Enact Holdings, Inc.

Good morning and welcome to the ENAX Third Quarter Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Daniel Cole, Vice President of Investor Relations. You may now begin.

Thank you and good morning. Welcome to our Third Quarter Earnings Call. Joining me today are Rohit Gupta, President and Chief Executive Officer, and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business, our performance, and progress against our strategy. Dean will then discuss the details of our third quarter results before turning the call back to Rohit for closing remarks. After prepared remarks, we will take your questions. The earnings materials we issued after market closed yesterday contain and act financial results for the third quarter of 2022. and a comprehensive set of financial and operational metrics are available on the investor relations section of the company's website at www.ir.enactmi.com under the section marked quarterly results. Today's call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections of as of today's date that are subject to risks and uncertainties, which may cause actual results to be materially different. We undertake no obligation to update or revise any such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release as well as in our filings with the SEC, which are available on our website. Also, please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures. Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filing on our website. With that, I'll turn the call over to Rohit.

Thank you, Daniel. Good morning, everyone, and thank you for joining us. This was another solid quarter of performance for Enact, driven by continued execution of our cycle-tested growth and risk management strategy and reserve release from cure activity. Net income increased 40% year-over-year to $191 million, or $1.17 per diluted share, and return on equity was approximately 19%. Our strong performance year-to-date has allowed us to continue delivering on our capital return commitments And yesterday, we announced our second special cash dividend and our first share repurchase program, both of which I will expand on in a few moments. As always, I would like to thank our team for their dedication and hard work as we continue to successfully operate through a complex environment. Insurance and force for the quarter was a record $242 billion driven by increased persistency, which reached 82% for the third quarter and new insurance written of $15 billion. While the rise in interest rates has dampened mortgage origination volumes, it has increased persistency, which has been a tailwind for our insurance and force. We have spoken about this natural hedge in our business in the past. Persistency tends to increase when interest rates rise as older mortgages with lower interest rates become economically favorable for consumers over those currently being offered. This counterbalancing dynamic supports F growth even in an environment in which origination volume is slower. As of the end of third quarter, 99% of the mortgages in our portfolio have rates at least 50 basis points below current market rates. a slight increase from 98% at the end of the second quarter, and we expect this dynamic to continue to benefit persistency going forward. A key aspect of our growth and risk management strategy is our commitment to pursue high-quality business priced to maximize our returns on a risk-adjusted basis. With increasing economic uncertainty, Industry pricing trended upwards during the quarter and we implemented selective increases to adjust our pricing to reflect our view of the risk attributes of certain segments and geographies. In fact, we have continued these actions into the fourth quarter. Overall, we remain confident in our ability to write new business that delivers attractive risk-adjusted returns and creates value for our shareholders. The credit quality of our portfolio continues to be strong. And while there have been some signs of slowing in the broader housing market, the environment remains favorable for our business. On an insurance-enforced basis, the weighted average FICO score in our portfolio during the quarter was 743. The average loan-to-value ratio was 93%, and our layered risk was 1.4% of our risk-enforced. Employment remains solid. Household balance sheets are healthy, and home price appreciation has resulted in 77% of our policies having realized mark-to-market equity of at least 20% at the end of third quarter. Even as home prices have weakened in certain geographies, the accumulation of embedded equity in our portfolio remains historically high and will act as a mitigant against future claims risk. Our delinquency rate in the third quarter continued to approach pre-pandemic levels as cures again outpaced new delinquencies. Given our approach to risk management and loss mitigation, ever-to-date home price appreciation, and the favorable resolution of long-term forbearance plans, we released an additional $80 million of reserves on a net basis in the third quarter, leading to a loss ratio of negative 17%. We continue to operate from a position of financial strength. Securing additional reinsurance coverage is an important part of our strategy that enhances our capital efficiency and ability to distribute and minimize credit risk. During the quarter, we completed our third excess of loss reinsurance transaction this year at attractive terms, further demonstrating our success in accessing capital and reinsurance markets. We ended the third quarter with a PMR sufficiency ratio of 174% or $2.2 billion of sufficiency. In addition, as Jenworth announced, it believes it has satisfied the GSE conditions in the third quarter and expects to comply at year end. If this occurs, the GSE restrictions will be lifted, providing an act additional financial flexibility, especially should future stress emerge. Dean will discuss this notable milestone in more detail shortly. I'd like to take a minute now to talk about our approach to capital allocation. As I've discussed before, our capital priorities are to support our existing policyholders, grow our current business, invest in attractive new business opportunities, and return capital to shareholders. We remain committed to prudently investing in the business and expanding and ask competitive differentiation. We are focused on enhancing our capabilities in data analytics, machine learning, pricing efficiency, and risk monitoring to ensure we are creating a differentiated market leader well-positioned for success and continue to evaluate and pursue attractive new business opportunities to increase shareholder value while also building a resilient portfolio and balance sheet. Additionally, during the quarter, we announced the appointment of Neenu Kanth as our first Chief Customer Experience Officer. I look forward to working with Nenu to ensure we continue meeting the unique needs of our customers. We remain focused on serving our lending partners while providing a best-in-class customer experience to support affordable and sustainable homeownership. One of the key aspects of our strategy has been our commitment to returning capital to our shareholders, and we have consistently delivered since our IPO just over a year ago. In the fourth quarter of 2021, we paid a special cash dividend of $200 million, or $1.23 per share. In the second quarter of 2022, we announced the initiation of our regular quarterly dividend of 14 cents per share. And yesterday, we announced our next milestones, the board's approval of a special cash dividend of $183 million, or $1.12 per share, and the authorization of a $75 million share repurchase program. The share repurchase program will return additional capital to our shareholders by enact buying back shares at valuations we believe are attractive relative to our long-term potential in a manner that is opportunistic and tailored to the size of our float. As part of the repurchase program, we have entered into an agreement with Genworth through which Genworth has agreed to participate by selling shares to enact on a basis proportional to its ownership. Our press release yesterday provides additional details on the repurchase program. We committed to returning $250 million of capital to shareholders in 2022 and will deliver on this commitment based on the ordinary and special dividends we will pay this year. And while we expect much of our share repurchase activity to occur in 2023, any repurchases done this year will deliver capital return in excess of our $250 million target. These actions not only reflect our commitment to our capital allocation goals, but also the strength of our balance sheet, the sustainability of our cash flows, and the confidence we have in our business. I'll close by making a few comments on the macro environment, the housing market, and an act's position moving forward. Several complex and interlinked factors, including the rapid increase in interest rates, persistent inflation, and economic uncertainty are driving volatility and have contributed to a slowdown in the market in the near term as homebuyers assess their options in a rapidly changing housing environment. However, we believe that healthy credit environment and strong underlying demand for housing will continue to act as a counterbalance over the longer term. Currently, the labor market is strong, household balance sheets are healthy, and there has been a meaningful buildup in homeowners' equity through ever-to-date home price appreciation, all factors which are mitigants to risk in our current insurance and force. Of course, the team continuously plans for all scenarios, and we have taken important steps to enhance our resiliency and ensure we are well positioned for today and the future. As we look ahead to the books we are writing now, we are continually evolving our pricing to ensure we optimize our risk-adjusted economics. In addition to significantly enhancing the credit profile of our portfolio, we have further mitigated risk through our CRT program. These actions have enhanced our balance sheet strength and financial flexibility as reflected in our PMIRS sufficiency. The benefits of the actions we have taken are evident in our performance through the pandemic and will continue going forward. Importantly, the co-drivers of demand remain in place. Long-term demand for housing remains fundamentally strong, as key demographic trends suggest first-time homebuyers will continue to provide a tailwind as they reach peak age for home buying. And while home prices and inventory levels have shifted in some markets, housing inventories overall remain at low levels, providing an offset to the reduction in demand we have seen from higher rates and affordability pressure. We are pleased with the performance we have delivered this year, and as we enter the fourth quarter, we remain confident in our business. With a more resilient portfolio, a strong balance sheet, and significant credit risk protection, we are well positioned for both the near and long term. I'll now turn it over to Dean.