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spk01: Hello, and welcome to NAC's fourth quarter earnings call. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Daniel Cole, Vice President of Investor Relations. You may begin.
spk00: Thank you, and good morning, everyone.
spk04: Welcome to our fourth 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 fourth quarter results before turning the call back to Rohit for some closing remarks. After prepared remarks, we will take your questions. The press release we issued after market closed yesterday contains Enact's financial results for the fourth quarter of 2021. This release 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. Before we begin, I would like to remind everyone that 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 differ materially. We undertake no obligation to update or revise any such statements as a result of new information, future events, or otherwise. 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 also available on our website. Also, please keep in mind the press release, the quarterly financial supplement, 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 investor presentation, and our upcoming SEC filing on our website. With that, I'll turn the call over to Rohit.
spk02: Thank you, Daniel. Good morning, everyone. Welcome to our fourth quarter earnings call. We delivered a very strong quarter and capped an excellent year for our company. 2021 was a transformational year for Enact in which we achieved several significant milestones. Most notable was our successful IPO in September a major step forward that enhances multiple aspects of our business and will allow us to achieve our full potential as a company. We have already begun to see the benefits of this transaction in just a few months since its completion, with much more to come. It was also a year in which we continued to execute on our cycle-tested growth strategy, which has consistently driven prudent market share growth for Enact. The result was some of the strongest performance in our history. Our ability to pursue new business with existing and new customers was further strengthened by the upgrades we received from all three rating agencies following our IPO. During the quarter, we reactivated our relationship with a key customer, and we continue to deepen existing relationships and develop new ones. We further differentiated our value proposition and invested in areas such as machine learning, data analytics, and modeling to ensure customers receive an experience tailored to their needs. Balance sheet strength that enhances our financial flexibility has always been a hallmark of our strategy, and that remained the case in 2021. We continue to protect our balance sheet by maintaining high standards for new business that properly balance risk and reward and executing on our acquire, manage, distribute model. As of the end of the year, 92% of our risk in force was covered by credit risk transfers, and we ended the year with one of the highest PMIRES buffers to publish standards in our history. We also took another significant step forward on this front with the announcement today of another approximately 300 million reinsurance transaction at attractive cost. Additionally, We executed against our balanced capital allocation strategy, supporting our existing policyholders, investing in our growth, and returning capital to shareholders through the issuance of a special $200 million cash dividend in the fourth quarter, our first as a public company. Dean will have more to say about our future dividend plans in a few minutes. Importantly, it was a year in which we once again fulfilled our mission of helping homebuyers achieve their homeownership dreams. In 2021, we enabled 317,000 families to get into homes through purchase or refinance transactions and helped another 35,000 families stay in their homes through the pandemic and its economic challenges. We achieved these milestones in an environment that remains healthy and supportive. Robust demand for housing, a strong consumer balance sheet, and low unemployment drove strong insurance-enforced growth of 9% in 2021. Mortgage origination activity remained robust, fueled by strong home sales and refinancing, and home prices continued to climb, increasing our average loan amount on new insurance written to $305,000 for the year. Turning to some of the highlights for the year. Our performance against key metrics was the strongest in our history. We delivered adjusted operating income of $551 million or $3.38 per diluted share compared to $373 million or $2.29 per diluted share in 2020. Adjusting for interest expense related to our 2020 debt issuance, this is the highest adjusted operating income we have ever achieved reflecting growth in our insurance in force as we continue to write large new books as well as lower delinquencies as a result of the ongoing economic recovery and prudent expense management. Insurance in force for the year rose to a record $227 billion, while new insurance written was $97 billion. We are committed to building our book with high quality and prudently priced business. We did so throughout 2021, with new business pricing yielding low to mid-teens returns. A key aspect of our success has been the continued execution of our risk management and pricing strategy and commitment to operational excellence, particularly throughout the pandemic. Driven by higher cure rates and a delinquency rate that has improved from 5% at the end of 2020 to 2.6% today, our loss ratio ended the year at 13%. We continue to maintain a high-quality risk profile in our portfolio with a weighted average FICO at year end of 741, an average loan-to-value ratio of 93%, and a declining layered risk concentration of 1.6%. As I mentioned, maintaining the strength of our balance sheet is a key strategic priority. Driven by our credit risk transfer program, our sufficiency to PMIR's published standards was $2 billion, or 165% at year-end, enhancing our flexibility to pursue our capital allocation goals, including returning capital to shareholders. Before I turn it over to Dean, let me take a minute to speak about what we see for the business going forward. With record insurance in force and a strong balance sheet, We feel very good about our growth prospects in 2022 and beyond as we build on the success of 2021. Demographic trends and industry fundamentals are strong tailwinds, and we continue to see robust demand for housing. As an insurance provider with scaled insurance in force, we should benefit from modestly increasing interest rates and lower refinance activity as we expect the net result to be higher persistency offsetting any declines in new originations. This, in turn, should drive continued insurance-enforced growth. Against this backdrop, we remain committed to executing against our growth strategy, writing new business above the cost of capital, further enhancing our relationships, protecting our balance sheet through the continued execution of our credit risk transfer strategy, investing in the solutions that provide differentiated value to our customers and strengthen our competitive position and ultimately generating value for our shareholders. And we will continue to take advantage of the benefits of our IPO, including a stronger competitive position, realizing the full power of our brand and enhanced financial flexibility. I will now turn the call over to Dean to discuss our fourth quarter and full year performance in more detail.
spk05: Thanks, Rohit, and good morning, everyone. As Rohit mentioned, we delivered another very strong quarter of financial results that concluded a strong 2021. GAAP net income for the fourth quarter was $154 million or $0.94 per diluted share as compared to $0.84 per diluted share in the third quarter of 2021 and $0.56 per diluted share in the same period last year. Adjusted operating income was $154 million or $0.94 per diluted share in the quarter as compared to $0.84 per diluted share in the third quarter of 2021 and $0.57 per diluted share in the same period last year. For the full year, GAAP net income was $547 million or $3.36 per diluted share compared to $370 million or $2.27 per diluted share in 2020. Adjusted operating income for 2021 totaled $551 million or $3.38 per diluted share compared to $373 million or $2.29 per diluted share in 2020. In terms of key revenue drivers, new insurance written was $21 billion for the quarter, down sequentially from $24 billion, driven by lower estimated mortgage originations. New insurance written for purchase transactions made up 90% of our total NIW in the quarter, up from 88% last quarter. In addition, Monthly payment policies represented 91% of our new insurance written in the quarter as compared to 90% last quarter. Record insurance in force of $227 billion increased 2% from the third quarter levels and 9% from the fourth quarter a year ago. The year-over-year increase was primarily driven by new insurance written, partially offset by historically low persistency of 62%, which continues to improve as market conditions normalize. As of the fourth quarter, our 2020 and 2021 book years represented over 70% of our total insurance in force, reflecting both the large market opportunity and the commercial success we've had in consecutive years. At the same time, these newest book years reflect a strong credit profile and attractive pricing, which we would expect to positively contribute to our future profitability and return profiles. Risk in force at year end was $56.9 billion, up from $55.9 billion last quarter and up from $52.5 billion in the fourth quarter 2020, primarily as a result of our growing insurance portfolio. Persistency for the quarter was 69%, up from 65% last quarter and 57% in the same period last year. The increase in persistency was primarily driven by an uptick in mortgage rates and a continued decline in the percentage of our enforced policies with mortgage rates above current market rates. Total revenues for the year were up 1% year over year, ending at approximately $1.1 billion for 2021. Revenues for the quarter were $273 million compared to $280 million last quarter and $286 million in the same period last year. Net premiums earned were $237 million, down 6% year over year, and down 3% compared to the prior quarter, driven by lower single premium cancellations as persistency increased and single product concentration decreased to 13% of our portfolio, and the lapsing of older, higher price policies as compared to our new insurance written, which was partially offset by growth of our insurance in force. In addition, the decrease in net premiums earned year over year was also driven by higher seeded premiums in the current quarter. from the expanded use of our credit risk transfer program. Our net premium rate of 42.2 basis points was down 1.9 basis points sequentially and 6.6 basis points year over year, driven primarily by the same combination of lower single premium cancellations, higher seeded premiums, and the lapsing of older higher price policies as compared to our new insurance written. Importantly, the current market conditions and underwriting conditions as well including the mortgage insurance pricing environment, is within our risk-adjusted return appetite, enabling us to write new business at attractive low- to mid-teen returns. Investment income for the fourth quarter was $35 million, in line with a year ago, primarily as the larger portfolio was offset by lower investment yields. For the year, investment income totaled $141 million. Turning to losses, losses in the quarter were 6 million as compared to 34 million last quarter and 89 million in the fourth quarter of 2020. The sequential change in losses was driven by 32 million of favorable reserve development in the current quarter on pre-COVID related delinquencies, partially offset by higher new delinquencies. New delinquencies in the quarter of approximately 8,300 were up approximately 900 sequentially from 7,400 last quarter and include an increase in delinquencies from natural disasters in FEMA impacted areas in addition to new delinquencies from our new large books that are aging and going through their normal loss development pattern as expected. The year-over-year decline in losses was driven by the current quarter favorable reserve development and approximately 30% lower new delinquencies as the economy continues to improve from the pandemic. Additionally, The fourth quarter of 2020 also included $37 million of reserve strengthening. For the year, losses were $125 million compared to $380 million in 2020. Our fourth quarter total delinquencies of approximately 24,800 and the associated delinquency rate of 2.6% reflect six consecutive quarters of improvement in both measures, driven by the continuation of CURES outpacing new delinquencies. Cures in the quarter of approximately 11,900 increased modestly as compared to the prior quarter and represented 144% cure ratio as compared to new delinquencies in the quarter. This quarter, 29% of new delinquencies were subject to a forbearance plan, which continues to decline from the peak of approximately 80% last year as the economy recovers. For the quarter, our new delinquency rate of 0.9% is consistent with pre-pandemic levels of development and indicative of the ongoing recovery. Our claim rate on new delinquencies for the quarter was 8%, consistent with the claim rate for new delinquencies throughout 2021. Turning to our ever-to-date cure performance of COVID-19 new delinquencies, or those new delinquencies since April of 2020, to date, approximately 92%, 88%, and 84% of delinquencies from the second, third, and fourth quarters of 2020 respectively have now cured. These cumulative cure rates have continued to increase through time as borrowers reach completion of their forbearance plan terms and are nearing their original estimated claim rate expectation. We continue to assess the resolution of COVID-19 delinquencies with a focus on the approximately 41% of our delinquencies subject to a forbearance plan, as we consider the appropriateness of our loss reserves over time. At present, our loss reserves reflect our best estimate of ultimate claims on our total delinquencies. The embedded equity position of our delinquent policies remains substantial, with approximately 98% of our delinquencies as of year-end having an estimated 10% or more mark-to-market equity using an index-based house price assessment. As I've noted in the past, this can serve as a potential mitigate both to the frequency of claims and the potential future loss for delinquencies that ultimately progress the claim. Turning to expenses, operating expenses for the quarter were $59 million, and the expense ratio was 25% in the quarter, as compared to $59 million and 24%, respectively, in the third quarter of 2021. Operating expenses were $246 million for the full year, up 4% year over year, and in line with our expectations. Now, let me take a minute to talk about how we're thinking about operating expenses in 2022, as there are a few puts and takes. Our ongoing efforts to drive operational efficiency and our shared services agreement with Genworth should serve to decrease our costs, including corporate overhead, over time. In addition, our run rate will also benefit from the non-recurrence of costs related to the preparation of our IPO. At the same time, and as we've discussed previously, we will incur incremental expenses related to standing up public company activities. Taken together, we expect operating expenses to decline to approximately $240 million in 2022. Turning to capital and liquidity, as Rohit mentioned, we are committed to maintaining a strong balance sheet aligned with our investment grade ratings. Our PMIRS sufficiency decreased sequentially to 165% or approximately $2 billion above the published PMIRS requirements. That compares to 181% or $2.3 billion in the third quarter of 2021. This decline was driven in large part by the execution of our 200 million dividend to shareholders in the quarter. In addition, our PMR sufficiency decline was impacted by our significant level of NIW in the quarter and the amortization of our existing reinsurance transactions, which were partially offset by elevated lapse from prevailing low interest rates, strong business cash flows, and lower delinquencies. At year end, we had approximately $1.4 billion of PMIRES capital credit and approximately $1.6 billion of lost coverage protection provided by our credit risk transfer program, which provides cost-efficient PMIRES capital and reduces future loss volatility by ceding risk to traditional reinsurers and the capital markets. Our PMIRES sufficiency includes the benefit of the 30% multiplier for COVID-19 related delinquencies, which reduce PMIRES required assets by about 390 million before giving effect to reinsurance benefits. The benefit from the 30% multiplier has declined over time as more COVID-19 related delinquencies resolve and cure. In addition, in January of this year, we executed an excess of loss reinsurance transaction with a panel of reinsurers, which provides approximately 300 million of forward reinsurance coverage on a portion of our mortgage insurance policies written during 2022. Beyond bolstering our future PMIR sufficiency at an attractive cost, this execution reflects our programmatic approach to the distribution of risk, diversification of sources of credit risk transfer program, and acquiring coverage in advance of the origination of our next book year. For the year, we executed approximately $1.4 billion of incremental credit risk transfer transactions, and since the program's inception in 2015, we've executed approximately $3.8 billion of aggregate credit risk transfer transactions, which provide both cost-efficient capital and loss volatility protection. Turning to our balance sheet more broadly, at year end, our GAAP equity was $4.1 billion, invested assets totaled $5.3 billion, cash and cash equivalents were approximately $426 million, long-term debt was $740 million, and our debt-to-capital ratio was a conservative 15%. Combined with our PMIRES sufficiency levels, these metrics continue to demonstrate why we're confident in the strength of our balance sheet to support our business. Moving to capital allocation, we will continue to pursue a balanced approach that maintains a strong balance sheet, pursues investments to enhance our differentiation and growth potential, and returns excess capital to shareholders. As I mentioned earlier, we delivered a key commitment and executed a special $200 million cash dividend to shareholders during the quarter. Returning capital to shareholders, balanced with our gross and risk management priorities, remains a key commitment for ENACT as we look to drive shareholder value through time. On this front, we're in the process of evaluating our capital return objectives for 2022, which includes an assessment of holding company liquidity and financial flexibility. We expect a component of our capital return plan to include the initiation of a regular common dividend around mid-year this year. In addition to this dividend, we'll continue to evaluate the potential for an incremental return of capital later in 2022 based on our ongoing business performance and a review of the macroeconomic conditions and regulatory landscape. With that, let me turn the call back over to Rohit.
spk02: Thanks, Dean. All in all, a very strong finish to a transformational year. We executed on our strategy, took the next step in our growth journey through our successful IPO, and generated value for our shareholders. I'd like to thank each and every member of the ENAC team for their contributions to our great performance. We enter 2022 well-positioned for continued success. The housing market remains strong, consumer credit remains healthy, and we continue to see solid demand, particularly among first-time homebuyers. We are incredibly proud of our role in helping families achieve homeownership and creating a path to build wealth. In 2021, we made it possible for 317,000 homebuyers who otherwise might not have to qualify for a mortgage to achieve their dreams of homeownership. At the same time, we worked hard to keep people in their homes, achieving cure and forbearance resolution rates that both reached record highs. We remain committed to working with Capitol Hill, the administration, trade groups, and consumer advocates to drive solutions that increase the accessibility, affordability, and sustainability of home ownership. We are now ready to take your questions. Operator?
spk01: Thank you. To ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from Doug Harder with Credit Suisse. Your line is open.
spk07: Thanks. Just hoping to get a little bit more on the premium yield. You know, I guess any color clarity as to kind of where and when we might see some bottoming out of the premium yield?
spk05: Yeah, Doug. Hey, it's Dean. Thanks for the question. You know, in terms of premium yield, I think the drivers of base and net premium rate are consistent to what we talked about last quarter, quite honestly. You know, if we focus on base premium rate, the decline of 1.2 basis points is impacted by the elevated lapsing of older, higher-priced policies relative to our new insurance written, which is at lower pricing, coupled with the fact that, you know, our most recent book years are becoming a bigger percentage of our overall portfolio, kind of focusing on the 2020 and 2021 book year concentrations. I do think it's important to note that when you think about base rate, it can fluctuate in the near term. So if you look at specifically slide 12 of our investor presentation and look at that table on the top right-hand side, you know, over the last six quarters, you're going to notice some lumpiness quarter to quarter as the base rate is impacted by a lot of different factors, you know, lapse and which cohorts lapsing, new insurance written, the purchase-refi mix, credit mix, and the like. So, you know, I do think in the short term, we do see some lumpiness, and I think it's exhibited on that time series on slide 12. From a net premium rate perspective, go ahead, Doug.
spk07: Yeah, I guess just curious of any color you could give us as to kind of where the rate is on new insurance written, you know, kind of for 2021 or the most recent quarter, how that would compare to the enforced You know, just to get a sense as to, you know, kind of when or how much more of that lapsing of higher cost policies there is to kind of happen.
spk02: Morning, Doug. This is Rohit. So I would say it's difficult to provide guidance on premiums rate. On an NRW basis, we are in a competitive market, and it's tough to provide guidance while we are executing on our strategy. I would just like to maybe add two things to what Dean said. First thing, when we look at our base premium rate or net premium rate, there is choppiness in that metric and it can fluctuate in the near term. So we do think about this metric on a longer term basis. And we do believe that we work to ensure that we are driving compelling returns for our investors over time. If you look at our net premium rate in the fourth quarter of 21, it generated a 14.8% return in the quarter and 13.8% return for the year. And our NRW pricing level, as we have stated in the past, remains attractive and consistent with low to mid-teen returns, as we have previously referenced. Now, coming back to your question on NRW pricing, I would say we continue to see the pricing as constructive in the market. We did see some stabilizing of pricing in the market in fourth quarter. And one thing that I always like to remind our investors is, A healthy MI market dynamic has enabled us to continue to write new business in a large market at attractive returns. So think about the $97 billion of new insurance written we added in 2021 at those healthy returns. Beyond that, it's tough to comment on any specific pricing levels.
spk08: Thank you. Thank you.
spk01: Thank you. Our next question comes from Bose George with KBW. Your line is open.
spk08: Yeah, good morning. Actually, first, just the percentage of NIW with DTI over 45%, that increased. It looks like it's 23% now, so it's, you know, back to kind of the highs pre-COVID. Just curious what's driving that, any changes in terms of your views on credit or just any other color on that would be great.
spk02: Sure. Bose, this is Rohit. Good morning. There are a few things driving this, and I would say just start off with thinking about the shift in origination market that's happening as we continue to see a burnout of refinance population. We saw that happen in 2021. For the entire year, I believe, the purchase portion of the market is up from 39% in 2020 to 43% in 21. And purchase loans generally come with slightly higher risk attributes. That means slightly higher debt-to-income ratios, higher loan-to-value, and also more mid-FICOs. So that's kind of one macro factor driving debt-to-income ratios along with LTVs and FICOs. Second thing, from our perspective, the mix and profitability of the business we are writing is in line with our expectations and our risk appetite. We have mentioned this before, that while we monitor single-dimension risk elements, all these attributes, our focus is truly on managing layered risk. We also focus on the price we receive for the risk and evaluate it against expected and stress cases. So based on that mindset, we are very comfortable with the risk-adjusted returns on the new production we are writing. And I would point out that the level at which we are writing our mix is very aligned with the last purchase market. So think about 2018 to early 2020. And the amount of layered risk in our business is extremely low. We actually disclosed our layered risk in one of our earnings presentation slides. I believe it's slide 10. And layered risk is at 1.6%. And you might remember that this number was higher than this in first quarter and second quarter of 21. So it's actually on a declining trend.
spk08: Okay, great. That's very helpful. Thanks. And then actually just going back to the ROE. discussion, you know, how do you treat like a normalized PMIRES excess when you talk about ROEs? Obviously, right now, you've got a lot of PMIRES excess. So is there like a normalized number that you kind of think about when you, you know, think about that ROE range you're targeting?
spk02: Yeah, so I think, Bose, very good question. I think when we think about our pricing, when we are talking about mid to low teen returns, that is our conditional pricing view on a gross basis, I would say. So that takes current and future market expectations into account from premiums as well as laps and losses. And then when we get to the capital line, it actually takes PMIRs into accounts. And we do have a view of economic capital, which is our internal view and a lot more granular than PMIRs. And we use that economic capital V to kind of almost think of that as an accelerator or a break in terms of certainty of delivering economic returns. So from a gross perspective, capital perspective, we are not looking at PMIRES buffer. We are not looking at benefit of reinsurance or ILN transactions in terms of cost of capital. When we talk about our economic returns, obviously our 165% PMIRES buffer, the cost of that buffer, the capital in our balance sheet is all aligned with that return. And as we have stated in the past, we generally see currently the market expectations on that PMIRES buffer in that 140, 150% range. In a pre-pandemic time, that number was in that 143 to 149 range for Q4-19 and Q1-2020. So we still think that in the near term, that is the right expectation. As we see cure activity from COVID delinquencies, as well as economy getting back to normal, we would reevaluate that number and look at different considerations, including rating agencies, GSE expectations, customer expectations, and then make a determination on what's the right level for our business.
spk08: Okay, great. Thank you. Thank you.
spk01: Thank you. Our next question comes from Jeffrey Dunn with Dow Lean and Partners. Your line is open.
spk03: Thanks. Good morning. Dean, I want to follow up on your commentary on capital management. When you consider augmenting your plans for introducing a common dividend with special dividends, Do you think special dividends will be an annual consideration, or could that be a semiannual review?
spk05: It's a good question, Jeff. Appreciate that. I think, you know, obviously as we pivot to the initiation of a regular common dividend, we're thinking about that on a quarterly basis. I think when we think in special dividend terms, it'll be facts and circumstances driven. I can see... that being driven on a semi-annual basis if the business conditions, the macroeconomic environment are accommodating for a semi-annual. I think at this point in time, specifically for 2022, we're thinking more on an annual basis than semi-annual basis. Again, being driven by what we see as the facts and circumstances of the ongoing recovery and, you know, with the lingering effects of the pandemic.
spk03: Okay, great. Thank you.
spk05: You're welcome.
spk01: Thank you. Our next question comes from Mihim Bhatia with Bank of America. Your line is open.
spk10: Good morning, Mihim. Good morning. Hi. Good morning. Thank you for taking my question. The first question, Ajay, maybe just going back to premium yield for a second. I understand the difficulty in forecasting it, but maybe just on the seeded premium line, given the ILNs, that have just taken place. Maybe just help us with that one at least. Is the proportion and the cost of reinsurance materially or, I guess, different than what it has been in the past, right? So, like, you know, it's been about a three million, it looks, three basis points pullback on the from gross to net, will that be increasing just given more of your business is being laid off? Which, again, could be a good thing, right, that you're laying off risk, but I just want to make sure from a forecasting standpoint and net premium yield standpoint we think about that correctly.
spk05: Yeah, Mihir, thanks for the question. I think, you know, the cost of our CRT coverage is generally in the low to middle single digits cost of capital from our perspective. I think, you know, cost is, again, kind of conditional in the reinsurance market. Certainly we saw an uptick in the cost of coverage at the height of the pandemic. Since that time, there's been a general downward recovery in cost of capital. I think we're generally back to a normal functioning credit risk transfer market. And, you know, again, I think pricing is conditional based on business conditions at the time you're securing coverage. I think what we see now is our costs generally in line with our historical costs and kind of that low to mid single-digit cost of capital. I do think, you know, just one point as you think about it. So that's the rate side of the equation. On the volume side of the equation, we ended the quarter at a 31%. operating leverage. So, you know, the amount of CRT that's covering our required PMIRES requirements. I think we do target a higher level generally in the kind of mid 30% level. So, you could see the leverage of credit risk transfer go up prospectively as we continue to, you know, optimize the use of our credit risk transfer program.
spk10: Understood. Thank you. Just maybe going back to slide 13 for a second, I just want to make sure we're understanding this correctly. I guess the first question is, can you remind us, did you disclose your original claim rate estimation on, like, you know, back in QQ and 3Q20?
spk05: Yeah, we did, Mihir. So, for calendar year 2020, we had a 7% claim rate expectation on COVID-related delinquencies. That did tick up to 8% in calendar year 2021 as the mix between forbearance and non-forbearance shifted towards non-forbearance, as you can kind of see on the right-hand side of that chart.
spk10: Right. So maybe staying on the 2020 for a second, I just wanted to make sure we understand, like, you know, the impact of those cumulative cure rates of 92%. So I guess 7% claim rate would imply 93% cure rate, the largest bucket in 2020 in approaching that. Is that the right way to think about timing of reserve releases is going to be in part driven by making you, I mean, you've also had good home price appreciation. We're clearly seeing so good momentum. I think all those cure rates are up, you know, six, 7% quarter over quarter cumulative cure rates. So what I want to make sure I understand is are we close to potentially, and I understand your reserves today reflect your, best view of losses in the portfolio. But if the path on cure rates continues and you continue to see improvement in those cumulative cure rates, is 93% some kind of magic trigger or something where once you pass that 93% hurdle, you're probably more likely to do some reserve releases? Or we're thinking about that wrong?
spk05: No, I think you're in the right framework, I think. you know, much like you indicated, we're encouraged by the cure rates on COVID-related delinquencies to date. I do think that needs to be tempered by, you know, we do recognize the ongoing unpredictability of the pandemic. So we do have, you know, what I would consider kind of a prudent wait-and-see type approach to the ultimate resolution of forbearance-related delinquencies. You know, we While on this page, Mihir, we do show quarterly cohorts, and really as a demonstration of progress to date, we're managing reserves more in the aggregate, so across the entire delinquent inventory. And so in that, looking at it through that lens, we think it's prudent to kind of take that more wait-and-see approach for ultimate resolutions. And so I think you're right that... If in aggregate we progress on the 2020 cohort towards that 93% cure rate, that would be an important trigger for us. But I wouldn't think about it cohort by cohort. I'd think about it more across the entirety of that delinquent population.
spk02: Yeah. And, Mihir, I would just add to Dean's point that as we think about these reserves, the traditional processes that we used to use for reserving are a little bit dislocated with the forbearance program. Because traditionally, our reserves would be much more aligned with number of past payments due, foreclosure starts. And as Dean said, all of those things were kind of changed with 18-month forbearance program that triggers down to 12 months, and then obviously foreclosure moratorium. So as we think about reserves, we are trying to be prudent and confident that as we think about reserve adequacy, we are confident in the cure activity. And we have seen that in this pandemic that we felt good in early part of 21, and then we saw Delta variant, then we felt good again, and then we saw Omicron. So I think that's just connecting the dots for you that we are just looking for a little bit more certainty because the last thing we would want to do is get optimistic and then get a surprise in the market.
spk10: Right. No, that's fair. Thank you so much for taking the questions.
spk02: Thanks, Mehr.
spk01: Thank you. Our next question comes from Rick Shane with JP Morgan. Your line is open.
spk09: Hey, guys. Thanks for taking my questions this morning. Most have really been asked and answered, but just like to revisit the claims. And can you just talk a little bit about the interplay that you've seen in the last couple quarters between frequency and severity? Because the severities have obviously been down fairly significantly in the second half of the year, what the implications are for 2022 and how that impacts your reserves.
spk05: Yeah, I think, thanks, Rick, for the question, but I think what you see in our claims experience is really the disruption that Rohit referenced in the last question and answer. Certainly, cure activity from our perspective has been disrupted by the prevalence of forbearance that allows borrowers to remain kind of in a delinquent state without any negative consequences from a credit reporting perspective for up to 18 months. And again, like we talked about last quarter, that 18 months can be extended as borrowers make certain of their payments, even in forbearance, and certain payments are considered inside or outside of forbearance. So you're seeing kind of even an elongation of that forbearance period beyond 18 months. And then in addition to that, you have the foreclosure moratorium that has really prevented any of these delinquencies going to claim. So I think it's more a function of the disruption of what is a normal functioning delinquency process, delinquent to claim process. Now, as that resolves, Rick, I think then you'll start to see From our perspective, an influx of cure activity, our belief still remains that forbearance allows borrowers to reestablish their financial footing and will cure at an elevated rate. But you'll also see the ones that progress ultimately through foreclosure and to claim start to pick up probably, you know, another six to 12 months, you know, after that disruption unwinds.
spk02: Yeah, and just two things to add there, Rick. One thing on our quarterly financial supplement, when you look at our average claim paid, it does have a footnote that that claim paid number for third quarter and fourth quarter includes non-performing loan deals, which means we actually didn't pay actual claims. It was a settlement with one of the GSEs. So that kind of artificially is pulling down the claim number. I would not read too much into that. And then second thing on... Dean's point in terms of he made this point in his prepared remarks that we do have the benefit of home prices in front of our delinquencies. Ninety-eight percent of our delinquencies at the end of fourth quarter had at least 10 percent equity. So while that is not something that we are seeing in claims because we don't have that many claims, we are encouraged by that amount of equity home price appreciation in front of our delinquency base.
spk09: Okay, great. A lot of additional information there. It's very helpful. One other thing in looking at the investment portfolio, you had about 50 or 64 million of unrealized losses in the quarter, which is 35 to 40 cents of impact on book value. Obviously, when we look at the portfolio, sort of dive into it a little bit. It looks like you're long some duration. I am curious, is there any thought of hedging some of that risk out as we enter a period of a much more hawkish?
spk05: Yeah, Rick, so our unrealized gains came down quarter over quarter, you know, around the amount you talked about, about $60 million to $106 million. at the end of the year. We have not discussed hedging, you know, an uptick in interest rates and a potential corresponding decline in unrealized gains. That's not something that's been necessarily on our radar. We think more, excuse me, we think more about our investment portfolio as maintaining a conservative position in our assets under management. maintaining liquidity, preserving capital, and ultimately, you know, kind of tertiary pursuing optimal risk-adjusted returns on the portfolio, not necessarily protecting or locking in the unrealized gain position.
spk02: And I would say the duration of our portfolio is actually not that long. If you actually compare duration of our portfolio to our peer set, we are more in line with our kind of liability matching under stress scenario. So that is something that we definitely look at it, Rick, on a regular basis, that are we getting paid for extending that duration, and if we have not, then we do not take that additional risk.
spk09: Okay, great.
spk02: Thank you, guys.
spk01: Thank you. Our next question comes from Ryan Gilbert with BTIG. Your line is open.
spk06: Hi, thanks. Good morning, everyone. Thanks for taking my questions. First one is on NIW. The number came in better than I expected in the quarter. And I'm wondering if you could break out, to the extent that it's possible, your NIW performance in the quarter between, as you said, reactivating a relationship with a key customer, doubling up with existing customers, versus just the overall market. So any details would be helpful.
spk02: Thank you, Ryan. So I would say, given the confidentiality of our customer relationships, we would probably not give too much information about the customer, but we believe that the reactivation of that key account after five years pause due to ratings sensitivity was a strong example that we are competing effectively in the market and unlocking our true value as a business post-ratings, post our IPO. We have previously shared that That is a potential upside for us in terms of post-IPO competitiveness in the marketplace and having a full value proposition. As an example, we shared that key customer account reactivation. But in addition to that, we have reactivated and expanded a lot more than that relationship. And we thought it was helpful to disclose that relationship specifically because we had talked about that during our IPO discussion. Broadly speaking, I would say from a market share perspective, it's tough to comment because we are the first MI company reporting at this point, but we feel very good about our market position, and we are very confident in our long-term strategy to drive competitive position through our strong relationships, our differentiated solutions, and the increased strength of our competitive position post-IPO. And I would also comment on the market side, which has less to do with market share, But given the shift towards the purchase market in 2021 and seems like that even in early 2022, that is very good for our business that while interest rates are rising, it seems like first-time home buyer demand is still very strong. And that actually gives us some good tailwinds going into 2022 because MI industry is much more closely aligned to purchase market because out of every 100 purchase loans, we receive 26 to 27 loans as MI industry, whereas out of every 100 refi loans, we receive three to four. So our refi concentration was already at 10% in 2021, and that could decline further, but the purchase market continues to be strong. So when we look at NIW potential, we are still optimistic about 2022 and beyond.
spk06: Okay, that's great. Thank you. My second question is on new delinquencies. It looked like they picked up as a percentage of, you know, on an absolute basis and as a percentage of policies in force. And I'm just wondering, do you think that's primarily just seasonality? Do you think that the new DQs are being driven by the new COVID variant or anything else that you want to call out on the new delinquency side?
spk05: Yeah, Ryan. You know, new delinquencies are up about 900 quarter over quarter. So I think it's important to frame the story. We're still talking about relatively small numbers. But we did give some attribution in the prepared remarks that the increase was driven by, in part, increase from delinquencies from natural disaster, natural disasters in FEMA impacted areas. So think about Hurricane Ida. In Louisiana, think about California wildfires through August, September, and October. And then in addition to that, those, we had more new delinquencies from our newest books, so I think 2020 and 2021, that are starting to begin their normal progression up the loss curve. You know, these books are continuing to perform very well. In fact, they're performing better than pre-pandemic books at the same time in their aging. but they will continue to experience delinquency development as they age through their normal loss development pattern as expected. So those are really the two drivers of the 12% increase, but I think it's important to note that that 12% increase is associated with just 900 new delinquencies. So, again, pretty small numbers.
spk06: Right. Absolutely. Thanks very much for the time. I appreciate it.
spk05: Thanks, Ryan.
spk01: Thank you. We have a follow-up from Jeffrey Dunn with Dowling and Partners. Your line is open.
spk03: Thanks. Dean, I wanted to go back to the premium rate and think about the future volatility. Right now, about 80% of your risk and force is from 19 and after. So this mix shift issue should decline as that keeps going towards 100%. But you also mentioned, obviously, this product mix shifts quarter to quarter for everybody. So Historically, have you done the work where you see how much your base rate shifts any given quarter from product mix? Is there a range around that? And as we think about the vintage mix shift changing, at roughly what level of 19 and after, does the quarter-to-quarter development become more about what you're writing in that given quarter versus this big vintage shift we've been dealing with for the last three, four years?
spk05: Yeah, Jeff, good question. I think it's extremely difficult for the reasons that we mentioned earlier to kind of provide really specific guidance on base rate changes given the fact that there's a lot of market-driven items embedded in that metric, purchase refi mix, credit composition, lapsing, both the timing, quantum, and where that lapse is happening. I think from that perspective, we're not providing guidance given all the various market drivers embedded in that. I do agree with the hypothesis that over 70 percent of our portfolio is now comprised of the 2020 and 2021 book years. That leaves much less subject to lapse-driven rate dilution or the lapsing of older books. less older books to lapse today than there has been through the course of the last two years. So, I think that is true that the book is starting to get to a position where lapse-driven rate dilution will start to decay, burn out, and have a lesser impact on changes in base premium rate prospectively.
spk03: All right, so ignoring guidance, but historically, obviously we can't see it on an apples-to-apples basis because there's always been all the rate card evolution and pricing changes, but on an apples-to-apples basis on the base rate, can simple product mix cause more than a 100 basis point, 200 basis point move quarter-to-quarter?
spk05: Yeah, I don't know that I can dimension it for you. I think it has a varied impact quarter-to-quarter. I think through time, you know, dimensioning that would be a challenge at this point in time. But we'll take a look at that through time. Again, I think quarter-to-quarter, that is maybe more variation due to the lump, you know, due to all the various market drivers are embedded in that. But let us take a look through time and and see if we can dimension that for you.
spk02: I think, Jeff, your question is in the right direction, and I don't think we have a quantitative answer to give, but I think if you look at our previously disclosed numbers, you do see that volatility in our base rate. There are quarters where it goes up and then it goes down while you would expect, like, if everything was going based on just lapse-driven dilution, that it would go in one direction. So there is some volatility in that number. And if you just look at percentages, looking at third quarter 20 onwards, it is like 140 basis points, 70 basis points in terms of base rate up, down, going in different directions. So we'll come back to you offline and see if we can find some rule of thumb looking at history.
spk05: Yeah, my concern with the rule of thumb will be, you know, some of the potential changes in the market, respectively. So You know, I think with the uptick in interest rates, we would expect persistency to increase prospectively. That's going to have an effect on, you know, the magnitude of the changes. You're going to have a transition from a refi market to a purchase market. That's going to have an effect on the transition. So, my concern is there isn't a rule of thumb, per se. And as we look historically, I'm not sure that we'll be able to translate what has happened in the past to the projected future. go forward, Jeff, but let us take a look and see what we come back with.
spk03: Yeah, that'd be helpful. I mean, again, I think a rule of thumb is dangerous. I agree with you. But I think we're still dominated by the vintage mix shift. Because if you look at this quarter, if, for example, we saw your rate drop this quarter, we're talking about vintage. Well, that would be contrary to seeing your 95-plus go up, your 45 DTI go up, and your singles coming down a little bit and not necessarily getting as much of that first quarter amortization. But, you know, we're eventually going to get into that environment, and so directionally we can assess the move in your rate and just trying to figure out where we get to that inflection point where it becomes, you know, about the business written in the quarter rather than this vintage mix shift.
spk05: I appreciate the question. We don't, as Rohit mentioned, don't have a quantitative answer, but we'll go back and take a look and go back and take a look to see is it applicable prospectively, which I think is also an open question. Great. Thanks. Thanks, Jeff. Thank you.
spk01: Thank you, and I'm showing no other questions in the queue. I'd like to turn the call back to Rohit Gupta for closing remarks.
spk02: Thank you, Catherine, and thank you all. We appreciate your interest in an act, and we look forward to working with you throughout this year. Thank you. We'll wrap up the call here.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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