trending upwards. In response to increased macroeconomic uncertainty, we continue to increase our price on new insurance written. We are committed to prudently pursuing high-quality business, strive to generate attractive returns on a risk-adjusted basis and remain…

Thanks, Rohit. Good morning, everyone. We delivered strong results for the first quarter of 2023. As Rohit mentioned, GAAP net income was $176 million or $1.08 per diluted share as compared to $1.01 per diluted share in the same period last year and $0.88 per diluted share in the fourth quarter of 2022. Return on equity was 16.8%. Adjusted operating income increased to $176 million or $1.08 per diluted share, as compared to $1.01 per diluted share in the same period last year and $0.90 per diluted share in the fourth quarter of 2022. Adjusted operating return on equity was 16.7%. Turning to revenue drivers, insurance in-force increased in the first quarter to a record -- a new record of $253 billion, up $5 billion or 2% sequentially and up $21 billion or 9% year-over-year. New insurance written of $13 billion was down $2 billion or 13% sequentially, and down $6 billion or 30% year-over-year, driven by the lower mortgage originations resulting from continued elevated interest rates. New insurance written for purchase transactions made up 97% of our total NIW in the quarter, which was flat to last quarter. Monthly payment policies made up 97% of our quarterly new insurance written, up from 91% last quarter. The overall credit risk profile of our new insurance written remains strong with loans that are underwritten to prudent market standards. Rohit discussed the counterbalancing effect of persistency in our business model. With elevated interest rates, persistency remained high at 85% in the first quarter of 2023, relatively flat sequentially and up 9 percentage points year-over-year. Given the expectation that interest rates will remain elevated in the short term, we expect to see continued strength in persistency levels, which is a positive for the future profitability of our insureds in-force insurance portfolio. Our base…

Thanks, Dean. As you can see, we are off to a great start to 2023 and continue to operate from a position of operational and financial strength. Our balance sheet focus on prudent risk management and commitment to operational excellence positions us to operate successfully in the current market environment and create value for our shareholders. I'd like to thank every member of our team for their ongoing commitment and contributions. Operator, we are now ready for Q&A.

Thank you. At this time, we will conduct a Q&A session. [Operator Instructions] Our first question comes from Bose George with KBW.

Hey, good morning, everyone. This is actually Alex on for Bose. Appreciate you taking the time to answer our questions. You touched on the investment income a little bit and it looks like the overall yield ticked down slightly in the quarter. I'm just wondering if you could talk a little bit more about what drove that decline and also how we should think about investment income over the remainder of the year.

Yeah, Alex, thanks for the question. When you look at investment income sequentially, there are a couple of things that happened in the quarter that affect the sequential trajectory. We did have lower bond calls in the quarter. There were approximately $1 million that affect quarter-over-quarter variation. The other thing that happens in the portfolio, kind of, a normal course, we do have principal and interest roll-off from the portfolio that gets reinvested. That's not necessarily uniform throughout the year, you can call that lumpy quarter to quarter. So that certainly has an effect on the capacity or the dry powder effectively that gets reinvested in the higher rate environment. The other -- the last thing I'd talk to, we did build a little bit of incremental cash accumulation in advance of the April distribution that I referenced in our prepared remarks. That gets invested at a modestly lower rate, closer to a 4.5% new money rate for cash versus the roughly 6% -- just under 6% that we invested assets in this environment. So I think those things are what's contributing to the maybe more flattish -- it's up modestly, I think $0.5 million sequential, but I think those things are the items that drove some downward pressure on that trajectory relative to maybe expectations. I'd say, going forward we're going to continue to take advantage of the elevated interest rate environment. Like I said, we're investing new monies, close to 6% now, and I think that would have an upwards impact on the trajectory of investment income, go forward.

Okay, great. That makes sense. And then also you touched on the trajectory of the premium yield for the remainder of 2023. I know you said it should be down a little bit more than -- sorry, a little bit less than in 2022. Just wondering if you guys have any more color on sort of the cadence of that quarter-to-quarter, or it should be -- that would kind of jump around slightly over the remainder of the year.

Yeah. A couple of things there, Alex. I think I'd start off with we have the highest base premium rate in the industry. I understand the focus on quarter-over-quarter change. But I certainly don't want to lose sight of that fact. I think that's important. But much like we've talked about in the past, base premium rate can fluctuate quarter to quarter. It fluctuates as a result of a bunch of different drivers; NIW pricing levels, persistency, credit mix, things along those lines. Coming into the year, much like you referenced, we did expect base premium rates to decline less than they did in 2022. And the good news as it relates to the quarterly results is that that's occurring. The 0.5 basis point is in line with that expectation. We do still expect base premium rate to decline inside that 2.4 basis point level from 2022 and feel confident that we can deliver against that expectation. Quarter-to-quarter there's going to be some volatility in that. So there's really not -- I think what we're comfortable with is giving you guidance on a full year basis and staying out of the quarter-to-quarter variance.

Okay, that makes sense. I appreciate your time.

Yes, thank you, Alex.

Our next question comes from Rick Shane with JPM.

Morning, Rick.

Good morning, everybody, and thanks for taking my question. You spoke a little bit -- or referenced the ratings upgrades and equally importantly, the lifting of the conditions from Fannie and Freddie. Can you talk about the operational and financial implications of both? I think in general, we get the financial implications of the ratings upgrades. But can you talk specifically about the Fannie-Freddie conditions lifting?

Good morning, Rick. So I would just start and then hand it off Dean. I think from an operational perspective, I'm assuming you're talking about our commercial relationships and kind of what that means. And as I said in my prepared remarks, the three ratings upgrades we have received year-to-date, two during the quarter and then one in April, are all very supportive of the journey we have had post-IPO. But when it comes to our competitive strengths and competitive value proposition in the market, each of these rating upgrades essentially support the value proposition that we take to our customers and to Fannie Mae and Freddie Mac and the perception we have with our customers of a very strong counterparty. And the same thing is true for the GSE conditions and restrictions. As we have spoken in the past, we generally saw these conditions as redundant to our capital levels from a PMIER's perspective, but lifting of those conditions is definitely a strong milestone for us because in a normal environment these restrictions are not problematic, but in a downturn that multiplier effect on the delinquent portfolio can actually have a much bigger impact. So we're really happy to achieve both milestones. I'll hand it off to Dean to talk about the financial implications.

Yes. So the financial implications, Rick, the GSE conditions and restrictions, we've talked a little bit about this in the past, they're largely redundant to what we would have considered to be a prudent level of PMIERs capital sufficiency. So it really -- it doesn't change our kind of view on PMIERs. What it does give us is additional financial flexibility, especially as Rohit referenced, in times of stress, where the delinquencies create some potential pressure and we're not held to a higher standard. 125% would have been the standard under the conditions as they were set. So we think it's actually additional or incremental financial flexibility, especially to the downside. I would say kind of similar thing on the ratings side, but just a different form. Now being an investment-grade debt issuer, it has both immediate and future impacts to our financial flexibility if I think about the impact in the immediate term, but we do get a reduction on our commitment fees for the revolver. We don't have any borrowings against that revolver. But we do pay commitment fees and those are reduced as a result of tipping into investment grade. And at the same time, on our $750 million indenture, we realize the suspension of certain restrictions and things like asset sales and additional debt issuances and restricted payments. So it just gives us some additional operational flexibility, financial flexibility. And then as you think about the ratings impact on a prospective basis, it gives us access as an investment grade issuer to a broader market with potentially better pricing and terms. So we think it's a big milestone for us, it's probably the most important single notch in the rating agency continuum. We're happy and pleased to realize that notch at this point in time.

Rohit, Dean, thank you very much, very helpful answer.

Thanks, Rick.

Thanks, Rick.

Stand by for our next question. It will come from Mihir Bhatia of Bank of America.

Good morning. Thank you for taking my questions. The first question I had -- actually wanted to go back to the questions about premium rates. I understand you don't want to give quarterly guidance, but I guess maybe just more bigger picture, just thinking about the premium rate environment, it sounds like it continues to be quite constructive. When do we start seeing that flow all the way through the financials? And what I mean by that is like when do you start seeing the base premium rate actually pick up? Is this the last year? If current trends continue, as current trends, they are not stable, is this the last year we see declines like -- can you help us with just like the size of the portfolio that's got the higher premium rates that are running off versus the new business you are acquiring et cetera. I'm just trying to understand where premium rates -- kind of base premium rates kind of settle out.

Yes, Mihir, good morning. This is Rohit. So thank you for your question. And I would start off by just talking about pricing. As I mentioned in my prepared remarks, we believe that our pricing environment in the market is very constructive. We saw pricing go up across the industry during the quarter, we increased our price several times during the quarter, both across our entire portfolio in terms of new insurance written, as well as also in specific geographies and risk tranches. So I think from portfolio yield coming in on new insurance written, we continue to find that constructive and still believe we are delivering attractive returns and creating value for shareholders. I think in terms of timing of when that portfolio yield, as well as the lapse, the mix on existing insurance in-force starts coming to a flattening trend and then starts turning around, I think in this interest rate environment where we have seen volatility in interest rates, is tough to call. So we are watching that trend very carefully in our portfolio. But I would say, while interest rates are so volatile and that can have an impact on which borrowers from prior books are refinancing, which borrowers are staying, I think as we get closer to that point, we can provide better guidance. I think the fact that we are seeing compression in the decline of premium rate is a leading indicator to getting to that point. I know that doesn't directly answer your question in terms of timing, but I think as we see more proof points and actual performance, especially with persistency being high on the existing book and new insurance written still holding up at good scale levels, I think we'll provide better guidance as we get closer to that point.

Okay. No, I understand it's difficult to call out something like that and then two quarters from now we'll like, hey, wait a minute, what happened? So I understand. In terms of persistency, with interest rates high, and I think you called out -- you gave some statistics about how much of your portfolio is, I guess, out of the money from a refinance perspective, yet persistency was basically, call it, stable, right, quarter-over-quarter. And I was wondering, is this the right persistency rate we should be thinking about in the short term, or is there a little bit more upside still persists?

Yeah, Mihir, good question. I think we've gotten that question a couple of different times in different ways. But our take on persistency is, it continues obviously to remain elevated, elevated given the current interest rate environment. I would say, the headline is persistency down a point. If you look under the hood a little bit more and do a granular assessment that reduction is really in the round, it's probably closer to 30 basis points in just rounded, but down from 86%, 85% quarter-over-quarter. I think as we think about where persistency can go and where it can level out, it is hard to predict. We've used our historical experience as a -- trying to give a sense to the market of how high can it go. We've never really experienced persistency above 90%, and only in very short periods of time in our past experience. So as an indication of where persistency can go, but I think our view is as long as the interest rate environment remains kind of stable in this general range that we would expect persistency to remain elevated as well and really serve as that counterbalance to a smaller originations market, allowing us to drive ongoing portfolio growth and premium growth.

Got it. And then this is my last question, in terms of claims payments. Are we -- how far to a normalized level are we? I think you've talked about delinquencies getting back to pre-pandemic levels, but it looks like on the claim payment side there might be sometimes. So can you just talk about that a little bit? Thank you.

Yeah. We continue to have dialog with servicers and trying to get an assessment of when delinquency development emerge -- turns into claims development. What's happened so far, during those discussions, we continue to push that time period out a couple of quarters. So I probably said it two quarters ago that it was two quarters in the making. I would say now it's still a couple of quarters out. So there's still work to be done on the servicer side to get comfortable -- well, first of all, exhausting all efforts to maintain -- keep borrowers in homes and then to get comfortable starting the foreclosure process for those delinquencies they deem that they can't effectively resolve through some type of cure or modification.

Understood. Thank you.

Sure, thanks, Mihir

Our next question comes from Arren Cyganovich with Citi.

Thus far through the earnings cycle, looks like you have the highest level of new insurance written amongst your peers. Any ideas of what could be driving that? I know it's tough to say on a quarter-by-quarter basis. And what's your outlook for potential production for the year?

Yeah, good morning, Arren. So I would just start off by saying that we are happy with the $13 billion of new insurance written we wrote in the first quarter. So far, of that $13 billion from pricing and mix perspective, we like that a lot. And just as a reminder, we have said this in the past, market share is not a strategy for us, but it's an outcome of execution of our successful strategy here. So I would say our focus in this environment continues to be on quality and pricing of the new insurance written. And as a reminder, that's referring to kind of two aspects of it. First thing, right price for right risk. And the second aspect is managing stack risk factors. So if you think about the current environment, in this environment we continue to monitor leading indicators for economic and housing. And as I said in my prepared remarks, we use that to implement both across-the-board pricing increases as well as geographic and credit-specific pricing increases and we executed on several of those during the quarter. So when it comes to market share, as I said last quarter, I would just say, just think about market share across the industry, it fluctuates quarter to quarter, it's very evident if you look at the industry share over the last 8 to 10 quarters, but that has been the case. So we are not focused on the quarter-to-quarter variations. We are focused on our long-term participation in the market. And if you look at the trailing 12 months, although our market share is not final yet because one company still has to report, I would say we kind of see that as being stable at around 17%, which is very comparable to prior periods. So…

Thanks. And then as we think about home prices kind of moving lower, how do you view the risk there for your new production and what would the severity -- or the severity is going to be worse through this production vintage, I guess, relative to past years.

Yeah. So when it comes to home prices as well as unemployment, as I've said in my answer to the previous question on pricing, I think we continue to focus in this environment, making sure that the business that we are writing can not only sustain this performance in a base case scenario, but we are also testing it against multiple stress case scenarios. So from a losses prospective, the first thing we focus on is frequency because once we actually have a claim and severity comes in at that point. So we are very focused on applying the right mindset from a pricing and credit perspective and taking on the right business and reducing stack risk factors. And then absolutely to your point, once we get to the point of severity in our models, we do factor in impact of declining home prices by market, to figure out what would be the impact or severity on our loss ratios, both in base and stress case and we make sure that we are taking that into account when we price our product. So I think that's factored in. I'm not sure if I can give you any kind of easy rule of thumb on impact of home prices on severity, but I can assure you that that is definitely part of our consideration.

Thank you.

Thank you.

All right. Stand by for our next question. Our next question comes from Geoffrey Dunn with Dowling & Partners.

I actually want to follow up on the last question more specifically. You formally shifted your claim rate assumption last quarter up to 10%, but could you discuss how your home price assumption in both your claim rate and your severity considerations has evolved over the last year, and can you bracket it in any way or is it down zero to five down five to 10, just some -- maybe more color on how you're thinking about your reserving practices?

Yes, Geoff. Thanks for the question. So you're absolutely right, we adjusted our claim rate on 2022 accident year delinquencies from 8% to 10%. We made this comment previously, but I think it bears repeating that we did that not because we had seen any deterioration in performance, but simply we wanted to apply kind of our measured philosophy as it relates to reserving for the possibility of future deterioration given the heightened economic uncertainty. We continue to measure that and we will continue to measure that through time. Obviously, we haven't seen, at this point, the economic deterioration and/or the deterioration that that economics could present in terms of performance. And if we don't see that we will continue to assess and take those factors into our loss reserves through time. I think as it relates to kind of severity and the impact of home prices, we did make a small adjustment to severity this quarter given our updated view on home prices. That view was less favorable than our prior assumption and it had a reduction in our view on what would otherwise be presale savings. It's a very small adjustment, about $300 on an average reserve per new, but it's indicative I think of what Rohit was talking about. He was maybe more talking in the pricing context. But we also use home prices or our future home price expectation as an input into our severity assumptions for our existing delinquencies.

Yeah. And just to add to Dean's answer, I think from a macro perspective, while we are keeping an eye on different markets and have views on which markets might be more vulnerable than other markets, I think we do continue to see this balance in housing market. So on one hand, we have seen demand go down because mortgage rates are high, there is broader inflation and consumers are concerned about a possible recession, but on the other side labor market is still strong, wages are strong and on top of it, we are still operating in a very tight inventory market, which is below the 40-year average, close to 2.5 months at the end of February. So I think in terms of actual impact we are -- it's difficult to bracket a number, but definitely staying close to that and developing deals as things continue to evolve.

Well -- and that's kind of why I asked the question, right, because I think the Fannie forecast only has national prices down a little bit at points this year. The market is still extremely tight. And it sounds like every time there's a bit of a rate drop, prices are actually reacting to the upside. So the companies are assuming down 5% or down 10% on a national basis, it gives us a better idea of, I don't know if conservatism is the right word, but caution -- a level of caution you're baking in ahead of the uncertainty.

Yeah. Geoff, you have the right perspective, completely agree with that view that I think when you start with kind of what we're seeing in the market in actual home price data that's coming out, as well as what we're seeing in forecast, I think the Fannie Mae forecast that you referenced, actually has reduced the amount of decline they expected from last forecast to this forecast. So I think that's kind of in line with what we are seeing in the market. And then at the same time, I think we are balancing two different facts. One, as I've said in my remarks, 86% of our delinquencies at a MSA level are doing kind of mark-to-market, 20% equity in front of them. On the other hand, we could be facing geography-specific declines in certain areas where inventory might be higher or conditions might be different. So I think that's where we are taking a prudent approach on reserves and just, I think we said it several times that when it comes to our results, we just want to be mindful of the uncertainty in the market we are looking at, and to Dean's point, it's not based on any performance deterioration, just more of a mindset in this environment.

Okay, thanks for the comments.

Thanks, Geoff.

Thank you.

Our next question comes from Eric Hagen with BTIG.

Good morning, Eric.

Hi, good morning. Thanks. A lot of good stuff covered here. I think there's one follow-up on something you were talking about with respect to loan modifications and the outlook there. Just maybe what's your perspective on the effectiveness of loan modifications and what servicers are able to offer to borrowers in a higher interest rate environment? Like how much does that effectiveness or lack thereof potentially drive your thinking around credit and reserving and the timeline to a loan liquidation?

Yeah. Eric, I'll start and then I'll hand it off to Dean. I would say we have confidence -- let's start at the macro level. I think every time we as an industry, as mortgage finance industry go through a recession we come out of that recession or any kind of dislocation, including COVID, we come out of that with more resilience and more learning. So I think I'll start off with that point that the experience we have had with forbearance, and the effectiveness of forbearance in COVID definitely has been a very good lesson for the industry that starts with GSEs, servicers, mortgage insurance companies and all participants. So I think just the fact that we have seen a tool that was not heavily utilized prior to COVID, so as a percentage of our delinquencies, forbearance used to be less than 5% of total delinquencies in terms of modification. And during COVID you obviously saw that number actually went higher than 50% at certain points, and now it's down to about less than 20% in our delinquencies in Q1 2023. So I think our perspective is the fact that GSEs have now created new forbearance programs, which have much more consumer-friendly terms is an example of we have more tools in our tool belt when it comes to modifications than we did three years ago. I think that is generally good for the system, good for consumers. And then from that point on, it just depends on which consumers go delinquent, which tools are available under what condition, but I would say, I'll start off at that and then ask Dean to add color.

Yes. So I'll just maybe supplement that with a proof point. So we've had about 105,000 forbearances on an ever-to-date basis, Eric, and about 95% of those have successfully cured. So that cure includes canceled forbearance where the borrower either sold the property and/or made good on the miss payments up to that point in time had there been any. And it includes the successful completion of, to your point, modifications, like either deferred payment solution or some other type of modification. So I think that's really just the quantitative evidence to the qualitative description that Rohit was talking about. I would also very much align with his commentary that forbearance program has been very successful on an ever-to-date basis.

Yeah. Okay, great. Thank you guys very much.

Thank you, Eric.

This concludes our [Multiple Speakers]

[Multiple Speakers] do we have any other question?

We do not. So this concludes our Q&A portion. I would now like to turn it back over to Rohit for closing remarks.

Thank you, Stacey. And thank you all. We appreciate your interest in Enact, and I look forward to seeing many of you in New York at the BTIG Conference next week. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.