Good day and thank you for standing by. Welcome to the Q2 2023 Enact's Earnings Conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel Kohl, vice President of Investor Relations. 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 quarterly results before turning the call back to Rohit for closing remarks. We will then take your questions. The earnings materials we issued after market closed yesterday contain our financial results for the quarter, 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. Additionally, they are subject to risks and uncertainties, which may cause results to be materially different, and we undertake no obligation to update or revise 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 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'll turn the call over to Rohit.

Thanks, Daniel. Good morning, everyone. Our team delivered another very strong quarter in a dynamic environment. We reported adjusted operating income of $178 million or $1.10 per diluted share and delivered a 16% adjusted operating return on equity. Insurance-in-force grew 9% year-over-year to a record $258 billion, driven by new insurance written of $15 billion and elevated persistency of 84%. during the quarter, we delivered solid new business production, disciplined growth in our insured portfolio, favorable credit performance, continued acceleration in investment income and expense efficiency. We remain confident in our strategy, as well as the strength and stability of the private mortgage insurance business model. While the macroeconomic environment remains uncertain with elevated inflation and heightened borrowing costs, the labor market has been resilient and household balance sheets are healthy. We continue to see evidence that manufacturing quality in the mortgage industry remains strong and that despite ongoing challenges to affordability, credit risk remains within our risk appetite. In addition, looking beyond housing, research indicates that serious delinquency rates for prime borrowers are at or below pre-pandemic levels across consumer sectors. Overall, we remain constructive on the long-term outlook for housing, as well as the demand for mortgage insurance. Low housing inventory and first-time homebuyer demand are likely to continue to support home prices, and MI will remain an important affordability tool to help buyers qualify for a mortgage. As higher interest rates have affected mortgage originations, elevated persistency has continued to act as a counterbalance, supporting insurance enforced growth. Pricing on new insurance written remained constructive during the quarter and we observed increased pricing on new insurance written in the market. We increased our price on NIW in response to continued macro uncertainty while continuing to onboard the right risk for the right price. the credit quality of…

Thanks, Rohit. Good morning, everyone. We again delivered very strong results in the second quarter of 2023. GAAP net income for the quarter was $168 million, or $1.04 per diluted share, as compared to $1.25 per diluted share in the same period last year, and $1.08 per diluted share in the first quarter of 2023. Return on equity was 15.5%. Adjusted operating income was $178 million, or a $1.10 per diluted share, as compared to $205 million, or $1.26 per diluted share in the same period last year, and $176 million, or $1.08 per diluted share in the first quarter of 2023. Adjusted operating return on equity was 16.4%. Turning to revenue drivers. primary insurance-in-force increased in the second quarter to a new record of $258 billion, up $5 billion, or 2% sequentially, and up $20 billion, or 9% year-over-year. New insurance written of $15 billion was up $2 billion, or 15% sequentially, driven in part by higher originations and down $2 billion, or 14% year-over-year, driven by lower mortgage originations resulting from continued elevated interest rates. With elevated interest rates, persistency remained high at 84% in the second quarter, down 1 percentage point sequentially and up 4 percentage points year-over-year. Given that most of our insured portfolio has mortgage rates at or below 6%, and the expectation that interest rates will remain elevated in the short term, we anticipate continued strength and persistency, which is a positive for the future profitability of our insurance-in-force portfolio. Our base premium rate was 40.3 basis points, down 0.2 basis points sequentially, 2.2 basis points year-over-year and 0.7 basis points year-to-date. The rate of change in our base premium rate continues to narrow and is in line with our expectations. As a reminder, base premium rate is impacted by a variety of factors…

Thanks, Dean. We are very pleased with our results for the second quarter, delivering continued high-quality growth in our insured portfolio and strong return. Looking forward, we will continue to deploy capital in a manner that balances investment in the business, balance sheet strength and distributions to our shareholders. Overall, we are well positioned to continue to serve our customers and their borrowers, grow our franchise, and deliver strong performance and value creation for our shareholders. Finally, I'd like to thank our talented team for their commitment and for driving us forward. Operator, we are now ready for Q&A.

[Operator Instructions] And our first question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.

Hey. good morning and thank you for taking my question. I wanted to start with competitive intensity in the industry right now. when I look at the market share numbers quarter-over-quarter. And I understand you don't manage the business by market share, but I guess the question on the competitive intensity is when you look at your market share numbers or the growth, you're seeing versus the growth some of the competitors are seeing. this quarter, I think you've had of the companies that I've reported, the lowest increase in quarter over quarter origination, suggesting you may be lost a little bit of market share. Now, like I said, I understand you don't manage the business from a market share perspective, but what does that tell you about the competitive intensity or the pricing that others are doing? Is it driven by pricing? Is it that others are pricing more aggressively? Maybe, just talk about that in general, what you're seeing in the pricing environment, how people are responding, the changes in pricing? Is pricing getting better, or getting worse? What's happening? Thank you.

Good morning, Mihir and thanks for the question. As you stated, we have said in the past, market share is not a strategy for us. It's an outcome of our successful execution of our go-to-market strategy, where we talk about charging the right price for the right risk. So, I would start off just by saying we like the $15 billion of NIW that we wrote in the quarter and its profile from both pricing and credit mix perspective. Also, I think important to kind of emphasize, especially in this environment, that we continue to see strong underwriting quality and credit policy, which is very much within our risk appetite. Now, market share right now is tough to calculate, because there are only three MI companies reporting and three to go. But from our perspective, we think of quarterly market share being volatile. And we have seen that over the last, I would say, three or so years, especially after all the MI companies move to opaque rate engines. It's just the volatility on quarterly market share has been higher. And that could be driven by just the timing of pricing moves by different companies. It could also be driven by specific lenders that MI companies do business with, and who is growing and who is shrinking in the origination market. I think our focus continues to be that we have a good market position, and actually are writing product and new business at very good returns. As I also said, coming back to your question on pricing, I said in my prepared remarks that we saw pricing being constructive in the marketplace. And during the quarter, we saw pricing across the industry move up and we actually moved our pricing up on new insurance written given the economic uncertainty that's in front of us. So, I think that hopefully provides you color on how we think about intersection of pricing and our market position. Last thing I would say, obviously, market share numbers are not known, but our directional sense is that if you look at our trailing 12 months of market share last quarter, the quarter before while there has been quarterly volatility. That number is actually relatively stable and within a range that is very much aligned with how we think of our market participation, that diversity of our customer base and doing business with close to 1,800 active lenders.

Got it. Thanks for that. In terms of the origination market in general, I guess particularly, on the purchase side, where are you seeing particular growth or areas of strength, I mean, you called out a little bit of the economic uncertainty. So maybe, talk about just where you expect things to trend for the back half of the year? Thank you.

Thank you, Mihir for the question. I would say, this is a tough environment to predict mortgage originations. I think just given the volatility we have seen in 10 years, treasury yield and the spreads to mortgage rates makes it difficult to predict mortgage rates on an ongoing basis. And that in turn means that when you think about consumer behavior, consumers are very interested in buying homes. But between broader inflation ever-to-date home price appreciation and then now, higher mortgage rates in 2023, I think consumer are just taking that step more carefully. I think what we are optimistic about is when you think of first-time homebuyers, we believe that there are more Americans coming to the age of being first-time homebuyers around the age of 33 to 36 in higher numbers than we have seen in a decade. And then we also know that in terms of their propensity or their desire to buy a home that is still in place. So, whether those folks come to market this month, this quarter or next year, I think that aspect is tough to predict. Our estimate is that origination market size will still be -- purchase origination market size will still be meaningful material this year. So, about $1.3-ish trillion is our general range for purchase originations market. Just to give you color on second quarter, we think second quarter did see that spring selling season. Obviously, we don't have final numbers, but our expectation is purchase market was up maybe 40%-ish over first quarter. Historical seasonality would be about 50% on that number. So, the seasonality is a little bit subdued with borrowers maybe holding back. What gives us more optimism is my point on first-time homebuyers will come to market and with the market dynamics, we are talking about MI being a very strong affordability tool for those borrowers. So, we still expect MI market size this year to be in the $300 billion plus range, maybe slightly over $300 billion. And while it's lower than prior years, it's mostly purchase driven, which means it's not churning the book and still gives us reasonable size scale from a new insurance written perspective.

And my last question just on persistency. It seems to have leveled off around this 85% area, I think 84% this quarter. It's the right number to think of through the rest of this year or really till we start seeing rates come down. Thank you.

Yes, Mihir. it's Dean. Thanks for the question. Just for some context again, this is for the broader market. Our highest persistency is really in the high 80% and that happened for one quarter. So, we really think about 84% persistency in the quarter as remaining elevated on a historical basis. I do think you saw the one-point decline sequentially in part by what Rohit just talked about the seasonality during the spring selling season, kind of like we've talked about where persistency is going to level out. It's hard to predict. We do have a combination of a large new book with very low interest rates coupled with a pretty dynamic rate environment that Rohit just referenced. It's obviously never going to be 100%. You got life events, job changes, health issues, divorce and other things that do cause borrowers to pay off their mortgage. I guess, what I would say is our view maybe not as prescriptive, but our view is given that our insured portfolio has loans with mortgage rates kind of at or below the 6% level, and our expectation that mortgage rates remain elevated in the short term, we'd expect persistency to remain elevated in the near term. Whether that's 84%, 85%, 83%, hard to predict, but elevated relative to kind of historical levels, Mihir.

Thank you.

Thanks, Mihir.

One moment for your next question. And your next question comes from the line of Bose George with KBW. Your line is now open.

Hey. good morning, everyone. This is actually Alex on for Bose. Thank you for taking our questions. I have another question on pricing. I was wondering if you guys would be willing to discuss your thoughts on the durability surrounding the price increases, we've seen across the industry over the past year. And then maybe, to drill a little bit deeper, if we were to see the macro-outlook potentially improve, could the industry potentially give some of that pricing power back?

Good morning, Alex and thank you for the question. I would say, the way we think about pricing is difficult to comment at an industry level. Every MI company has their own macroeconomic view, and their own view of returns and credit risk. I think our perspective is that we are still not past the point of economic uncertainty being gone. I think we see the balance in the market kind of the forces I described in my prepared remarks that on one hand, we are talking about consumers still having healthy balance sheets, labor market being strong. On the other hand, we are talking about broader inflation still being there, elevated home prices from the last two, two and a half years and at the same time, higher rates at this point of time. And given what fed has done in terms of increasing rates, the effect of that on economy on consumer is a little bit lagged. So, we are still kind of expecting some volatility in the market or some uncertainty in the market. And as I said earlier, in my answer, we are increasing our price for that economic uncertainty. Depending on how that uncertainty plays out, we will adjust our pricing. So, if that leads to a scenario, where there is a short mild recession, then obviously, we did the right thing in terms of increasing price for those credit losses. And if you look back at COVID, we kept our prices elevated during the time of the COVID unemployment spike and then as unemployment came down, there was adjustment in price. So, I would just say that those are kind of the broad boundaries on how we think about pricing. But given kind of we are in a competitive market, I'm not going to describe kind of specific risk attributes or changes that we might make depending on how the market moves.

Great. Yes, that makes sense. And then maybe, a quick follow-up on Enact Re. Would you be willing to walk us through the benefits of seeding that I think it's 7.5% of the in-force business? And then is there a minimum capital requirement at enact Re as well?

Yes, Alex. I'll take the first question as it relates to the benefit of the quota share. Our immediate business objective of Enact Re was really to gain access to the GSE's CRT market on attractive terms. Longer term, we'll look for ways to develop the broader platform for future growth. But in the immediate term, it's all about GSE's CRT market. And to accomplish that, we believe we needed an A- rating. As you know, the GSE's CRT capital standards are predicated on ratings, both capital and collateralization requirements. But the 7.5% quota share reinsurance allowed us to scale Enact Re to achieve those A- ratings, and ultimately was an enabler to provide that access to the GSE's CRT market again, on those attractive terms. So, I really think if you kind of look backwards, we were looking for ratings. The quote we needed scale for the ratings and ultimately, the quota share transaction provided Enact re, the scale necessary to get an A.M. Best the A- rating. That's really the basis for the quota share reinsurance transaction, the affiliated quota share reinsurance transaction.

And then from a minimum ratings perspective, let me start, and then Dean can chime in. I think, we don't think of Enact Re having like a single dimension of ratings framework. We actually think about four different ratings frameworks, and think of that as Bermuda Monetary Authority. As Dean just said, A.M. Best framework. Then, we have PMIERs, because we are seeding affiliate risk into the entity and we also intend to primarily focus on GSE credit risk transfer market. And then our internal view on top of it, which would be management capital either from an economic capital or a solvency capital perspective. So, we combine all those views together and then think about the capital needed. And I think Dean summarized it well that as you think about us launching this entity, we are launching this entity with a significant portion of the capital we contributed, supporting the affiliate quota share at inception with obviously forward funding some of the GSE CRT market. And as we move forward, we'll basically continue to look at that capital and our commercial success in the GSE CRT market to make sure that that entity has the right amount of capital. It is important to emphasize and we said it in our prepared remarks, that we structured this entity in a very capital efficient way, both from PMIERs and from statutory policyholder surplus. So that allows us to actually achieve scale to Dean's point, achieve A- rating, write business on an accretive basis at attractive risk-adjusted returns, and then at the same time continue our balanced focus on return of capital to shareholders, which was evident with the announcements we made.

Great. that makes sense and thank you so much for taking our questions.

Thanks, Alex.

Thanks, Alex.

One moment for your next question. and the next question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Thanks for taking my questions. Most have been asked and answered, but I'd love to talk a little bit about the cadence of the second quarter and implications as we move into the third. We did hear that as we moved through the quarter, mortgage originations did slow month after month and I'm curious if that's what you saw, and if that's continued, I guess we are now in August so through July as well.

Good morning, Rick and thanks for the question. in terms of this goes back to my point on trying to predict origination market size this year, I think, we are seeing consumer behavior being very well-aligned with two things; one is historical seasonality that consumers buy more homes during the spring selling season. So, we are continuing to see that as I said in a previous response, that we saw an increase in purchase originations and we attribute that to seasonality and that consumer behavior. The second thing is there is an aspect of consumers either coming to market or staying on the sidelines based on where mortgage rates are. I think this is a little bit of unprecedented time that we see significant volatility month to month in 30-year mortgage rates by the fact that 10-year treasury yield is moving in a pretty wide band. And on top of it, we have a historically high spread between 10-year treasury yield and 30-year mortgage almost standing between 270 basis points to 300 basis points. So, when you combine those two factors and you say like mortgage rates are let's say, 6.8%, at that point we generally see and we hear from our customers when I've talked to CEOs of certain mortgage companies recently, they generally see higher than 6.5% 30-year mortgage rate. It slows down activity between 6% to 6.5%, I think activity is a little bit stronger. and then anytime we are in the neighborhood of 6% for 30-year mortgage fixed rate or slightly below it, I think more and more consumers are coming to market and they see that as a deal. So, if you compare that to 2022, that's a net positive, because I think 2022 especially middle of 2022 was a year when people were seeing a sticker shock. They were used to a 3% mortgage rate and they started seeing 6%. I think right now, a 6% is more well accepted in the market. but then the range around it kind of guides people's participation in the market. Hope that helps.

No. it's very helpful. And just dimensionalizing it in that way makes a big difference. One other question, what was the PMIER's credit again, I know you'd mentioned I think you said $1.5 billion. Do you have it with precision? I just wasn't able to find it in the disclosures.

Rick. Hey, it's Dean. It's actually in our QFS on page 14. I think it's 1.524, I can read my own handwriting. And it's the sum of PMIERs required asset credit down in the middle of page 14.

Terrific. Thank you so much.

We actually don't sum it. You'll have to do the math, I apologize for that. But it's the sum of that line.

Hopefully, my excel will be able to pull it together for me. Thanks, Dean.

Thanks, Rick.

One moment for your next question. And next question comes from the line of Eric Hagen with BTIG. Your line is now open.

Hey. thanks. Good morning. Maybe, following up on that actually really quickly, would you say that there are any thresholds you think about for your capital ratios, which could either lead to higher or lower capital return than what you guys have guided to? Thanks.

Eric, I think what we've talked about is given the ongoing macroeconomic uncertainty that we expect to hold PMIER's sufficiencies probably a little bit higher than we would under maybe more normal times. We've talked about holding PMIER's sufficiencies at or north of 150%. I think if we think about PMIER's sufficiency over a longer-time period maybe, with the abatement of the macro uncertainty, we've talked about PMIER's levels pre-pandemic, which were closer to 140%. And so over a longer period of time as macroeconomic conditions maybe level off, that gives you a sense of where we might head with PMIER's sufficiency under different facts and circumstances, different macroeconomic environments.

Yes. I would just add to that, Eric, that I think from a capital return perspective, you said what could lead for it to be higher or lower? I think all our capital return guidance is obviously subject to regulatory approvals and macroeconomic conditions. So, we feel good about our results year-to-date. We've delivered very strong performance, as we said in our prepared remarks. But at the same time, we'll continue to keep an eye on the environment in terms of any regulatory changes, if that happens or any change in the economic environment, whether housing or broadly. But given the fact that we increased our guidance, we feel very good about the guidance we have given for the rest of the year.

Yes. that's helpful. Thank you. Maybe, following up on the conversation around mortgage rates and such, I mean, if rates were to rally 50 basis points or 100 basis points from these levels, how much insurance do you think you can put back on your books in that scenario? And maybe, even more broadly, like do you have any perspective on how MI pricing would potentially behave in response to bigger rallies in interest rates, mortgage rates.

And Eric, just to clarify, when you say rates were to rally another 50 basis points to 100 basis points, you are saying rates actually being higher -- 30-year mortgage rates being higher.

No, lower.

Lower. Okay, perfect. So, I think if you look at recent months and times when we have actually seen mortgage rates come down to that range. So, let's say, 6% to 6.5% range, I think that does increase market participation. I will probably offset that expectation with a little bit of housing market dilemma that we have seen over the last year, which is lack of housing inventory. So, I think in an environment, where there are more buyers coming to market, but sellers are still not willing to sell their homes. And this goes back to you love your mortgage and you hate your house that even if you actually want to upgrade your house, but you're in a 3% mortgage and you can't find another house in the market that's attractive to you, you might not actually sell your house. So, I think we have to work on that dynamic. I'm not sure if I can give you a rule of thumb on how much more business could come to market. We would expect purchase originations to be stronger in that scenario. That could be driven by a combination of some units being higher. But if the supply market is tight, that could also lead to home prices rising again, which would essentially give us higher new insurance written. in terms of how much more we can write or we are willing to write, as Dean pointed out earlier, we are operating with a very strong balance sheet, with a very conservative balance sheet, even at the holding company level. So, we feel comfortable that if the market size was to increase, we have ample capacity and we have ample ability to source third-party capital through reinsurance or insurance linked notes market that we could support a much higher market size and a much higher NIW on our books.

Right. That was helpful. Thank you. Hey. did you guys say what the weighted average price was at which you bought back stock last quarter?

We didn't say it. but since inception, Eric, we've bought back shares at $24.30 on that $71 million of share repurchases.

Yes. Great. Thank you, guys, very much.

Thank you.

Thank you.

Your next question comes from the line of Geoffrey Dunn with Dowling Partners. Your line is now open.

Hi. Thank you. Good morning. It looks like we just got some static.

Hey, Geoff.

Given your commentary on pricing and the implication that if we're in a soft landing or normalized, it sounds like you might think pricing comes down. I'm curious if you think industry pricing was adequate for the environment a year ago. And so as we think about things going forward, if we are going into something that's more normal, do we go back to where we were a year ago, or do we only give part of that back, because maybe the industry was, on average, cheating a little too much for normalized credit?

Good morning, Geoff and thank you for the question. So, let me kind of answer your question in two ways. First thing, a year ago, when we were writing new business, we did say that we found that business to be attractive in terms of returns. And we believe that we were writing that business above our cost of capital. I think at that point of time, our view of macroeconomic environment was different than today's macroeconomic environment. And let me just separate it into two broad buckets. First thing would be just risk-free rates. Our risk-free rates were a lot lower. And I'll just point you to early 2022. And then second thing would be our expectations in terms of unemployment, home prices and just the uncertainty in the environment. So at that point of time, using those assumptions, we were writing business at good returns. Now, as it turns out, conditions change a lot in the last 18 months or so. I think, looking forward, you have a very fair question that if we are in an environment, where we do end up with a soft landing. but at the same time, market rates, risk free rates are still higher. I would expect that we would retain some of the price increases or most of the price increases, because our cost of capital would have moved up. So, even if the economic expectations are coming back to normal, I could see scenarios in which our pricing actually sustains at a higher level. And that's how we think about it. Obviously, every MI company needs to think of their own frameworks, but we could see that pricing being sustained at a higher level.

That's helpful. Thank you.

You're welcome.

And we have no further questions at this time. I will now turn the call back over to Rohit Gupta.

Thank you, Bella. Thank you, everyone. We appreciate your interest in Enact and I look forward to seeing some of you in New York at the Barclays Global Financial Services Conference in September. Thank you, all. We'll wrap up the call here.

This concludes today's conference call. Thank you for your participation. You may now disconnect.