This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Hello, and welcome to ENAC's first quarter earnings call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Daniel Cole, Vice President of Investor Relations. You may begin.
spk02: Thank you, and good morning. Welcome to our first quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer, and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business, our performance, and progress against our strategy. Dean will then discuss the details of our first quarter results before turning the call back to Rohit for closing remarks, and then we will take your questions. The earnings materials we issued after market closed yesterday contain our financial results for the first quarter of 2023, along with a comprehensive set of financial and operational metrics. These are available on the investor relations section of the company's website at www.ir.enactmi.com. Today's call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections as of today's date and are subject to risks and uncertainties which may cause actual results to be materially different. We undertake no obligation to update or revise such statements as a result of the new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, as well as in our filings with the SEC, which will be available on our website. Please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures. Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filing on our website. With that, I'll turn the call over to Rohit.
spk07: Thank you, Daniel. Good morning, everyone. Thank you for joining us to discuss our first quarter 2023 results. The first quarter marked a strong start to 2023 for Enact. We delivered a 17% return on equity and net income of $176 million, or $1.08 per diluted share, which was up 7% year over year. In a market that remained dynamic and volatile, we achieved these robust results by executing our strategy, maintaining our commitment to a strong balance sheet, and continuing to prudently manage our risk. Insurance in force in the quarter was a record $253 billion, driven by persistency of 85% and new insurance written off $13 billion as we continue to win new business. I've spoken in the past about our commitment to investing to further enhance and differentiate our product offerings. And we made additional progress here during the quarter, announcing integrations with several pricing and loan origination systems designed to increase connectivity simplify and enhance the customer experience, and support the platform that works best for our customers. As higher interest rates have affected mortgage origination volumes in NIW, elevated persistency has continued to act as a counterbalance and support continued insurance-enforced growth as maintaining older mortgages with lower rates remains economically favorable to refinancing at current rates. As of the end of the quarter, 99% of the mortgages in our portfolio had rates at least 50 basis points below the prevailing market rate, and we expect this dynamic to be a tailwind for persistency going forward. The pricing environment remained constructive during the quarter, with pricing across the industry trending upwards. In response to increased macroeconomic uncertainty, we continue to increase our price on new insurance ratings. We are committed to prudently pursuing high-quality business priced to generate attractive returns on a risk-adjusted basis and remain confident in our ability to do so and create value for shareholders. Overall, underwriting and credit quality remain healthy, and our portfolio dynamics are strong, and as seen in our investor presentation on slide eight, have significantly improved over time. On an if basis, The weighted average FICO score in our portfolio during the quarter was 744. The average loan to value ratio was 93%, and our layered risk was 1.4% of risk in force. At 1.9%, our delinquency rate was down slightly from the fourth quarter of 2022 and was consistent with pre-pandemic levels. In addition, 86% of our delinquent policies had an estimated 20% or more of mark-to-market equity. As I stated in the past, this could act as a mitigant to both the frequency and severity of defaults. The loss ratio in the quarter was negative 5%, which reflected a reserve release of $70 million driven by ever-to-date home price appreciation, our approach to risk management and loss mitigation, and the favorable resolution of long-term forbearance plans. We will continue to act with prudence with respect to loss reserves, with careful consideration given to the macro environment and various factors which may affect future credit performance. Based on our current views, we believe we are well-reserved for the current market environment. I spoke to you last quarter about our focus on and commitment to cost discipline and operational excellence. During the quarter, we were able to reduce our operating expenses by 13% sequentially, driving a 400 basis point decrease in our expense ratio, despite the ongoing impact of inflation on the economy more broadly. Now, turning to the macro environment, while it generally remains uncertain, we continue to view several positive economic factors and secular trends as supportive for the MI industry. Elevated inflation, higher borrowing costs, and the possibility of a recession continue to pose risks. In addition, the excess savings accumulated by households during the pandemic has declined as revolving credit balances have increased. Having said that, unemployment, wage growth, and household balance sheets remain generally healthy, and despite recent softening in some areas, consumer finances are still better than pre-pandemic levels. While the sharp increase in mortgage rates has dampened demand, inventories remain well below the 40-year average, as does the rental vacancy rate, making it difficult to find a housing alternative. In addition, single-family housing starts have largely remained below the long-term average since 2008. At the same time, the demographics surrounding first-time homebuyers remain unchanged and a driver of continued long-term demand. in addition to low housing supply, are supportive to home prices and constructive for the MI industry as an important tool to help buyers qualify for a mortgage, especially in an environment of lower affordability. Additionally, the legislative, regulatory, and business changes that have been implemented over the last decade have made our business a lot more resilient. So while the near-term economic outlook is less clear, we are confident in the long-term strength of the MI industry. In the current environment, our commitment to balance sheet strength and financial flexibility becomes even more important. PMIR's sufficiency at the end of first quarter remained very strong at 164% or $2.1 billion of sufficiency, and 90% of our risk in force was covered by credit risk transfers. Additionally, we executed an excess of loss reinsurance transaction in the quarter with a panel of reinsurers, which provides up to $180 million of reinsurance coverage on our 2023 book year. Our performance and enhanced financial strength were again recognized by the market. During the quarter, we received ratings upgrades from both S&P and Moody's, with the Moody's upgrade marking the third we have received from them since our IPO. In April, Fitch Ratings upgraded ANAC's Insurer Financial Strength Rating to A-. In addition, during the quarter, we received confirmation from Fannie Mae and Freddie Mac that the GSC conditions first imposed after the issuance of ANAC's August 2020 Senior Notes have been satisfied, and the accompanying restrictions were lifted on March 1st. Each of these developments support our competitive position and financial flexibility and create more opportunity for customer engagement. We maintained our focus on discipline capital allocation during the period, focused on our three key pillars, supporting our policyholders, investing to enhance and diversify our platform, and returning capital to our shareholders. I've already discussed supporting our policyholders through our strong PMIRES position, and I've highlighted some of our recent initiatives to enhance our product solutions during the quarter. So let me turn to our third pillar of returning capital to our shareholders. On this front, we continue to make meaningful strides. During the quarter, we repurchased an additional $22 million in stock. Additionally, we repurchased an additional $9 million in April. On May 1st, we announced the Board's approval of an increase in ANAC's regular quarterly dividend by 2 cents to 16 cents per common share, a 14% increase over the prior quarter's dividend amount, and a decision that reflects our belief in the strength and sustainability of our cash flows, our confidence in the business, and our commitment to shareholder value creation. We believe our performance and financial strength positions us well related to our commitment to return capital to shareholders and Dean will have more to say about this shortly. Now, turning to recent events, on February 22nd, the Biden administration announced a reduction of 30 basis points on FHA annual mortgage insurance premium rate effective for loans endorsed after March 20th, 2023. This move, while widely anticipated, came on the heels of the Federal Housing Finance Agency's loan level pricing adjustment changes announced on January 19th. These changes became effective May 1st and favored low to moderate income borrowers. We believe the combined impact of these actions is consistent with our prior expectations of a modest low to mid single digit percent decrease in the MI market. We will continue to monitor market dynamics related to both announcements. Finally, before I turn the call over to Dean, I'd like to take a minute to highlight a recent milestone that I know is very important to all of us at ENACT. For the past 40 years, we have enabled people to realize their dreams of homeownership and create a path to building wealth. This is our purpose as a company, and it motivates everything we do. Good corporate citizenship has always been an important part of our culture, and last month, we took our next significant step forward on this journey since becoming a public company with the release of our inaugural 2022 ESG report. The report provides insight into our environmental, social, and governance priorities, as well as how we are approaching these priorities in our operations and seeking to expand and improve our performance. It can be found on our investor page of our website, and I encourage you to review it. We are proud of our record of corporate responsibility and look forward to building on our progress as we continue integrating ESG initiatives with our business objectives to help build a more inclusive and sustainable future for our customers, employees, investors, and communities. I will now turn it over to Dean.
spk11: Thanks, Rohit. Good morning, everyone. We delivered strong results for the first quarter of 2023. As Rohit mentioned, GAAP net income was $176 million, or $1.08 per diluted share, as compared to $1.01 per diluted share in the same period last year. and 88 cents per diluted share in the fourth quarter of 2022. Return on equity was 16.8%. Adjusted operating income increased to $176 million, or $1.08 per diluted share, as compared to $1.01 per diluted share in the same period last year, and 90 cents per diluted share in the fourth quarter of 2022. Adjusted operating return on equity was 16.7%. Turning to revenue drivers, insurance and force increased in the first quarter to a new record of $253 billion, up $5 billion, or 2% sequentially, and up $21 billion, or 9% year-over-year. New insurance written of $13 billion was down $2 billion, or 13% sequentially, and down $6 billion, or 30% year-over-year, driven by the lower mortgage originations resulting from continued elevated interest rates. New insurance written for purchase transactions made up 97% of our total NIW in the quarter, which was flat to last quarter. Monthly payment policies made up 97% of our quarterly new insurance written, up from 91% last quarter. The overall credit risk profile of our new insurance written remains strong, with loans that are underwritten to prudent market standards. Rohit discussed the counterbalancing effect of persistency in our business model. With elevated interest rates, persistency remained high at 85% in the first quarter of 2023, relatively flat, sequentially, and up nine percentage points year over year. Given the expectation that interest rates will remain elevated in the short term, we expect to see continued strength and persistency levels, which is a positive for the future profitability of our insurance, in-force insurance portfolio. Our base premium rate of 40.5 basis points was down 0.5 basis points sequentially and down 1.8 basis points year over year. As we've noted before, changes to base premium rate are impacted by a variety of factors and can deviate from quarter to quarter. For 2023, we continue to believe the change in our base premium rate will be less than the decrease seen in 2022 of 2.4 basis points. In addition to the changes in base premium rate, our net earned premium rate also reflected lower single premium cancellations year over year. For the quarter, single premium cancellations were flat sequentially and contributed only 2 million of net earned premium, limiting its potential for meaningful future dilution. Over the past several quarters, our net earned premium rate has been the highest in the industry, driven in part by our efficient CRT program. Revenues for the quarter were $281 million, up $4 million, or 1% sequentially, and up $11 million, or 4% year-over-year. Net premiums earned were $235 million, up 1% sequentially, and relatively flat year-over-year. The increase in net premiums sequentially was driven by strong if growth, partially offset by the lapse of older, higher-priced policies as compared to our new insurance returns. Investment income in the fourth quarter was $45 million, flat sequentially and up 29% year over year. The recent rise in interest rates and the current rate environment are favorable for our investment portfolio, as our new money yields for the quarter were just under 6%. As of quarter end, unrealized losses in our investment portfolio decreased by $80 million to $407 million. In general, unless we identify opportunities to create longer-term value within the portfolio, We do not expect to realize these losses as we can hold the securities to maturity where market values trend to par value. Let me take a minute now to share some thoughts on recent concerns related to certain U.S. regional banks and commercial real estate. In short, we have not seen a direct impact on our business from these issues, and we do not have exposure in our investment portfolio to any of the failed institutions. Additionally, we have no exposure to CMBS and no significant exposure to U.S. regional banks. Turning to credit, losses in the quarter were a benefit of $11 million as compared to a loss of $18 million last quarter and a benefit of $10 million in the first quarter of 2022. Our loss ratio for the quarter was negative 5% compared to 8% last quarter and negative 4% in the first quarter of 2022. Losses and loss ratio in the quarter were primarily driven by favorable cure performance from COVID-related delinquencies, which were above our prior expectations and resulted in a $70 million reserve release in the quarter. New delinquencies decreased by approximately 700 sequentially to 9,600 from 10,300. Our new delinquency rate for the quarter was 1%, consistent with pre-pandemic levels and reflective of the continuation of positive credit trends. We continue to book new delinquencies in an approximate 10% claim rate, reflecting our prudent and measured approach to reserving as a result of heightened economic uncertainty. Total delinquencies in the first quarter decreased by approximately 1,300 to approximately 18,600 as cures outpaced new delinquencies. The associated delinquency rate decreased to 1.9%, which is stabilizing near pre-pandemic levels. The embedded equity position of our delinquent policies remains substantial, with approximately 86% of our delinquencies at the end of the quarter having an estimated 20% or more mark-to-market equity using an index-based house price assessment. As I've noted in the past, this can help mitigate the future frequency of claims and the potential future loss for delinquencies that ultimately progress to claims. Turning to expenses, operating expenses in the quarter were $54 million, down $9 million or 13% sequentially, and down $3 million or 5% year-over-year. The expense ratio for the quarter improved to 23% compared to 27% in the fourth quarter of 2022 and 24% in the first quarter of 2022, reflecting the ongoing benefit of cost reduction actions taken in 2022. including our previously announced renegotiated shared services agreement with Genworth and our voluntary separation program executed in the fourth quarter. We continue to expect costs for the full year to total $225 million, reflecting a 6% year-over-year decline despite the ongoing inflationary environment. Moving to capital and liquidity, we continue to operate from a position of financial strength and flexibility. As Rohit referenced, This quarter, we executed a reinsurance transaction as part of our credit risk transfer program. The transaction secured excess of loss coverage from a panel of highly rated reinsurers, covering our new insurance written throughout 2023 and providing up to $180 million of reinsurance coverage. We believe this transaction serves as another proof point to the value of diversified capital sources, which allowed us to secure coverage on attractive terms despite volatility in other parts of the market. Since its inception in 2015, we have executed a total of $4.7 billion of loss protection through our credit risk transfer program through both the traditional reinsurance market and capital markets. Our PMIRS sufficiency remains strong in the quarter at 164% or $2.1 billion above PMIRS requirements compared to 165% or $2.1 billion in the fourth quarter of 2022. At quarter end, we had 1.5 billion of PMIRES capital credit and 1.7 billion of loss coverage provided by our credit risk transfer program. 90% of our risk enforced is covered by our credit risk transfer program. Since our IPO, we have been clear in our commitment to and focus on a strong balance sheet. And I'm pleased that our efforts here have again driven numerous ratings upgrades from all three major rating agencies. During the quarter, S&P upgraded Emico to BBB+, and Moody's upgraded us to A-. Additionally, in April, Fitch upgraded us to A-. With Moody's and Fitch's upgrades, our senior debt rating is now considered investment grade, an important milestone in improving our financial flexibility. Turning now to capital allocation, we remain committed to our prioritization framework, which balances maintaining a strong balance sheet and supporting our policyholders. prudently investing to strengthen and differentiate our platform, and returning capital to shareholders. We returned a total of $45 million to shareholders during the first quarter, consisting of our $23 million, or $0.14 per share, quarterly dividend and share repurchases, totaling $22 million. As of April 30, 2023, we have repurchased $32 million in stock and have $43 million remaining on our current $75 million share repurchase authorization. The board's approval of a 14% increase to our quarterly dividend to $0.16 per share on May 1st reflects our confidence in our business and we believe strikes the proper balance between our commitment to maintaining a strong and flexible financial position and creating value for our shareholders. As Rohit noted, we are well positioned relative to our commitment to return capital to shareholders in 2023. With a strong first quarter behind us, We currently expect this return to be at least on par with the $250 million we delivered in 2022. The final amount and form of capital returned to shareholders will ultimately depend on market conditions, business performance, and regulatory approvals. In April, Emaco, our primary mortgage insurance operating company, completed a distribution of $158 million that will be used to support our ability to return capital to shareholders and bolster financial flexibility. In closing, we had a strong quarter and start to 2023. We remain focused on prudently managing our risk, driving cost efficiencies across our business, and maintaining a strong balance sheet with the financial and operational flexibility to adapt to market conditions. With that, I'll turn it back to Rohit.
spk07: Thanks, Dean. As you can see, we are off to a great start to 2023 and continue to operate from a position of operational and financial strength. Our balance sheet focus on food at risk management and commitment to operational excellence positions us to operate successfully in the current market environment and create value for our shareholders. I'd like to thank every member of our team for their ongoing commitment and contribution. Operator, we are now ready for Q&A.
spk05: Thank you. At this time, we will conduct the Q&A session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Bose George with KBW.
spk10: Hey, good morning, everyone. This is actually Alex on for Bose. Appreciate you taking the time to answer our questions. You touched on the investment income a little bit, and it looks like the overall yield took down slightly in the quarter. Just wondering if you could talk a little bit more about what drove that decline and also how we should think about investment income over the remainder of the year.
spk11: Yeah, Alex, thanks for the question. You know, when you look at investment income sequentially, there are a couple things that happen in the quarter that affect the sequential trajectory. We did have lower bond calls in the quarter. They were approximately a million dollars that, you know, affect quarter over quarter variation. The other thing that happens in the portfolio, kind of a normal course, we do have, you know, principal and interest roll off from the portfolio that gets reinvested. That's not necessarily uniform throughout the year. You can call that lumpy, quarter to quarter. So that certainly has an effect on, the capacity or the dry powder effectively that gets reinvested in the higher rate environment. The other, the last thing I talked to, we did build a little bit of incremental cash accumulation in advance of the April distribution that I referenced in our prepared remarks. That gets invested at a, you know, modestly lower rate, you know, closer to a 4.5%. new money rate for cash versus the roughly 6%, just under 6% that we invest, you know, invested assets in in this environment. So I think those things are what's contributing to, you know, the maybe more flattish. It's up modestly, I think, a half a million dollars sequential. But I think those things are the items that drove, you know, some downward pressure on that trajectory relative to maybe expectations I'd say go forward. We're going to continue to take advantage of the elevated interest rate environment. Like I said, we're investing new monies close to 6% now, and I think that would have an upwards impact on the trajectory of investment income go forward.
spk10: Okay, great. That makes sense. And then also you touched on the trajectory of the premium yield for the remainder of 23. I know you said It should be down a little bit more than or sorry, a little bit less than 22. Just wondering if you guys have any more color on sort of the cadence of that quarter to quarter, if it should be or if that will kind of jump around slightly over the remainder of the year.
spk11: Yeah, a couple of things there, Alex. You know, I think I start off with we have the highest base premium rate in the industry. I understand the focus on quarter-over-quarter change, but I certainly don't want to lose sight of that fact. I think that's important. But much like we talked about in the past, a base premium rate can fluctuate quarter-to-quarter. It fluctuates as a result of a bunch of different drivers, NIW pricing levels, persistency, credit mix, things along those lines. You know, coming into the year, much like you referenced, we did expect base premium rates to decline less than they did in 2022. And the good news as it relates to the quarterly results is that that's occurring. You know, the half a basis point is in line with that expectation. We do still expect base premium rates to decline inside that 2.4 basis point level from 2022 and feel confident that we can deliver against that expectation. You know, quarter to quarter, there's going to be some volatility in that. So, there's really not, I think what we're comfortable with is giving you guidance on a full year basis and staying out of the quarter to quarter variance.
spk10: Okay. That makes sense. I appreciate the time. Yep. Thank you, Alex.
spk05: Our next question comes from Rick Shane with JPM.
spk04: Good morning, Rick. Good morning, everybody, and thanks for taking my question. You spoke a little bit or referenced the ratings upgrades and, equally importantly, the lifting of the conditions from Fannie and Freddie. Can you talk about the operational and financial implications of both? I think, in general, we get the financial implications of the ratings upgrades, but can you talk specifically about the Fannie Freddie conditions lifting?
spk07: Good morning, Rick. So I would just start and then hand it off to Dean. I think from an operational perspective, I'm assuming you're talking about our commercial relationships and kind of what that means. And as I said in my prepared remarks, the three ratings upgrades we have received here today, two during the quarter and then one in April, are all very supportive of the journey we have had post-IPO. So when it comes to our competitive strength and competitive value proposition in the market, each of these rating upgrades essentially support the value proposition that we take to our customers and to Fannie Mae and Freddie Mac and the perception we have with our customers of a very strong counterparty. And same thing is true for the GFC conditions and restrictions. As we have spoken in the past, We generally saw these conditions as redundant to our capital level from a PMIRES perspective, but lifting of those conditions is definitely a strong milestone for us, because in a normal environment, these restrictions are not problematic, but in a downturn, that multiplier effect on a delinquent portfolio can actually have a much bigger impact. So, we are really happy to achieve both milestones. I'll hand it off to Dean to talk about the financial implications.
spk11: Yeah, so the financial implications, Rick, you know, the GSE conditions and restrictions, we've talked a little bit about this in the past. You know, they're largely redundant to what we would have considered to be a prudent level of PMIRES capital sufficiency. So, it really, it doesn't change our kind of view on PMIRES. What it does give us is additional financial flexibility, especially as Rohit referenced in times of stress where, you know, the delinquencies create some potential pressure and we're not held to a higher standard. 125% would have been the standard under the conditions as they were set. So we think it's extra additional or incremental financial flexibility, especially to the downside. I would say kind of similar thing on the rating side, but just a different form. You know, now being an investment grade debt issuer, it has both immediate and future impacts to our financial flexibility. If I think about the impacts in the immediate term, like we do get a reduction on our commitment fees for the revolver. We don't have any borrowings against that revolver, but we do pay commitment fees, and those are reduced as a result of tipping into investment grade. And at the same time, on our $750 million indenture, we realized the suspension of certain restrictions, restrictions in things like asset sales and and additional debt issuances and restricted payments. So it just gives us some additional operational flexibility, financial flexibility. And then as you think about the ratings impact on a prospective basis, it gives us access as an investment grade issuer to a broader market with potentially better pricing in terms. So we think it's a big milestone for us. It's probably the most important single notch in the rating agency continuum. We're happy and and pleased to realize that notch at this point in time. Rohit, Dean, thank you very much. Very helpful answer. Thanks, Rick. Thanks, Rick.
spk05: Stand by for our next question. It will come from Mihir Bhatia of Bank of America.
spk09: Good morning. Thank you for taking my question. The first question I had, I actually wanted to go back to the question about premium rates. I understand you don't want to give quarterly guidance, but I guess maybe just more bigger picture, just thinking about the premium rate environment, it sounds like it continues to be quite constructive. When do we start seeing that flow all the way through the financials? And what I mean by that is, like, when do you start seeing the base premium rate actually take off? Is this the last year? If current trends continue or if current trends are not stable, is this the last year we see of declines? Like, Can you help us with just like, you know, on the size of the portfolio that's got the higher premium rates that are running off versus the new business you're acquiring, except for just trying to understand where premium rates kind of base premium rates kind of settle out.
spk07: Yes, good morning. This is Rohit. So thank you for your question. And I would start off by just talking about pricing. As I mentioned in my prepared remarks, we believe that the pricing environment in the market is very constructive. We saw pricing go up across the industry during the quarter. We increased our price several times during the quarter, both across our entire portfolio in terms of new insurance written, as well as also in specific geographies and risk branches. So I think from portfolio yield that's, excuse me, coming in on new insurance written, We continue to find that constructive and still believe we are delivering attractive returns and creating value for shareholders. I think in terms of timing of when that portfolio yield, as well as the lapse, the mix on existing insurance and force starts coming to a flattening trend and then starts turning around, I think in this interest rate environment where we have seen volatility in interest rates, it's tough to call. So we are watching that trend very carefully in our portfolio. But I would say while interest rates are so volatile and that can have an impact on which borrowers from prior books are refinancing, which borrowers are staying, I think as we get closer to that point, we can provide better guidance. I think the fact that we are seeing compression in the decline of premium rate is a leading indicator to getting to that point. I know that doesn't directly answer your question in terms of timing, but I think as we see more proof points in actual performance, especially with persistency being high on the existing book and new insurance written still holding up at good scale levels, I think we'll provide better guidance as we get closer to that point.
spk09: Okay, no, I understand. It's difficult to call out something like that. And then, you know, two quarters from now, we'll be like, hey, wait a minute, what happened? So I understand. In terms of persistency, with interest rates high, and I think you called out, you know, you gave some statistics about how much of your portfolio is, I guess, out of the money from a refinance perspective. Yet, persistency was basically, like, call it stable, right, quarter over quarter. And I was wondering, is this the right persistency rate we should be thinking about in the short term, or is there a little bit more upside to persistency?
spk11: Yeah, Mihir, good question. I think we've gotten that question a couple different times in different ways. But our take on persistency is it continues, obviously, to remain elevated. elevated given the current interest rate environment. I would say the headline is persistence is down a point. If you look under the hood a little bit more and do a granular assessment, that reduction is really in the round. It's probably closer to 30 basis points and just rounded down from 86 to 85 quarter over quarter. I think as we think about where persistency can go and where it can level out, it is hard to predict. We've used Our historical experience as trying to give a sense to the market of how high can it go, we've never really experienced persistency above 90% and only in very short periods of time in our past experience. So as an indication of where persistency can go. But I think our view is as long as the interest rate environment remains kind of stable in this in this general range that we would expect persistency to remain elevated as well, and really serve as that counterbalance to a smaller originations market, allowing us to drive ongoing portfolio growth and premium growth.
spk09: And then just my last question, in terms of claims, payments, how far to a normalized level are we? I think you talked about delinquencies getting back to pre-pandemic levels, but it looks like on the claim payment side, There might be some time still. Can you just talk about that a little bit? Thank you.
spk11: Yeah, we continue to have dialogue with servicers and trying to get an assessment of when, you know, delinquency development emerged or turns into claim development. What's happened so far during those discussions, we continue to push that time period out a couple of quarters. So, I probably said, you know, two quarters ago that it was two quarters in the making. I would say now it's still a couple quarters out. So, there's still work to be done on the servicer side to get comfortable. Well, first of all, exhausting all efforts to maintain, keep borrowers in homes, and then to get comfortable starting the foreclosure process for those delinquencies they deem that they can't effectively resolve through some type of cure or modification.
spk09: Understood. Thank you.
spk11: Sure. Thanks, Mihir.
spk05: Our next question comes from Aaron Signovich with Citi.
spk03: Thus far through the earning cycle, it looks like you have the highest level of new insurance written amongst your peers. Any ideas of what could be driving that? I know it's tough to say on a quarter-by-quarter basis. And what's your outlook for potential production for the year?
spk07: Yeah, good morning, Aaron. And so, I would just start off by saying that we are happy with the $13 billion of new insurance written we wrote in the first quarter. Profile of that $13 billion from pricing and mixed perspective, we like that a lot. And just as a reminder, we have said this in the past, market share is not a strategy for us, but it's an outcome of execution of our successful strategy here. So I would say our focus in this environment continues to be on quality and pricing of the new insurance written. And as a reminder, that's referring to kind of two aspects of it. First thing, right price for right risk. And the second aspect is managing stacked risk factors. So if you think about the current environment, in this environment, we continue to monitor leading indicators for economic and housing. And as I said in my prepared remarks, we use that to implement both across the board pricing increases as well as geographic and credit specific pricing increases and be executed on several of those during the quarter. So, when it comes to market share, as I said last quarter, I would just say just think about market share across the industry fluctuates quarter to quarter. It's very evident if you look at the industry share over the last eight to ten quarters that that has been the case. So, we are not focused on the quarter to quarter variations. We are focused on our long-term participation in the market. And if you look at the trailing 12 months, although our market share is not final yet because one company still has to report, I would say we kind of see that as being stable at around 17%, which is very comparable to prior periods. So, we are more focused on executing our strategy, getting the right business mix, and then I think from a market participation perspective that those stabilize over a period of time. That was the answer to your question on share. You also asked about perspective on full year outlook. I think I would start off by just saying that we are operating in a dynamic environment when it comes to mortgage rates and impact of mortgage rates on consumer's participation in the purchase market, because majority of our business is tied to the purchase market. So as we think about the year, we still think that this year, 2023, compared to 2022, will be a lower year. on purchase originations market because in 2022, at least the first part of the year was still under lower interest rates where consumers actually had rate loss coming in from 2021. So, our perspective is while not being very prescriptive, closer to where maybe the Fannie Mae forecast is, originations on purchase side being around $1.3 trillion. Obviously, VFI market doesn't feed a lot of our MI market size, and that would give us an MI market size somewhere in the neighborhood of $300 billion, which we believe is still at scale. So while the market would be down from 2022, we think that that's kind of a good scale range from a market perspective. And then if you think about the possibility of mortgage rates maybe coming down if the spread between 10-year treasury and 30-year mortgage rate comes down in later part of the year, then that could have some upside to it.
spk03: Thanks. And then as we think about home prices kind of moving lower, you know, how do you view the risk there for your new production? you know, what were the severities? Are the severities going to be, you know, worse through this, you know, production vintage, I guess, relative to past years?
spk07: Yep. So when it comes to home prices as well as unemployment, as I said in my answer to the previous question on pricing, I think we continue to focus in this environment, making sure that the business that we are writing can not only sustain its performance in a base case scenario, but we're also testing it against multiple stress case scenarios. So from a losses perspective, the first thing we focus on is frequency, because once we actually have a claim, then severity comes in. at that point. So, we are very focused on applying the right mindset from a pricing and credit perspective and taking on the right business and reducing stacked risk factors. And then, absolutely, to your point, once we get to the point of severity in our models, we do factor in impact of declining home prices by market to figure out what would be the impact of severity on our loss ratios, both in base and stress case. and we make sure that we are taking that into account when we price our product. So, I think that's factored in. I'm not sure if I can give you any kind of easy rule of thumb on impact of home prices on severity, but I can assure you that that is definitely part of our consideration. Thank you.
spk01: Thank you.
spk05: Stand by. Excuse me. Stand by for our next question. Our next question comes from Jeffrey Dunn with Dowling and Partners.
spk06: I actually want to follow up on the last question more specifically. You formally shifted your claim rate assumption last quarter up to 10%, but could you discuss how your home price assumption in both your claim rate and your severity considerations has evolved over the last year? And can you bracket it in any way? Is it down zero to five, down five to 10? Just some maybe more color on how you're thinking about it in your reserving practices.
spk11: Yeah, Jeff, thanks for the question. So you're absolutely right. We adjusted our claim rate on 2022 accident year delinquencies from 8% to 10%. We made this comment previously, but I think it bears repeating that You know, we did that not because we had seen any deterioration in performance, but simply we wanted to apply kind of our measured philosophy as it relates to reserving for the possibility of future deterioration given the heightened economic uncertainty. You know, we continue to measure that, and we will continue to measure that through time. Obviously, we haven't seen at this point the economic deterioration and or, the deterioration that economics could present in terms of performance. And if we don't see that, we'll continue to assess and take those factors into our loss reserves through time. I think as it relates to, you know, kind of severity and the impact of home prices, we did make a small adjustment to severity this quarter, given our updated view on home prices. That view was, you know, less favorable than our prior assumption, and it had a reduction in our view on what would otherwise be pre-sale savings. It's a very small adjustment, about $300 on an average reserve per new, but it's indicative, I think, of what Rohit was talking about. He was maybe more talking in the pricing context, but we also use home prices or our future home price expectation as an input into our severity assumptions for our existing delinquencies.
spk07: And just to add to Dean's answer, I think from a macro perspective, while we are keeping an eye on different markets and have views on which markets might be more vulnerable than other markets, I think we do continue to see this balance in housing markets. So on one hand, we have seen demand go down because mortgage rates are high, there's broader inflation, and consumers are concerned about a possible recession. But on the other side, labor market is still strong, wages are strong, and on top of it, we are still operating in a very tight inventory market, which is below the 40-year average, at close to 2.5 months at the end of February. So I think in terms of actual impact, we are, it's difficult to bracket a number, but definitely staying close to that and developing views as things continue to evolve.
spk06: Well, and that's kind of why I asked the question, right? Because I think the Fannie forecast only has national prices down a little bit at points this year. The market is still extremely tight, and it sounds like every time there's a bit of a rate drop, prices are actually reacting to the upside. So if companies are assuming down 5% or down 10% on a national basis, it gives us a better idea of I don't know if conservatism is the right word, but caution or level of caution you're baking in ahead of the uncertainty.
spk07: Yeah. Jeff, you have the right perspective. Completely agree with that view that I think when you start with kind of what we are seeing in the market in actual home price data that's coming out as well as what we are seeing in forecast, I think the Fannie Mae forecast that you referenced actually has reduced the amount of decline they expected from last forecast to this forecast. So I think that's kind of in line with what we are seeing in the market. And then at the same time, I think we are balancing two different facts. One, as I said in my remarks, 86% of our delinquencies at our MSA level doing kind of a mark-to-market have 20% equity in front of them. On the other hand, we could be facing geography-specific declines in certain areas where inventory might be high or conditions might be different. So I think that's where we are taking a prudent approach on reserves. And just I think we said it several times that when it comes to our results, we just want to be mindful of the uncertainty in the market we are looking at. And to Dean's point, it's not based on any performance deterioration, just more of a mindset in this environment.
spk06: Okay. Thanks for the comments.
spk01: Thanks, Jeff. Thank you.
spk05: Our next question comes from Eric Hagen with BTIG.
spk08: Hey, good morning. Thanks. A lot of good stuff covered here. I think there's one follow-up on something you were talking about with respect to loan modifications and the outlook there. Just maybe what's your perspective on the effectiveness of loan modifications and what servicers are able to offer to borrowers in a higher interest rate environment? Like how much does that effectiveness or lack thereof potentially drive your thinking around credit and reserving and the timeline to a loan liquidation?
spk07: Yeah. Eric, I'll start and then I'll hand it off to Dean. I would say we have confidence. Let's start at the macro level. I think every time we as an industry, as mortgage finance industry go through a recession, we come out of that recession or any kind of dislocation, including COVID, we come out of that with more resilience and more learning. So I think I'll start off with that point that The experience we have had with forbearance and the effectiveness of forbearance in COVID definitely has been a very good lesson for the industry that starts with GSEs, servicers, mortgage insurance companies, and all participants. So, I think just the fact that we have seen a tool that was not heavily utilized prior to COVID, so as a for delinquencies, Forbearance used to be less than 5% of total delinquencies in terms of modification. And during COVID, you obviously saw that number actually went higher than 50% at certain points, and now it's down to about less than 20% in our new delinquencies in Q1 23. But I think our perspective is the fact that GSEs have now created new forbearance programs which have much more consumer-friendly terms is an example of we have more tools in our tool belt when it comes to modification than we did three years ago. I think that is generally good for the system, good for consumers, and then from that point on, it just depends on which consumers go delinquent, which tools are available, and under what conditions. But I would say I'll start off with that and then ask Dean to add color.
spk11: Yeah, so I'll just maybe supplement that with the proof point. So we've had about 105,000 forbearances on an ever-to-date basis, Eric. And about 95% of those have successfully cured. So that cure includes, you know, canceled forbearance where the borrower either sold the property and or made good on the missed payments up to that point in time, had there been any. And it includes the successful completion of, to your point, modifications like either deferred payment solution or some other type of modification. So, I think that's really just, you know, the quantitative evidence to the qualitative description that Rohit was talking about. I would also very much align with his commentary, the forbearance program has been very successful on an ever-to-date basis.
spk08: Yep.
spk01: Okay, great. Thank you guys very much. Thank you, Eric. This concludes our.
spk05: We do not. So, this concludes our Q&A portion. I would now like to turn it back over to Rohit for closing remarks.
spk07: Thank you, Stacey, and thank you all. We appreciate your interest in that, and I look forward to seeing many of you in New York at the BTIG conference next week. Thank you.
spk05: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Disclaimer