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spk15: Good day and thank you for standing by. Welcome to the Q3 2023 Enact Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press TAR 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press TAR 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel Cole, Vice President of Investor Relations. Please go ahead.
spk08: Thank you and good morning.
spk14: Welcome to our third quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer, and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business performance and progress against our strategy. Dean will then discuss the details of our quarterly results before turning the call back to Rohit for closing remarks. We will then take your questions. The earnings materials we issued after market closed yesterday contain our financial results for the quarter, along with a comprehensive set of financial and operational metrics. These are available on the investor relations section of the company's website at www.ir.enactmi.com. Today's call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections as of today's date. Additionally, they are subject to risks and uncertainties which may cause actual results to be materially different and we undertake no obligation to update or revise such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, as well as in our filings with the FDC, 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.
spk05: Thanks, Daniel. Good morning, everyone. Our team delivered very strong results in the third quarter as we continued to execute against our strategy. We reported adjusted operating income of $164 million or $1.02 per deleted share, and generated a 15% adjusted operating return on equity. Insurance in force reached a record $262 billion, up 8% year-over-year, driven by new insurance written off $14 billion and persistency that remained elevated at 84%. We saw disciplined growth in our insured portfolio with stable new business production and higher persistency amid higher interest rates. Investment income continue to accelerate, and we continue to exercise expense discipline. Credit performance remains strong, accompanied by a seasonal uptake in new delinquencies and the seasoning of newer large books. We remain confident in our strategy and our business, and in the continued strength of the private mortgage insurance model. The economy continues to be resilient, supported by the strong labor market and household balance sheets that remain healthy. Having said that, macro factors including geopolitical conflicts, persistent inflation and higher interest rates, and a lessening of the cash buffers consumers have had since the pandemic continue to be risked. However, delinquency rates for prime mortgage borrowers are consistent with pre-pandemic levels. Our manufacturing quality continues to be strong, and credit risk remains well within our appetite. Even as housing activity has slowed amid higher borrowing costs, we remain confident in the long-term outlook for housing as well as demand for mortgage insurance. Home prices continue to be supported by low housing inventory and strong demand, particularly among first-time homebuyers, and mortgage insurance will remain an important tool to help buyers qualify for a mortgage. In addition, while higher interest rates have affected mortgage origination, higher persistency has continued to support insurance-enforced growth. As of September 30th, only 1% of the mortgages in our portfolio had raised at least 50 basis points above the prevailing market rate. Pricing on new insurance written remained constructive in the quarter. In response to continued macroeconomic uncertainty, We increased our price on NIW, ensuring we continue to underwrite risk at the appropriate level while remaining competitive. The credit quality of our insured portfolio remains strong. The weighted average FICO score was 744. The weighted average loan-to-value ratio was 93%, and our layered risk remained level with the second quarter at 1.3% of risk in force. Our delinquency rate was 2%, up 11 basis points sequentially, flat year over year, and consistent with pre-pandemic levels. The loss ratio in the quarter was 7%. Continued strength in the labor market, healthy household balance sheets, and our loss mitigation efforts helped drive strong cure activity, and as a result, we released $55 million of results. New delinquencies rose in the quarter. primarily driven by seasonality and the seasoning of newer large books. We continue to take a prudent approach to loss reserves and believe we are well-reserved for a range of scenarios. We continue to operate from a position of financial strength and remain well-capitalized relative to regulatory requirements. PMIR sufficiency at the end of the quarter remains strong at 162 percent, or $2 billion of sufficiency. and 91% of our risk in force was covered by credit risk transfers. We remain disciplined with respect to capital allocation and focus on our three pillars, supporting our policyholders, investing to enhance and diversify our platform, and returning capital to our shareholders. As previously announced, during the second quarter, we launched an Act Re, a reinsurer that expands our franchise to access to new business opportunities including the GSC credit risk transfer market. I'm pleased to note that Anacri participated in all six of the GSC deals that came to market since its launch. Between its quota share agreement with Emoco and its successful participation in the GSC transaction, Anacri continues to utilize the capital initially contributed by Emoco, and we are pleased with the strong underwriting and attractive risk-adjusted returns we have seen from these transactions. we continue to see Anacri as a long-term capital and expense-efficient growth opportunity. We also continue to pursue ways to expand the Anacri platform into new related opportunities. During the quarter, we entered into an agreement with core specialty through which Anac will provide underwriting advisory and expertise, market intelligence, and portfolio analysis in support of Core Specialty's entrance into the mortgage reinsurance market through GSE credit risk transfer. Core Specialty closed its first transaction during the quarter, leveraging ANAC's mortgage expertise, and we look forward to continuing to support Core Specialty and expanding on this market opportunity. We also continue to return capital to our shareholders. I'm pleased to note that yesterday we announced the board's approval of a special cash dividend of approximately $113 million for 71 cents per share, as well as the authorization of over 16 cents per share quarterly dividend. And we continue to repurchase shares during the quarter. We remain committed to returning $300 million of capital to shareholders in 2023 through a combination of quarterly and special dividends and our share repurchase program. On the whole, our distributions to shareholders reflect our commitment to our capital allocation goals, the strength of our balance sheet, the sustainability of our cash flows, and the confidence we have in our business. We are very pleased with the performance we have delivered in 2023 to date and remain confident in our business as the year comes to a close. Our portfolio is strong with significant risk protection through our CRT program, as is our balance sheet and ability to deliver return. I will now turn the call over to Dean. Thanks, Rohit.
spk19: Good morning, everyone. We again delivered very strong results in the third quarter of 2023. GAAP net income was $164 million, or $1.02 per diluted share, as compared to $1.17 per diluted share in the same period last year, and $1.04 per diluted share in the second quarter of 2023. Return on equity was 15%. Adjusted operating income was also $164 million, or $1.02 per diluted share, as compared to $1.17 per diluted share in the same period last year and $1.10 per diluted share in the second quarter of 2023. Adjusted operating return on equity was 15%. Turning to revenue drivers, primary insurance and force increased in the third quarter to a new record of $262 billion, up $4 billion, or 2% sequentially, and up $20 billion, or 8% year-over-year. New insurance written of $14 billion was down $1 billion, or 5% sequentially, and down $1 billion, or 4% year-over-year, primarily driven by lower mortgage originations resulting from continued elevated interest rates. Persistency remained elevated at 84% in the third quarter, flat sequentially, and up 2 percentage points year over year. Given that approximately 1% of the mortgages in our portfolio had rates at least 50 basis points above the prevailing market rate, we anticipate continued strength and persistency, which will help hedge against lower production from higher mortgage rates. Net premiums earned were $243 million, up $5 million or 2% sequentially, and up $8 million or 4% year-over-year. The increase in net premiums earned sequentially was driven primarily by insurance and forced growth and slightly lower seeded premiums. Our base premium rate was 40.2 basis points, down 0.1 basis points sequentially, and 0.8 basis points year-to-date. As a reminder, base premium rate is impacted by a variety of factors and tends to modestly fluctuate from quarter to quarter. Year to date, the decline in our base premium rate continues to stabilize and is in line with our expectations. Our net earned premium rate was 37.3 basis points, flat sequentially, reflecting changes to the base rate in addition to modestly lower seeded premiums in the current quarter. Investment income in the third quarter was $55 million, up $4 million or 8% sequentially, and up $15 million or 39% year-over-year. The rise in interest rates in the current rate environment are favorable for our investment portfolio as our new money yield was over 5% and our portfolio book yield increased to 3.5% for the quarter. As of quarter end, unrealized losses in our investment portfolio increased by $58 million to $497 million. As I've mentioned, we generally do not expect to realize these losses given our ability to hold the securities to maturity. Turning to credit, losses in the quarter were 18 million as compared to a benefit of 4 million last quarter and a benefit of 40 million in the third quarter of 2022. Our loss ratio for the quarter was 7% compared to negative 2% last quarter and negative 17% in the third quarter of 2022. Our losses and loss ratio were driven by an uptick in the current quarter delinquencies, partially offset by favorable cure performance, primarily on 2022 and earlier delinquencies that remained above our expectations and resulted in a $55 million reserve release in the quarter. New delinquencies increased sequentially to 11,100 from 9,200. Our new delinquency rate for the quarter was 1.2%, reflective of ongoing positive credit trends and primarily driven by historical seasonality and the normal loss development of new large books. We continue to book new delinquencies at an approximate 10% claim rate, reflecting our prudent and measured approach to reserving in this dynamic environment. Total delinquencies in the third quarter increased by approximately 1,100 to about 19,200. The associated delinquency rate increased 11 basis points to 2%. We continue to deliver solid expense performance that reflects the ongoing benefits of our cost reduction actions. Operating expenses in the quarter were 55 million, approximately flat sequentially and down 3 million or 5% year over year. The expense ratio for the quarter was 23%, flat compared to the second quarter of 2023 and down two percentage points year over year. We continue to expect costs for the full year to decline 6% to $225 million. Moving to capital and liquidity, we continue to operate from a position of financial strength and flexibility. Our PMIRES sufficiency remains strong at 162% or $2 billion above PMIRES requirements, which is flat to our second quarter 2023 results. At quarter end, we had $1.5 billion of PMIRES capital credit and $2.9 billion of seeded RIF provided by our third-party CRT program which currently covers 91% of our risk and force. Turning now to capital allocation, we remain committed to our capital prioritization framework, which balances maintaining a strong balance sheet, investing in our business, and returning capital to shareholders. As Rohit mentioned, we are pleased with the solid initial progress we've seen from EnactRE since its launch last quarter. Anacri continues to deploy capital, and to date has participated in four Fannie Mae and two Freddie Mac reinsurance transactions. Anacri's commercial success will drive any potential future funding, and we remain excited about its long-term growth potential. We returned a total of 32 million to shareholders during the third quarter, consisting of the 16 cent per share, or 26 million quarterly dividend, and share repurchases totaling $6 million. Year to date through October, we have repurchased 78 million in stock and have 96 million remaining on our current share repurchase authorization. As we said in the past, we will continue to deploy capital towards share buybacks opportunistically. All in all, to date, we have returned approximately 150 million to shareholders between our quarterly dividend and share repurchases, and we remain committed to returning 300 million to shareholders in 2023. Towards that end, The Board authorized our quarterly dividend of approximately $26 million, or $0.16 per share, and a special dividend of $113 million, or $0.71 per share, both payable on December 5, 2023. Overall, we had another strong quarter and are well positioned as we enter the final quarter of 2023. Going forward, we will remain focused on prudently managing our risk, driving cost efficiencies, and maintaining a strong balance sheet while executing against our capital prioritization framework. With that, I'll turn it back to Rohit.
spk05: Thanks, Dean. Looking forward, we will continue to pursue prudent growth opportunities and disciplined capital allocation that balances financial strength and policyholder support, investment in the business, and capital return. Overall, Enact is well positioned to continue to serve our customers and their borrowers, grow our franchise, and deliver strong performance and value creation for our shareholders. I'll close by saying thank you to our talented team for all you do and for driving us forward.
spk08: Operator, we are now ready for Q&A.
spk15: In order to ask a question, please press TAR11 on your telephone and wait for your name to be announced. To withdraw your question, please press TAR 1 again. Please stand by while we'll compile the Q&A roster. And our first question comes from the line of Bose George with KBW. Your line is now open.
spk10: Hey, everyone. Good morning. On capital return going forward, is the plan to target a certain level of capital return, like the $300 million you talked about this year, And then the split between buybacks and dividends, you know, ends up being more opportunistic or just, you know, what's kind of the philosophy going forward?
spk19: Yeah, it's good morning. Thanks for the question. I think you hit it kind of on the head in terms of the mix of capital return. I think it's really going to be dictated by the opportunity provided in our share repurchase plan. The level of share buybacks will ultimately kind of dictate ultimately what gets returned via special dividend at the end of the year. I think when we think about our quarterly dividend, we think about it across a bunch of different dimensions, certainly competitive, but also, and probably most importantly, what is durable, not just in our kind of base case forecasting, but through some level of stress. We want to make sure that the quarterly dividend has that level of durability, and we have that confidence to do, to return that through cycles.
spk10: Okay, great. Thanks. That makes sense. And then just switching to the investment portfolio, what's the timeframe in which your portfolio kind of rolls into the new money yield, assuming, you know, rates remain stable going forward?
spk19: Yeah, well, we have an effective duration of less than four years. I think it's about three and a half years. So, you know, as you see today, we're investing, our new money yields are roughly 5.5%. I think we exited the quarter, you know, just under 6%. And you are seeing that have an effect on the overall weighted average book yield on the portfolio. It ticked up about 10 basis points sequentially. So, but, you know, more specific to your question, the duration of the portfolio is about three and a half years.
spk07: Okay, great. Thanks.
spk16: One moment for your next question.
spk15: And your next question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.
spk06: Good morning. Thank you for taking my question. I wanted to start maybe just on vintage performance. And I was curious on what you're seeing, particularly on the post-pandemic vintages. Are they performing well? in line with your expectations i suspect it's better than what you've underwritten to but i was just curious more in terms of your expectations and how they would perform maybe even compare them versus the 2018 2019 vintages for you know where they are in their life cycle are they other vintage girls or the lost girls on top of the 2018 2019 the reason i ask is because obviously uh on the unsecured lending side we've heard a lot about you know fico inflation and some and some underperformance from these pandemic era of integers. So, I was curious if you're seeing anything similar in your book or on the housing credit side.
spk19: Yeah, I think, Mahir, thanks for the question. You know, I think Rohit in his prepared remarks colored credit performance as very strong overall. I think that would characterize our view of the credit environment, credit performance to date. Obviously, that's exemplified in some of the portfolio metrics that we publish. Delinquency rate of 2%, new delk rate of 1.2%, reflective of pre-pandemic levels, which is indicative of, you know, again, strong performance. Kind of more to your question, when we look more granularly at performance by attribute, we don't see any deterioration in performance across the credit spectrum. That's really ranging from you know, the embedded risk characteristics, FICO LTV, DTI, but also on a vintage basis, there's really no deterioration that we're seeing relative to our expectations.
spk05: And Mayor, just to add to Dean's point, I would agree that credit performance across the board continues to be very strong. As Dean said, don't see any deterioration in any credit cohorts. I would keep in mind that When we are talking about 18-19 versus 22 vintages, they're just seasoning in different environments, macroeconomic environment and housing environment. So that is going to have an embedded difference. And your question was, how is it performing against our expectations? And I would say that's generally in line with our expectations because our expectations incorporate the most recent economic view. But if you basically normalize for that, that would be the primary factor driving the difference.
spk06: Got it. Maybe going back to the capital return question a little bit, is there a rule of thumb, like in terms of what will drive that going forward? Is there a target percent of net income or anything like that that we should be thinking about as you, you know, as we think about 2024, start looking at that for capital return?
spk19: Yeah, Mihir, I think it's less target-based and maybe more principles-based. You know, we look at things like the current macroeconomic environment, the prospective macroeconomic environment, our view on business trajectory, business results, both in an expected case, a stress case. We obviously look at the regulatory environment as well, what's, you know, what standards were held to, how those standards might change through time. So, I think it's more, you know, kind of a triangulation. of those considerations than a prescriptive formula.
spk06: Got it. And then just switching to the core specialty agreement you called out, I think they also mentioned you guys on their website as managing, you know, helping manage their reinsurance in that space. Is this, like, a new entry for them? Like, they didn't do this before, and, like, was this a competitive takeaway? where they were using someone else and now they're using you. I'm just trying to understand the plan with, I guess, in ACRI, right? Like, is the idea that you're going to try to sign up more of these types of agreements where you're managing it for a reinsurer looking to come in already in CRT and reinsurance? Or are you looking to also put more of your own capital to work here?
spk05: Yeah, Mayor, thank you for the question. I would say this is more of an outcome of using our expertise that we already have in the mortgage insurance business and we're beginning to deploy in the mortgage reinsurance space with GSE CRT. So core speciality was not participating in the mortgage reinsurance space, and we essentially started talking to them about their participation. They liked our expertise, our depth, our market intelligence, not only in the mortgage reinsurance space, but also what we do every day, which is look at the front end of the market, mortgage originators, different attributes, and obviously intelligence that we use in our risk-based pricing also in terms of debt at a very granular level and loan attribute level. So all of that led to Core Specialty using us to essentially start participating in the GSC reinsurance market. I would say that this is much more of a validation point for us versus a true kind of substantial contribution to our P&L. I would still think of ANATRI's primary kind of goal to be participating in non-private mortgage insurance kind of space and GSEV insurance space primarily, and then adding that advisory service that we provide to core specialty being an add-on. And if we are able to expand that to other companies who might be using somebody else or who are not in the space, I think that would be a plus and a validation of our expertise in the area.
spk09: Got it. Thank you. Thank you for taking my questions. I'll get back to you. Thank you.
spk15: One moment for the next question. Your next question comes from the line of Rick Shane with JP Morgan. Your line is now open.
spk02: Good morning, guys. Thanks for taking my question, Zach. Look, we're in a unique environment. The purchase is a historically high percentage of mortgage originations given the constraints in homes for sale new home purchases are disproportionately high as a percentage of purchase volumes. That means that a great deal of originations are being driven by home builders. Can you talk a little bit about how that impacts the business? How you look at things like rate buy downs provided by the builders, whether they're temporary or permanent and shifts in terms of how you work with builders to drive business?
spk05: Yeah, thank you, Rick. So I'll take this question. I think from our perspective, first, we agree with your point in terms of origination market being impacted by higher rates as well as broader inflation. And in this market, obviously, given the number of consumers who are locked in at very low interest rates, we also have a tight inventory, which means there is more focus on new homes. And those new homes are basically driving more of the origination market. So, first thing, from a market participation perspective, that is a good thing for our business. As you know, private mortgage insurance is much more tied to the purchase market, and that essentially means that gives us a bigger origination market to participate in and also provides new inventory. Now, coming down to builder performance, our builder portfolio performance, kind of from both perspectives, recent performance and historic performance has been very similar to our overall portfolio. Specifically on the topic of rate buy-downs, we look at those programs, each program at a time, and approve it for our own guidelines. And essentially, we see the same performance. Consumers are appropriately qualified. There are no payment shocks. And I know that there has been a topic of permanent rate buy-downs discussed. We don't see a prevalence of permanent rate buy-downs. We see more short-term rate buy-downs, one-year, two-year, which are more economical. for a mortgage originator to fund compared to a permanent rate buy down. And the way the consumer is qualified, that gives us kind of a good performing and well-qualified loan on our books.
spk02: Okay. So, and so what you're suggesting is that to the extent you're seeing rate buy downs from loans available through, either the originators or through the home builders that proportionately you're seeing more short-term buy-downs as opposed to permanent buy-downs?
spk05: Yes. We are seeing short-term buy-downs. And even for those short-term buy-downs, the consumer is actually qualified at the full note rate, not at the bought-down rate. So if a consumer had a 1% buy-down upfront, The consumer is still basically being qualified at the prevailing market rate. Got it. Okay.
spk20: Second question, and this is a follow-on to that.
spk02: To the extent the industry is, or the mortgage industry is increasingly concentrated around developments from those builders, is there any concern like if you think about purchase volume ordinarily it's going to be very disparate across the country fine we're going to see regional concentrations due to migration but is there anything within your model that says okay wait a second if we're increasingly focused on these 25 or 100 developments um that we're creating more correlation risk within the portfolio so
spk05: Yeah, so I would say in terms of concentration down to that level, we track our concentration at a state level, at an MSA level. As we have said in the past, we also have an ability to price our loans on an ongoing basis down to the MSA level, and we do. And that view is driven by the economic conditions in that city, in that MSA, both on a current basis and our view moving forward. And it includes a view into home prices and housing conditions, I would say, in terms of tightness of inventory or too many homes coming to market. We subscribe to several different market views to make sure that we have a pretty well-rounded view down to the MSA level. And that's how we control our appetite. I don't believe that we see our concentration in specific developments kind of controlling our risk appetite, because by the time our share of that development shows up on our books, you're talking about Like if MI penetration on purchase loans is somewhere between 20 to 25 percent, and we have 16 to 18 percent of that portion, we are talking about small numbers of loans that actually make it to our portfolio from any specific development. And in the builder segment, I would say our participation is very proportionate to our overall share. So it's not that we are taking on a specific subdivision for a builder and insuring a lot of loans down to that level. Okay, thank you very much.
spk12: Absolutely.
spk15: One moment for the next question. And your next question comes from the line of Eric Hagan with BTAG. Your line is now open.
spk18: Hey, thanks. Good morning. Hey, a couple follow-ups here. I mean, how much did the recent increase in interest rates you feel like play a part in the level of the special dividend that you just declared? And then can you share what kinds of returns you think you're getting in the GSE CRT deals and maybe just how much capital you feel like could be directed there next year? Thanks.
spk19: Yes. Let me start off, Eric. So as it relates to the interest rate environment and the special dividend, I don't really think those are highly correlated. I'm failing to see the correlation. I think really More than anything, I'll go back, I think it was Bose's question, on a mix of returns of capital. And the special dividend was really sized based on the opportunity we saw in the share repurchases that was much more directly attributable. You know, interest rates, obviously, I guess if you, you know, maybe tying that question to an earlier question, when we think about how we're thinking about returns of capital in the future, interest rates are certainly part of our economic view, our prospective economic view that affect both the macro as well as our view of our expectations around business performance. So maybe that's the connection that you're trying to draw. And I think in that case, as we look forward, that will certainly be a consideration.
spk18: Okay. Yeah, just curious what kind of returns you guys are expecting in the CRT deals. Thank you, guys.
spk05: So I think on the GSE CRT deals, we have not given any specific guidance, Eric, on type of returns. What we have said is we like the quality of underwriting and we like the returns on those transactions. And the way we actually structured an ACRI right out of the gate was an ACRI is structured in a very capital-efficient, expense-efficient way. And it leverages the ratings, the scale of Emico and our entire insurance operation. So we expect our returns to be very much in line with market returns on those transactions. And we are continuously participating in, as I said in my prepared remarks, in every deal, at least up to this point, that has been coming to market. So that hopefully shows you that we find the returns attractive.
spk18: Yep, that's helpful. Hey, lots of attention in the market around lenders having to you know, buyback loans from the GSEs when there's a breach in the underwriting process of any sort, you know, scratch and dent kind of loans. Can you describe how that maybe impacts you guys and just how you see that maybe developing going forward?
spk05: Yeah, Eric, for us, that process has limited applicability to us. We have our own independent processes both for non-delegated underwriting and for delegated underwriting where we do essentially quality assurance checks at different frequencies for different lender segments. And we have our own view of loan quality for each lender and each customer segment, I would say, that we keep an eye on. So if a lender's performance is deteriorating from a manufacturing quality perspective, we work with that lender to go through training to remediate whatever the reason was. And if their quality still doesn't approve, we move them from delegated to non-delegated. As far as GSE buybacks are concerned, I think those are more driven by rules that GSEs use to determine that loans have significant defects, and then there's an entire process around early notification and then putting the loan back, which has a very, I would say, disproportionate impact on lender economics, because not only are you getting a loan back on your books, more than likely that loan has a 3% note rate in an environment where market rate is 7% to 8%, so you also take a mark-to-market hit on that asset. So, from a quality perspective, as I said in my prepared remarks, we like the manufacturing quality in the market. We actually calibrate our processes with GSEs and give them feedback. So, we are satisfied with manufacturing quality, and we see this much more as a secondary market issue between GSEs and originators.
spk18: That's really helpful. Thank you, guys.
spk12: Absolutely. Thanks.
spk15: One moment for the next question. And your next question comes from the line of Joffrey Dunn with Doley. Your line is now open.
spk03: Thanks. Good morning. I'm curious what your thoughts are. If Bermuda adopts this 15% tax rate, obviously there might be pluses and minuses around that, but how do you think that will affect the returns and competition in the GSE CRT market?
spk05: Good morning, Jeff. Very good question. So, as we said last quarter, to clarify our expectations, an ACRI does not benefit from any kind of tax efficiency based in Bermuda because taxes are consolidated in the U.S. As far as Bermuda participants are concerned, with the higher taxes in Bermuda, if it's implemented, those participants might need higher returns from the transactions, everything else being held constant. that could actually lead the prices to be higher. And for us, that would mean higher returns. So I would expect that to be good for us. We are very happy with the quality and the return. So if there is less capacity from others, and that means more capacity or higher prices for us, I think we see that as a net positive.
spk03: Okay. And I know just following up the prior question, can you qualify those returns right now? Are they at least on par with the primary U.S. business?
spk05: So, Jeff, very good question. And unfortunately, we also haven't given guidance on the U.S. primary returns recently. We generally describe our returns as attractive in the primary business. And I think the toughest thing in this environment is we see a lot of uncertainty in the market in terms of what scenario plays out. I know the market has been talking about some kind of weakness in economy, at least majority of the economies, for almost 18 months, and that hasn't happened. So instead of picking a point estimate and giving you returns, we believe that our returns are very much in line with our expectations. And we believe the price increases we have done, including the price increases in the third quarter in the primary business, make the primary business attractive. And we do think that for the CRT business we are writing, those returns are also attractive to us. And especially, we are talking about different structures here. In the CRT market, we are writing mezzanine risk. So that obviously increases the attractiveness of those returns because in base case scenarios, those transactions are not attaching from a loss perspective.
spk09: Okay. All right. Thanks. Yes.
spk15: And we have no further questions at this time. I will now turn the call back over to Rohat Gupta.
spk05: Thank you, Bella. And thank you, everyone. We appreciate your interest in an act, and I look forward to seeing some of you next week at the JPMorgan Conference in Florida. Thank you.
spk15: This concludes today's conference.
spk16: Thank you for your participation. You may now disconnect. you Thank you.
spk01: Thank you. Thank you.
spk15: Good day and thank you for standing by. Welcome to the Q3 2023 Enact Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press TAR 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press TAR 1-1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel Cole, Vice President of Investor Relations. Please go ahead.
spk08: Thank you and good morning.
spk14: Welcome to our third quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer, and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business performance and progress against our strategy. Dean will then discuss the details of our quarterly results before turning the call back to Rohit for closing remarks. We will then take your questions. The earnings materials we issued after market closed yesterday contain our financial results for the quarter, along with a comprehensive set of financial and operational metrics. These are available on the investor relations section of the company's website at www.ir.enactmi.com. Today's call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections as of today's date. Additionally, they are subject to risks and uncertainties which may cause actual results to be materially different and we undertake no obligation to update or revise such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, as well as in our filings with the FCC, 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.
spk05: Thanks, Daniel. Good morning, everyone. Our team delivered very strong results in the third quarter as we continued to execute against our strategy. We reported adjusted operating income of $164 million or $1.02 per deleted share, and generated a 15% adjusted operating return on equity. Insurance and force reached a record $262 billion, up 8% year-over-year, driven by new insurance written off $14 billion and persistency that remained elevated at 84%. We saw disciplined growth in our insured portfolio, with stable new business production and higher persistency amid higher interest rates. Investment income continue to accelerate, and we continue to exercise expense discipline. Credit performance remains strong, accompanied by a seasonal uptake in new delinquencies and the seasoning of newer large books. We remain confident in our strategy and our business, and in the continued strength of the private mortgage insurance model. The economy continues to be resilient, supported by the strong labor market and household balance sheets that remain healthy. Having said that, macro factors including geopolitical conflicts, persistent inflation and higher interest rates, and a lessening of the cash buffers consumers have had since the pandemic continue to be risked. However, delinquency rates for prime mortgage borrowers are consistent with pre-pandemic levels. Our manufacturing quality continues to be strong, and credit risk remains well within our appetite. Even as housing activity has slowed amid higher borrowing costs, we remain confident in the long-term outlook for housing as well as demand for mortgage insurance. Home prices continue to be supported by low housing inventory and strong demand, particularly among first-time homebuyers, and mortgage insurance will remain an important tool to help buyers qualify for a mortgage. In addition, while higher interest rates have affected mortgage origination, higher persistency has continued to support insurance-enforced growth. As of September 30th, only 1% of the mortgages in our portfolio had raised at least 50 basis points above the prevailing market rate. Pricing on new insurance written remained constructive in the quarter. In response to continued macroeconomic uncertainty, We increased our price on NIW, ensuring we continue to underwrite risk at the appropriate level while remaining competitive. The credit quality of our insured portfolio remains strong. The weighted average FICO score was 744. The weighted average loan-to-value ratio was 93%, and our layered risk remained level with the second quarter at 1.3% of risk in force. Our delinquency rate was 2%, up 11 basis points sequentially, flat year over year, and consistent with pre-pandemic levels. The loss ratio in the quarter was 7%. Continued strength in the labor market, healthy household balance sheets, and our loss mitigation efforts helped drive strong cure activity, and as a result, we released $55 million of results. New delinquencies rose in the quarter. primarily driven by seasonality and the seasoning of newer large books. We continue to take a prudent approach to loss reserves and believe we are well reserved for a range of scenarios. We continue to operate from a position of financial strength and remain well capitalized relative to regulatory requirements. PMIR sufficiency at the end of the quarter remains strong at 162% or $2 billion of sufficiency. and 91% of our risk in force was covered by credit risk transfers. We remained disciplined with respect to capital allocation and focused on our three pillars, supporting our policyholders, investing to enhance and diversify our platform, and returning capital to our shareholders. As previously announced, during the second quarter, we launched an Act Re, a reinsurer that expands our franchise through access to new business opportunities including the GSC credit risk transfer market. I'm pleased to note that Anacri participated in all six of the GSC deals that came to market since its launch. Between its quota share agreement with Emoco and its successful participation in the GSC transaction, Anacri continues to utilize the capital initially contributed by Emoco, and we are pleased with the strong underwriting and attractive risk-adjusted returns we have seen from these transactions. we continue to see Anacri as a long-term capital and expense efficient growth opportunity. We also continue to pursue ways to expand the Anacri platform into new related opportunities. During the quarter, we entered into an agreement with Core Specialty through which Anac will provide underwriting advisory and expertise, market intelligence, and portfolio analysis in support of Core Specialty's entrance into the mortgage reinsurance market through GSE credit risk transfer. Core Specialty closed its first transaction during the quarter, leveraging ANAC's mortgage expertise, and we look forward to continuing to support Core Specialty and expanding on this market opportunity. We also continue to return capital to our shareholders. I'm pleased to note that yesterday we announced the board's approval of a special cash dividend of approximately $113 million for 71 cents per share, as well as the authorization of over 16 cents per share quarterly dividend. And we continue to repurchase shares during the quarter. We remain committed to returning $300 million of capital to shareholders in 2023 through a combination of quarterly and special dividends and our share repurchase program. On the whole, our distributions to shareholders reflect our commitment to our capital allocation goals, the strength of our balance sheet, the sustainability of our cash flows, and the confidence we have in our business. We are very pleased with the performance we have delivered in 2023 to date and remain confident in our business as the year comes to a close. Our portfolio is strong, with significant risk protection through our CRT program, as is our balance sheet, and ability to deliver returns. I will now turn the call over to Dean.
spk09: Thanks, Rohit. Good morning, everyone.
spk19: We again delivered very strong results in the third quarter of 2023. GAAP net income was $164 million, or $1.02 per diluted share, as compared to $1.17 per diluted share in the same period last year, and $1.04 per diluted share in the second quarter of 2023. Return on equity was 15%. Adjusted operating income was also $164 million, or $1.02 per diluted share, as compared to $1.17 per diluted share in the same period last year, and $1.10 per diluted share in the second quarter of 2023. Adjusted operating return on equity was 15%. Turning to revenue drivers, primary insurance and force increased in the third quarter to a new record of $262 billion, up $4 billion, or 2% sequentially, and up $20 billion, or 8% year-over-year. New insurance written of $14 billion was down $1 billion, or 5% sequentially, and down $1 billion, or 4% year-over-year, primarily driven by lower mortgage originations resulting from continued elevated interest rates. Persistency remained elevated at 84% in the third quarter, flat sequentially, and up 2 percentage points year over year. Given that approximately 1% of the mortgages in our portfolio had rates at least 50 basis points above the prevailing market rate, we anticipate continued strength and persistency, which will help hedge against lower production from higher mortgage rates. Net premiums earned were $243 million, up $5 million, or 2% sequentially, and up $8 million, or 4% year-over-year. The increase in net premiums earned sequentially was driven primarily by insurance-enforced growth and slightly lower seeded premiums. Our base premium rate was 40.2 basis points, down 0.1 basis points sequentially, and 0.8 basis points year-to-date. As a reminder, base premium rate is impacted by a variety of factors and tends to modestly fluctuate from quarter to quarter. Year to date, the decline in our base premium rate continues to stabilize and is in line with our expectations. Our net earned premium rate was 37.3 basis points, flat sequentially, reflecting changes to the base rate in addition to modestly lower seeded premiums in the current quarter. Investment income in the third quarter was $55 million, up $4 million or 8% sequentially, and up $15 million or 39% year-over-year. The rise in interest rates in the current rate environment are favorable for our investment portfolio as our new money yield was over 5% and our portfolio book yield increased to 3.5% for the quarter. As of quarter end, unrealized losses in our investment portfolio increased by $58 million to $497 million, As I've mentioned, we generally do not expect to realize these losses given our ability to hold the securities to maturity. Turning to credit, losses in the quarter were 18 million as compared to a benefit of 4 million last quarter and a benefit of 40 million in the third quarter of 2022. Our loss ratio for the quarter was 7% compared to negative 2% last quarter and negative 17% in the third quarter of 2022. Our losses and loss ratio were driven by an uptick in the current quarter delinquencies, partially offset by favorable cure performance, primarily on 2022 and earlier delinquencies that remained above our expectations and resulted in a $55 million reserve release in the quarter. New delinquencies increased sequentially to 11,100 from 9,200. Our new delinquency rate for the quarter was 1.2%, reflective of ongoing positive credit trends and primarily driven by historical seasonality and the normal loss development of new large books. We continue to book new delinquencies at an approximate 10% claim rate, reflecting our prudent and measured approach to reserving in this dynamic environment. Total delinquencies in the third quarter increased by approximately 1,100 to about 19,200. The associated delinquency rate increased 11 basis points to 2%. We continue to deliver solid expense performance that reflects the ongoing benefits of our cost reduction actions. Operating expenses in the quarter were 55 million, approximately flat sequentially and down 3 million or 5% year over year. The expense ratio for the quarter was 23%, flat compared to the second quarter of 2023 and down two percentage points year over year. We continue to expect costs for the full year to decline 6% to $225 million. Moving to capital and liquidity, we continue to operate from a position of financial strength and flexibility. Our PMIRES sufficiency remains strong at 162% or $2 billion above PMIRES requirements, which is flat to our second quarter 2023 results. At quarter end, we had $1.5 billion of PMIRES capital credit and $2.9 billion of seeded RIF provided by our third-party CRT program, which currently covers 91% of our risk and force. Turning now to capital allocation, we remain committed to our capital prioritization framework, which balances maintaining a strong balance sheet, investing in our business, and returning capital to shareholders. As Rohit mentioned, we are pleased with the solid initial progress we've seen from Enactor E since its launch last quarter. Anakri continues to deploy capital and to date has participated in four Fannie Mae and two Freddie Mac reinsurance transactions. Anakri's commercial success will drive any potential future funding, and we remain excited about its long-term growth potential. We returned a total of $32 million to shareholders during the third quarter, consisting of the $0.16 per share, or $26 million quarterly dividend, and share repurchases totaling $6 million. Year to date through October, we have repurchased $78 million in stock and have $96 million remaining on our current share repurchase authorization. As we said in the past, we will continue to deploy capital towards share buybacks opportunistically. All in all, to date, we have returned approximately $150 million to shareholders between our quarterly dividend and share repurchases, and we remain committed to returning $300 million to shareholders in 2023. Towards that end, The Board authorized our quarterly dividend of approximately $26 million, or $0.16 per share, and a special dividend of $113 million, or $0.71 per share, both payable on December 5, 2023. Overall, we had another strong quarter and are well positioned as we enter the final quarter of 2023. Going forward, we will remain focused on prudently managing our risk, driving cost efficiencies, and maintaining a strong balance sheet while executing against our capital prioritization framework. With that, I'll turn it back to Rohit.
spk05: Thanks, Dean. Looking forward, we will continue to pursue prudent growth opportunities and disciplined capital allocation that balances financial strength and policyholder support, investment in the business, and capital return. Overall, Enact is well-positioned to continue to serve our customers and their borrowers, grow our franchise, and deliver strong performance and value creation for our shareholders. I'll close by saying thank you to our talented team for all you do and for driving us forward.
spk08: Operator, we are now ready for Q&A.
spk15: In order to ask a question, please press TAR11 on your telephone and wait for your name to be announced. To withdraw your questions, please press TAR 1 again. Please stand by while we'll compile the Q&A roster. And our first question comes from the line of Boze George with KBW. Your line is now open.
spk10: Hey, everyone. Good morning. On capital return going forward, is the plan to target a certain level of capital return, like the $300 million you talked about this year, and then the split between buybacks and dividends you know, ends up being more opportunistic or just, you know, what's kind of the philosophy going forward?
spk19: Yeah, it's good morning. Thanks for the question. I think you hit it kind of on the head in terms of the mix of capital return. I think it's really going to be dictated by the opportunity provided in our share repurchase plan. The level of share buybacks will ultimately kind of dictate ultimately what gets returned via special dividend at the end of the year. I think when we think about our quarterly dividend, we think about it across a bunch of different dimensions, certainly competitive, but also, and probably most importantly, what is durable, not just in our kind of base case forecasting, but through some level of stress. We want to make sure that The quarterly dividend has that level of durability and we have that confidence to do to return that through cycles.
spk10: Okay, great. Thanks. That makes sense. And then just switching to the investment portfolio, what's the timeframe in which your portfolio kind of rolls into the new money yield, assuming, you know, rates remain stable going forward?
spk19: Yeah, well, we have an effective duration of less than four years. I think it's about three and a half years. So, you know, as you see today, we're investing, our new money yields are roughly 5.5%. I think we exited the quarter, you know, just under 6%. And you are seeing that have an effect on the overall weighted average book yield on the portfolio. It ticked up about 10 basis points sequentially. So, but, you know, more specific to your question, the duration of the portfolio is about three and a half years.
spk07: Okay, great. Thanks.
spk16: One moment for your next question.
spk15: And your next question comes from the line of Mihir Bhatia with Back of America. Your line is now open.
spk06: Good morning. Thank you for taking my question. I wanted to start maybe just on vintage performance. And I was curious on what you're seeing, particularly on the post-pandemic vintages. Are they performing in line with your expectations i suspect it's better than what you've underwritten to but i was just curious more in terms of your expectations and how they would perform maybe even compare them versus the 2018 2019 vintages for you know where they are in their life cycle are they other vintage girls or the lost girls on top of the 2018 2019 the reason i ask is because obviously uh on the unsecured lending side we've heard a lot about you know fico inflation and some and some underperformance from these pandemic era of integers. So, I was curious if you're seeing anything similar in your book or on the housing credit side.
spk19: Yeah, I think, Mahir, thanks for the question. You know, I think Rohit in his prepared remarks colored credit performance is very strong overall. I think that would characterize our view of the credit environment, credit performance to date. Obviously, that's exemplified in some of the portfolio metrics that we publish. Delinquency rate of 2%, new delk rate of 1.2%, reflective of pre-pandemic levels, which is indicative of, you know, again, strong performance. Kind of more to your question, when we look more granularly at performance by attribute, we don't see any deterioration in performance across the credit spectrum. That's really ranging from you know, the embedded risk characteristics, FICO, LTV, DTI, but also on a vintage basis, there's really no deterioration that we're seeing relative to our expectations.
spk05: And Mayor, just to add to Dean's point, I would agree that credit performance across the board continues to be very strong. As Dean said, don't see any deterioration in any credit cohorts. I would keep in mind that When we are talking about 18-19 versus 22 vintages, they're just seasoning in different environments, macroeconomic environment and housing environment. So that is going to have an embedded difference. And your question was, how is it performing against our expectations? And I would say that's generally in line with our expectations because our expectations incorporate the most recent economic view. But if you basically normalize for that, that would be the primary factor driving the difference.
spk06: Got it. Maybe going back to the capital return question a little bit, is there a rule of thumb, like, in terms of what will drive that going forward? Is there a target percent of net income or anything like that that we should be thinking about as you, you know, as we think about 2024, like, start looking at that for capital return?
spk19: Yeah, Mihir, I think it's less target-based and maybe more principles-based. You know, we look at things like the current macroeconomic environment, the prospective macroeconomic environment, our view on business trajectory, business results, both in an expected case, a stress case. We obviously look at the regulatory environment as well, what's, you know, what standards were held to, how those standards might change through time. So, I think it's more, you know, kind of a triangulation. of those considerations than a prescriptive formula. Got it.
spk06: And then just switching to the core specialty agreement you called out, I think they also mentioned you guys on their website as managing, you know, helping manage their reinsurance in that space. Is this, like, a new entry for them? Like, they didn't do this before, and, like, was this a competitive takeaway? where they were using someone else and now they're using you. I'm just trying to understand the plan with, I guess, in ACRI, right? Like, is the idea that you're going to try to sign up more of these types of agreements where you're managing it for a reinsurer looking to come in already in CRT and reinsurance? Or are you looking to also put more of your own capital to work here?
spk05: Yeah, Mayor, thank you for the question. I would say this is more of an outcome of using our expertise that we already have in the mortgage insurance business and we're beginning to deploy in the mortgage reinsurance space with GSE CRT. So core speciality was not participating in the mortgage reinsurance space, and we essentially started talking to them about their participation. They liked our expertise, our depth, our market intelligence, not only in the mortgage reinsurance space, but also what we do every day, which is look at the front end of the market, mortgage originators, different attributes, and obviously intelligence that we use in our risk-based pricing also in terms of debt at a very granular level and loan attribute level. So all of that led to Core Specialty using us to essentially start participating in the GSC reinsurance market. I would say that this is much more of a validation point for us versus a true Kind of substantial contribution to our P and L, I would still think of primary kind of goal to be participating in non private mortgage insurance kind of space and insurance space primarily and then adding that advisory service that we provide to core specialty being an add on. And if we are able to expand that to other companies who might be using somebody else or who are not in the space, I think that would be a plus and a validation of our expertise in the area.
spk09: Got it. Thank you. Thank you for taking my questions. I'll get back to you. Thank you, Mehran.
spk15: One moment for the next question. Your next question comes from the line of Rick Shane with JP Morgan. Your line is now open.
spk02: Good morning, guys. Thanks for taking my question today. Look, we're in a unique environment. The purchase is a historically high percentage of mortgage originations given the constraints in homes for sale. new home purchases are disproportionately high as a percentage of purchase volumes. That means that a great deal of originations are being driven by home builders. Can you talk a little bit about how that impacts the business, how you look at things like rate buy-downs provided by the builders, whether they're temporary or permanent and shifts in terms of how you work with builders to drive business?
spk05: Yeah, thank you, Rick. So I'll take this question. I think from our perspective, first, we agree with your points in terms of origination market being impacted by higher rates as well as broader inflation. And in this market, obviously, given the number of consumers who are locked in at very low interest rates, we also have a tight inventory, which means there is more focus on new homes. And those new homes are basically driving more of the origination market. So first thing, from a market participation perspective, that is a good thing for our business. As you know, private mortgage insurance is much more tied to the purchase market, and that essentially means that gives us a bigger origination market to participate in and also provides new inventory. Now, coming down to builder performance, our builder portfolio performance, kind of from both perspectives, recent performance and historic performance has been very similar to our overall portfolio. Specifically on the topic of rate buy-downs, we look at those programs, each program at a time, and approve it for our own guidelines. And essentially, we see the same performance. Consumers are appropriately qualified. There are no payment shocks. And I know that there has been a topic of permanent rate buy-downs discussed. We don't see a prevalence of permanent rate buy-downs. We see more short-term rate buy-downs, one-year, two-year, which are more economical. for a mortgage originator to fund compared to a permanent rate buy down. And the way the consumer is qualified, that gives us kind of a good performing and well-qualified loan on our books.
spk02: Okay. So, and so what you're suggesting is that to the extent you're seeing rate buy downs from loans available through, either the originators or through the home builders that proportionately you're seeing more short-term buy-downs as opposed to permanent buy-downs?
spk05: Yes. We are seeing short-term buy-downs, and even for those short-term buy-downs, the consumer is actually qualified at the full note rate, not at the bought-down rate. So if a consumer had a 1% buy-down upfront, The consumer is still basically being qualified at the prevailing market rate. Got it. Okay.
spk20: Second question, and this is a follow-on to that.
spk02: To the extent the industry is, or the mortgage industry is increasingly concentrated around developments from those builders, Is there any concern, like if you think about purchase volume ordinarily, it's going to be very disparate across the country. Fine, we're going to see regional concentrations due to migration, but is there anything within your model that says, okay, wait a second, if we're increasingly focused on these 25 or 100 developments that we're creating more correlation risk within the portfolios?
spk05: Yeah, so I would say in terms of concentration down to that level, we track our concentration at a state level, at an MSA level. As we have said in the past, we also have an ability to price our loans on an ongoing basis down to the MSA level, and we do. And that view is driven by the economic conditions in that city, in that MSA, both on a current basis and our view moving forward. And it includes a view into home prices and housing conditions, I would say, in terms of tightness of inventory or too many homes coming to market. We subscribe to several different market views to make sure that we have a pretty well-rounded view down to the MSA level. And that's how we control our appetite. I don't believe that we see our concentration in specific developments kind of controlling our risk appetite, because by the time our share of that development shows up on our books, you're talking about Like if MI penetration on purchase loans is somewhere between 20% to 25%, and we have 16% to 18% of that portion, we are talking about small numbers of loans that actually make it to our portfolio from any specific development. And in the builder segment, I would say our participation is very proportionate to our overall share. So it's not that we are taking on a specific subdivision for a builder and insuring a lot of loans down to that level. Got it. Okay. Thank you very much.
spk02: Absolutely.
spk15: One moment for the next question. And your next question comes from the line of Eric Hagan with BTAG. Your line is now open.
spk18: Hey, thanks. Good morning. Hey, a couple of follow-ups here. I mean, how much did the recent increase in interest rates you feel like play a part in the level of the special dividend that you just declared? And then can you share what kinds of returns you think you're getting in the GSE CRT deals? and maybe just how much capital you feel like could be directed there next year? Thanks.
spk19: Yes. Let me start off, Eric. So as it relates to the interest rate environment and the special dividend, I don't really think those are highly correlated. I'm failing to see the correlation. I think really more than anything, I'll go back, I think it was Boze's question, on a mix of... of returns of capital, and the special dividend was really sized based on the opportunity we saw in the share repurchases that was much more directly attributable. You know, interest rates, obviously, I guess if you, you know, maybe tying that question to an earlier question, when we think about how we're thinking about returns of capital in the future, interest rates are certainly part of our economic view, our prospective economic view. that affect both the macro as well as our view of our expectations around business performance. So maybe that's the connection that you're trying to draw. And I think in that case, as we look forward, that will certainly be a consideration.
spk18: Okay. Yeah, just curious what kind of returns you guys are expecting in the CRT deals. Thank you, guys.
spk05: Sure. So I think on the GSE CRT deals, we have not given any specific guidance, Eric, on type of returns. What we have said is we like the quality of underwriting, and we like the returns on those transactions. And the way we actually structured an ACRI right out of the gate was an ACRI is structured in a very capital-efficient, expense-efficient way, and it leverages the ratings, the scale of Emico, and our entire insurance operations. So we expect our returns to be very much in line with market returns on those transactions. And we are continuously participating in, as I said in my prepared remarks, in every deal, at least up to this point, that has been coming to market. So that hopefully shows you that we find the returns attractive.
spk18: Yep, that's helpful. Hey, lots of attention in the market around lenders having to buy back loans from the GSEs when there's a breach in the underwriting process of any sort. you know, scratch and dent kind of loans. Can you describe how that maybe impacts you guys and just how you see that maybe developing going forward?
spk05: Yeah, Eric, for us, that process has limited applicability to us. We have our own independent processes, both for non-delegated underwriting and for delegated underwriting, where we do essentially quality assurance checks at different frequencies for different lender segments. And we have our own view of loan quality for each lender and each customer segment, I would say, that we keep an eye on. So if a lender's performance is deteriorating from a manufacturing quality perspective, we work with that lender to go through training to remediate whatever the reason was. And if their quality still doesn't approve, we move them from delegated to non-delegated. As far as GSE buybacks are concerned, I think those are more driven by rules that GSEs use to determine that loans have significant defects, and then there's an entire process around early notification and then putting the loan back, which has a very, I would say, disproportionate impact on lender economics, because not only are you getting a loan back on your books, more than likely that loan has a 3% note rate in an environment where market rate is 7% to 8%, so you also take a mark-to-market hit on that asset. So, from a quality perspective, as I said in my prepared remarks, we like the manufacturing quality in the market. We actually calibrate our processes with GSEs and give them feedback. So, we are satisfied with manufacturing quality, and we see this much more as a secondary market issue between GSEs and originators.
spk18: That's really helpful. Thank you, guys.
spk12: Absolutely. Thanks.
spk15: One moment for the next question. And your next question comes from the line of Joffrey Dunn with Doley. Your line is now open.
spk03: Thanks. Good morning. I'm curious what your thoughts are. If Bermuda adopts this 15% tax rate, obviously there might be pluses and minuses around that, but how do you think that will affect the returns and competition in the GSE CRT market?
spk05: Good morning, Jeff. Very good question. So, as we said last quarter, to clarify, our expectations are an actually does not benefit from any kind of tax efficiency based in Bermuda because taxes are consolidated in the U.S. As far as Bermuda participants are concerned, with the higher taxes in Bermuda, if it's implemented, those participants might need higher returns from the transactions, everything else being held constant. that could actually lead the prices to be higher. And for us, that would mean higher returns. So I would expect that to be good for us. We are very happy with the quality and the return. So if there is less capacity from others, and that means more capacity or higher prices for us, I think we see that as a net positive.
spk03: Okay. And I know just following up the prior question, can you qualify those returns right now? Are they at least on par with the primary U.S. business?
spk05: So, Jeff, very good question. And unfortunately, we also haven't given guidance on the U.S. primary returns recently. We generally describe our returns as attractive in the primary business. And I think the toughest thing in this environment is we see a lot of uncertainty in the market in terms of what scenario plays out. I know the market has been talking about some kind of weakness in economy, at least majority of the economists, for almost 18 months, and that hasn't happened. So instead of picking a point estimate and giving you returns, we believe that our returns are very much in line with our expectations. And we believe the price increases we have done, including the price increases in the third quarter in the primary business, make the primary business attractive. And we do think that for the CRT business we are writing, those returns are also attractive to us. And especially, we are talking about different structures here. In the CRT market, we are writing mezzanine risk. So that obviously increases the attractiveness of those returns because in base case scenarios, those transactions are not attaching from a loss perspective.
spk09: Okay. All right. Thanks. Yes.
spk15: And we have no further questions at this time. I will now turn the call back over to Rohit Gupta.
spk05: Thank you, Bella. And thank you everyone. We appreciate your interest in an act and I look forward to seeing some of you next week at the JP Morgan conference in Florida. Thank you.
spk15: This concludes today's conference. Thank you for your participation. You may now disconnect.
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