Good day, and welcome to the Inapp Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to hand the call to Daniel Cole, Vice President of Finance and Investor Relations. Please go ahead.

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 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 our website. 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 actual 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 material 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. I will turn the call over to Rohit.

Thank you, Daniel. Good morning, everyone. Before discussing our third quarter results, I would like to start by acknowledging the devastation that has recently affected the Southeast. Our thoughts go out to everyone affected by the recent hurricane. As a company that calls North Carolina home, we were especially saddened by the brutal toll Helene took on Western North Carolina. Since Helene, Inapp and its employees have mobilized to help the victims in several ways, including volunteering at a local food bank, launching a relief effort to collect much-needed items, and donating to relief efforts through the Inapp Foundation employee giving campaign. Inapp is deeply engaged in the communities we serve, and philanthropy and volunteerism are at the core of our culture. We know that recovery from events such as these takes time, and we will continue supporting the impacted communities as they rebuild. Turning back to the business and our third quarter performance, we delivered another set of excellent results driven by continued execution against our priorities and favorable market dynamics. We reported adjusted operating income of $182 million, up 11% year over year. Adjusted EPS was $1.16. Adjusted return on equity was a solid 15%, and our adjusted book value per share was $33.27, up 3% sequentially and 10% year over year. Turning to the operating backdrop, we continue to operate in a dynamic environment, and while there are potential macroeconomic risks, the US economy remains strong. During the quarter, the consumer and labor market wages grew, and inflation continued to slow. In addition, while constrained housing supply and higher mortgage rates continue to influence the housing market in the short term, the long-term drivers of demand remain intact. Against this backdrop, our credit and manufacturing quality continues to be strong, resulting in high-quality NIW and a portfolio…

Thanks, Rohit. Good morning, everyone. We delivered another set of very strong results in the third quarter of 2024. GAAP net income was $181 million or $1.15 per diluted share compared to $1.02 per diluted share in the same period last year and $1.16 per diluted share in the second quarter of 2024. Return on equity was 15%. Adjusted operating income was $182 million or $1.16 per diluted share compared to $1.02 per diluted share in the same period last year and $1.27 per diluted share in the second quarter of 2024. Adjusted operating return on equity was 15%. Turning to revenue drivers, primary insurance in force increased to $268 billion in the third quarter, up $2 billion sequentially and up $6 billion or 2% year over year. New insurance written was approximately $14 billion, flat sequentially and down 6% year over year, primarily driven by lower estimated market share. Persistency was 83% in the third quarter, flat sequentially and down one percentage point year over year. The portfolio remains resilient to mortgage rate volatility, with 8% of the mortgages in our portfolio having rates at least 50 basis points above the October 31st mortgage rate. Additionally, 70% of our portfolio has a mortgage rate below 6%. With these facts and continued volatility in mortgage rates, we anticipate the elevated persistency will continue to help offset lower production in the current higher rate environment. Net premiums earned were $249 million, up $4 million or 2% sequentially and up $6 million or 2% year over year. The sequential and year-over-year increases in net premiums were driven by insurance in force growth and our growth in attractive adjacencies consisting primarily of InappRe's GSE CRT participation. These increases were partially offset by higher ceded premiums. Our base premium rate of 40.2 basis points…

Thanks, Dean. As I reflect on our performance and look to the remainder of 2024 and beyond, I continue to believe that the long-term dynamics of our market remain compelling. Our product continues to help people responsibly achieve the dream of homeownership, and our dedication to this principle underpins all aspects of our business and drives our efforts to deliver exceptional value for all of our stakeholders. Operator, we are now ready for Q&A.

If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question will come from Doug Hartner of UBS. Please go ahead.

Thanks. I was hoping you could talk about the competitive dynamic in the industry right now. You had one competitor take significant share in the quarter. What are you seeing in terms of pricing and the level of competition? Thank you.

Sure. Good morning, Doug. Thank you for your question. Our perspective is that MI pricing continues to be competitive, but also expected pricing returns, as we have said in the past, continue to remain attractive within our risk-adjusted return appetite. We remain confident in our ability to write new business that delivers attractive returns and creates value for our shareholders across a range of scenarios. We are happy with our new insurance written at $13.5 billion. We like the pricing, we like the underwriting quality, and as I said in my prepared remarks, the credit quality and manufacturing quality continue to be very strong. So we are happy with our production, and we generally see pricing as constructive in the market.

Great. Thank you.

The next question comes from Mihir Bhatia of Bank of America. Please go ahead.

Hi. Good morning, and thank you for taking my questions. Just to start, first on the hurricane and how you are going to reserve for the hurricane delinquencies. I understand that typically you see a lot of cure activity or not a lot of claim activity because of the property damage. But when you reserve for it, how are you going to go about reserving it?

Yeah, Mihir. It's Dean. Thanks for the question. As we mentioned in our prepared remarks, we did have some modest impact this quarter from Hurricane Barrel. I think about 300 new delinquencies this quarter changes the trajectory of sequential variance from 24% to 21%, or it takes the new delinquency rate from 1.4% to 1.3%. So pretty modest impact. We made no adjustments to our reserving this quarter for Barrel-related delinquencies. At the same time, as you know, the severity of each hurricane is unique. It certainly appears that Hurricanes Helene and Milton will have a little bit of a sharper, maybe broader impact than Hurricane Barrel. We have not seen any reporting to date, but we do expect that to start coming in in the fourth quarter. In terms of how we reserve, we will wait to see what is reported. I guess the reminder here, and we will take this into consideration as we think about the appropriate claim rate to assign on those hurricane-related delinquencies, is that our historical experience with hurricane-related delinquencies shows that they cure at a very elevated rate, with again very limited claim activity. So more to come on exactly how we will handle Helene and Milton, and it will be somewhat determined by the magnitude of the reporting next quarter.

Got it. Then I wanted to ask about InappRe. Starting to grow a little bit. It's starting to drive a little bit more. I know it's embedded in the reported on the income statement on the premium income, but you do break it out on the slide. I guess the question is just on InappRe. Are we at scale now? Is it going to continue to grow and drive more premium revenue quarter over quarter? Because it's been growing pretty nicely so far. So I'm just trying to understand how much more growth we should embed in models for it over the next year or two.

Yeah. Good morning, Mihir. Your question on InappRe is a good one because we launched InappRe about six quarters ago, five or six quarters ago, and when we launched InappRe, our primary intent was to actually take advantage of our core competencies and our existing infrastructure and scale to enter an adjacent space on an attractive return for our shareholders, and that's what we have done. As I said in my prepared remarks, we have participated in GSE transactions that came to the market in the quarter. But I would also say that given how we structured the entity and the capital, you know, expense and capital-efficient way, our journey on InappRe is much more long-term. It's going to grow over a period of time, so we will measure that success in quarters and years, not in months. We are happy with the growth we are seeing in InappRe. We are happy with the returns we are seeing in InappRe, and we will provide more visibility in the future. At this point in time, I would say just given the size of the originations market, which has been suppressed, just given the mortgage rates as well as kind of GSE reinsurance transactions, I would just think of this as gradual growth over a period of time. So look forward to having that discussion in the future. But at this point in time, we think of that as prudent growth at attractive returns over a period of time.

Okay. And then, like, my last question, just on housing policy. Obviously, a new administration is coming in in January. Look, I get the general idea that historically, Republicans have been less regulatory-focused or maybe a little bit lighter on regulatory touch. But are there any specific regulations that we should be keeping an eye out for, whether from a rollback perspective, whether from something that's inhibiting your growth, something that you're particularly paying attention to that you're looking for the new administration to either roll back, change, or implement? Anything specific we should be looking at keeping an eye out for? Thank you.

Yeah. Thank you, Mihir. So a very appropriate question given what we are seeing coming out of elections. I would just say starting off, there are still seats remaining on the House side, which will determine the composition of Congress. So look forward to seeing how that comes together, especially on the House side. And then also, I think it will be important to see appointments in key regulatory roles. I think post-Collins decision, we know that there can be changes in regulatory roles, so we have to see who are the individuals who end up in those key roles. Obviously, I'm referring to FHFA, HUD, FHA, CFPB. Those roles are impactful to our industry when it comes to mortgage finance. But I would also say our product is well-received by both sides of the aisle. When you think about who our product supports every day, we support homebuyers who are most in need, and at the same time, we put our capital in front of taxpayer money every day. So the product has appeal on both sides of the aisle. If you think about the last two administrations, in the last eight years, we have navigated well under both administrations. So I would say it's too early to speculate right now on regulatory changes or regulatory implementations, but I would just generally say our track record shows that we navigate well as an industry under either administration and actually have very good relationships. I think this is an important point. Our industry has very good relationships both on the regulatory and legislative side, which helps us make sure that our advocacy and our view are heard.

Thank you for taking my questions.

Yep. Thank you.

The next question comes from Bose George of KBW. Please go ahead.

Hey, guys. Good morning. Actually, going back to credit, I wanted to ask what do you see as normalized delinquency ratios for the portfolio as it seasons? And can you just talk about the timeline as these portfolios get fully seasoned?

Yeah. Bose. Thanks for the question. So, you know, normal or average delinquency development curves generally start to increase, obviously, from the books at origination and generally peak between years three and four. Peak is a little bit of a misnomer. It's kind of a plateau, so it kind of levels off generally in that three to four-year time horizon and then takes, you know, twelve to eighteen months later, it starts to default. But I think looking at that on average can be a challenge. The real answer to the question is the level of delinquencies on each book is very dependent on both the credit characteristics of the insured loans as well as the macroeconomic conditions that each book is really aging through. If I try to crystallize that, maybe just by way of example, the 2021 book year, which saw a much heavier concentration in refinance originations, so it has lower loan-to-values, it has lower debt-to-income, and it has marginally higher FICOs. It also had meaningful embedded equity given the environment that it's seasoned through. So we would expect that 2021 book year to produce lower delinquencies than, say, the 2022 book, which had a higher concentration of purchase originations, so higher LTVs, higher DTIs, and marginally lower FICOs. It also, the 2022 book, while it has some embedded equity for sure, it has less than the 2021 book. So there's really no rule of thumb, I think, that I can provide, and I think it probably feels a little too granular to go book year by book year. But, you know, the average is as I suggested, and the books are going to vary depending on their credit characteristics and the macroeconomic conditions. And then the last thing I'd say just on credit overall is just a reminder, whether it's a 2021 or 2022 book, cure activity has remained very elevated given these books still have a significant amount of embedded equity in them. Just to maybe crystallize that point, new delinquencies in the third quarter, 92% of our new delinquencies had at least 10% embedded equity. Seventy percent had at least 20% embedded equity. So we're still seeing the impact of embedded equity on the cure activity, and when you put those two things together, I think we end up in a place where we characterize in our prepared remarks that we still believe overall credit performance remains very strong through the third quarter.

Okay. Great. That's helpful. Thanks. And then actually, a different topic. How much buy-down volume do you guys see coming through the MI market, you know, a lot of the builder product? And is that sort of permanent or temporary? Just curious how much of that's...

Yes. Thanks, Bose. So we have not articulated overall buy-down volume that we see in our new insurance written. We had talked about it in prior quarters. I would say the majority of the volume we see is coming from the permanent buy-down product because builders actually have the capacity to create a permanent buy-down product or what's called forward commitment. So that product actually is not a one or two-year buy-down. That's a lifetime of loan fixed rate, and the note rate is essentially lower than the market rate by typically a meaningful amount. So the majority of our composition is coming from that product, and then a smaller portion within the buy-down product comes from the one or two-year buy-downs where the first year might be bought down by two points, the second year is one point, and then it comes back to the market rate. And as a reminder, all the products are qualified at the fully indexed rate at the maturity of that buy-down ramp-up.

Okay. So you expect no real difference? No expectation or different expectation in terms of credit performance on that product?

No. We don't, Bose. And we have modeled that product and looked at it. I know there are some concerns in the market that while the consumers have the note rate bought down, do they actually apply their income and other expenses? We haven't seen that come through in actual credit performance in prior cycles.

Okay. Great. Thanks.

The next question comes from Richard Shane of JPMorgan. Please go ahead.

Hey, guys. Thanks for taking my question. Bose really covered it, but I just want to clarify one thing in terms of the buy-down. So you just commented that historically, you haven't seen a difference in credit performance as buy-downs roll off. I am curious. We're probably just now reaching the point where those one and two-year buy-downs are reaching the inflection point in terms of rate. Is there anything on the margin that you're seeing? And, again, I think everybody sees that particular product as the edge case in the current environment. And so I'm just curious if you're seeing anything there worth mentioning.

Yeah. Good morning. So I'll start off by just as a reminder that, as I mentioned in answer to Bose's question, the majority of our product coming from that segment, we are broadly calling it buy-down, but the builder product is typically not buy-down. It's a forward commitment product. That product is actually a fixed-rate product for the life of the loan. So for that product, there's no payment shock coming. And then my comment was for the minority of that product, which is temporary buy-downs. For those temporary buy-downs, in the last few years as we have seen, so I would go back to the second half of 2022. In the second half of 2022, when rates started going up, the feel of this product became more in the market. So we have this product starting in the 2022 vintage. So some of that seasoning has already shown up in terms of the rate getting normalized to the fully indexed rate and that product performing in the market. So I would say at this point in time, we have not seen a performance differential. We look at all attributes, and we still don't see that. But we continue to keep an eye, and if we see any differences show up, then we would make adjustments to our underwriting guidelines.

Got it. And is the market from a pricing perspective differentiating that product if it's got a temporary buy-down?

Yeah. I'm not going to comment on pricing attributes, as you well know. The MI market operates on a black box pricing for the majority of the market. And the attributes we use and how we price, whether it's credit attributes, loan attributes, or geographies, is very key to our commercial strategy and our competitive strategy. So whether we use pricing strategy or guidelines to differentiate in that segment, I think it's not something I am comfortable talking about on an earnings call.

Totally understand. If you can't blame me for asking, though.

Yeah. Absolutely. What I will say is in prior calls, we have talked about our mindset broadly on how we think about pricing and credit. So our principle is the right price for the right risk. So underlying in that assumption is if we see a risk in that product in any way, we are pricing for it. And we have an ability at a very granular level to deploy that pricing in the market and deliver it to our customers. And the second thing is we always take into account layered risk on loans. So if we believe that we are getting to a point where we have multiple layered risks in the market on loan attributes, that's something that we are very, very cautious about. And I commented on that percentage in my prepared remarks. So just to give you an example, even during this quarter, we made several pricing changes and specifically targeted price increases on some layered risk and on some geographies. That just gives you a flavor of how we think about pricing and deploying it in the market.

No. It's very helpful. Thank you very much.

Thank you.

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

Thank you, Andrea. Thank you, everyone. We appreciate your interest in Inapp, and I look forward to seeing you in Miami at JPMorgan's Equity Opportunities Forum on November 13th. Thank you.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.