Enact Holdings Inc (ACT) 2021 Q3 法說會逐字稿

Hello and welcome to Enact's third-quarter earnings call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Daniel Kohl, Vice President of Investor Relations. You may begin.

Thank you and good morning, everyone. Welcome to our first earnings call as a publicly traded company. 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 in the quarter and progress against our strategy. Dean will then discuss the details of our third-quarter performance before turning the call back to Rohit for some closing remarks. After prepared remarks we will take your questions.

The press release we issued after market close yesterday contains Enact's financial results for the third quarter of 2021. This release, and a comprehensive set of financial and operational metrics, are available on the Investor Relations section of the Company's website at www.IR.enactmi.com under the section marked Quarterly Results.

Before we begin I would like to remind everyone that today's call is being recorded and will include the use of forward-looking statements. These statements are based on current expectations, estimates, projections and assumptions as of today's date. They are subject to risks and uncertainties which may cause actual results to differ materially.

And we undertake no obligation to update or revise any such statements as a result of new information, future events or otherwise. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release, as well as in our filings with the SEC, which are also available on our website.

Also please keep in mind the press release, the quarterly financial supplement and management's prepared remarks today include certain non-GAAP measures. Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our investor presentation and our upcoming quarterly filing on our website. With that I'll turn the call over to Rohit.

Thanks, Daniel, and good morning, everyone. I'm excited to welcome you to our first earnings call following our successful IPO in September. The IPO was a significant milestone for Enact that provides a launching point as we aim to realize the full potential of our business. Enact starting selling mortgage insurance in 1981 with a clear mission to help people buy houses and stay in their homes and we have never wavered in that mission.

Through our strong relationships with mortgage lenders, underwriting excellence and commitment to prudent risk and capital management we have grown into one of the leading private mortgage insurance companies in the US, operating in all 50 states and DC. Following our successful IPO in September, we are better positioned than ever driven by a number of factors, including deep customer relationships.

We serve over 1,800 active customers across the mortgage origination market, including all of the top 20 mortgage originators, and provide them with a compelling value proposition including competitive pricing and guidelines, a best-in-class underwriting platform and other tools and support to help them achieve their growth objectives.

We are prudent managers of risk, we utilize a proprietary approach that ensures the underlying credit quality of our insured mortgage portfolio is aligned with our risk and profitability framework. And we have further strengthened our risk management efforts through the actions we have taken to transfer risk from our balance sheet, which we believe will enhance our return profile and reduce volatility in losses over time.

Today, over 90% of our risk in force is covered by our credit risk transfer program. Our executive team is second to none with an average of nearly 30 years of experience and a proven track record of delivering results through the cycle, complemented by the right combination of skills to drive our long-term success.

Finally and importantly, dynamics in our market remain very strong as a combination of low interest rates, robust housing prices, demand for homeownership and favorable demographics create a favorable environment for purchase originations. Despite the tight housing market, the number of first-time homebuyers purchasing homes remained robust in the first half of 2021, and they use high loan-to-value products more than 80% of the time when becoming homeowners.

Over the next five years, an additional 1.5 million people, above the existing trend, are expected to reach peak first-time homebuying age, which we believe will expand the first-time homebuyer market even further. These dynamics were evident in the third quarter.

Mortgage origination activity remained robust fueled by strong home sales and refinance activity. Total unsold inventory of single-family homes remains low at a 2.6 month supply as of August 2021. This continues to drive home prices higher, increasing our average loan amount on new insurance written.

At the same time historically low interest rates continue to serve as an offset to rising prices, which allows for continued affordability for borrowers. Finally, refinance activity remained robust compared to the second quarter of 2021 but decreased compared to the third quarter of 2020.

As a public company with an improved ratings profile we are better positioned to both start doing business with new customers and defend and grow share within our long-standing customer relationships by leveraging our best-in-class underwriting platform and customer service. Going forward we will leverage our strengths to execute against a clear growth strategy designed to further differentiate Enact, generate strong returns for our shareholders and maximize value creation.

This strategy is based on an informed cycle tested approach that has allowed Enact to outpace industry average insurance in force growth over time. We will have as our principal focus to continue to write profitable new business supported by our differentiated value proposition and the ongoing positive market backdrop.

We remain committed to deepening existing relationships and developing new ones by offering our customers a differentiated value proposition and an experience tailored to their needs. As part of this, we plan to continue to invest in areas such as machine learning, modeling and data solutions that will increase our differentiation, drive greater efficiency and enhance our decision-making.

We will also continue to focus on protecting our balance sheet and earnings profile by maintaining strong capital levels, robust underwriting standards and managing risk via our proprietary risk assessment and pricing tools and our credit risk transfer program. We will also stay dedicated to maximizing value creation through a balanced capital allocation approach that supports our existing policyholders, invest to grow the business, as I just mentioned, and return capital to shareholders.

Dean will provide more color on our current thoughts in this area shortly. Overall our focus remains on balancing growth while generating strong return for shareholders and we are very pleased with our production and performance.

Shifting now to the quarter. Dean will cover all results in more depth in a few minutes. Let me start with some highlights. This was another very strong quarter and we are proud of our performance, which was driven by a combination of our positioning in the market and competitive advantages, the successful execution of our strategy and ongoing favorable market dynamics.

Adjusted operating income was $137 million or $0.84 per diluted share compared to $138 million or $0.86 per diluted share a year ago. Adjusting for 2020 debt issuance interest expense, this is the highest adjusted operating income we have achieved since the beginning of the pandemic, reflecting growth in our insurance in force as we continue to write sizable new books, lower delinquencies as a result of the ongoing economic recovery and prudent expense management offset partially by lower premium rates.

Insurance in force rose to $222 billion in the quarter while new insurance written remained strong at $24 billion. We are committed to building our book with the right business that properly balances risk and reward, and to continue to do so in the third quarter with business priced at low to mid-teen returns. We continue to manage our risk and drive operational excellence resulting in a 400 basis point reduction year-over-year in our loss ratio.

Our risk management efforts have resulted in a high quality credit portfolio with a weighted average FICO of 741 and an average loan to value ratio of 93%. We finished the quarter with a very strong balance sheet, including a sufficiency to PMIERs published standards of $2.3 billion or 181%.

This is the highest level of sufficiency for our business since the inception of this standard and enhances the flexibility we have to pursue our capital allocation goals, including returning capital to shareholders via dividends, as Dean will discuss shortly.

The increased strength of our business following our IPO was recognized by the credit rating agencies and we received upgrades from Fitch, Moody's and S&P following the transaction. These will meaningfully enhance our ability to pursue new business from customers sensitive to credit rating, and we have already begun to see new traction as a result that we expect will continue to build over time. I'll now turn the call over to Dean to discuss drivers of our third-quarter performance in more detail.

Thanks, Rohit, and good morning, everyone. Let me begin by also taking the opportunity to welcome everyone to our first earnings conference call. This is a very exciting time for Enact and I look forward to working with all of you going forward.

As Rohit mentioned, we delivered another very strong quarter of financial results. GAAP net income for the third quarter was $137 million or $0.84 per diluted share as compared to $0.80 per diluted share in the second quarter of 2021 and $0.85 per diluted share in the third quarter of 2020. Adjusted operating income was also $137 million or $0.84 per diluted share in the quarter as compared to $0.82 per diluted share in the second quarter of 2021 and $0.86 per diluted share in the third quarter of 2020.

In terms of key revenue drivers, new insurance written was $24 billion during the quarter compared to $26.7 billion in the second quarter of 2021 and $26.6 billion in the third quarter of 2020. New insurance written for purchase transactions made up 88% of our total NIW in the quarter, up from 79% last quarter and 75% in the third quarter of 2020. In addition, monthly payment policies represented 90% of our new insurance written in the quarter as compared to 93% last quarter and 88% in the third quarter of 2020.

Insurance in force of $222 billion increased 2% from second-quarter levels and 10% from the third quarter a year ago. The year-over-year increase was primarily driven by new insurance written, partially offset by elevated lapse associated with the prevailing low interest-rate environment. As of the third quarter, our 2020 and 2021 book years represented approximately two-thirds of our total insurance in force, indicative of the large market opportunity and commercial success we've had in consecutive years.

Risk in force at quarter end was $55.9 billion, up from $54.6 billion last quarter, and up from $51.4 billion in the third quarter 2020, primarily as a result of growing insurance portfolio. Persistency for the quarter was 65%, an increase from 57% last quarter and 59% in the third quarter of 2020. The increase in persistency was primarily driven by a decline in the percentage of our enforced policies with mortgage rates above current rates.

Total revenues for the quarter were $280 million compared to $276 million last quarter and $284 million in the third quarter of 2020. Net premiums earned were $243 million, flat to the prior quarter and down 3% compared to the third quarter of 2020. Our net premium rate of 44 basis points was modestly lower sequentially driven primarily by lower single premium cancellations, and was down 6 basis points year-over-year due to a combination of lower single premium cancellations, higher ceded premiums and the lapse of older higher-priced policies as compared to our new insurance written.

Importantly, the current market and underwriting conditions, including the mortgage insurance pricing environment, is well within our risk-adjusted return appetite, enabling us to write new business attractive low to mid-teens returns.

Turning to losses, losses were $34 million in the quarter as compared to $30 million last quarter and $44 million in the third quarter of 2020. The sequential change in losses was driven by seasonally higher new delinquencies, while the year-over-year decline in losses was driven by lower new delinquencies as the economy continues to improve. This was partially offset by favorable IBNR development in the third quarter of 2020.

36% of new delinquencies in the quarter were subject to a forbearance plan, which reflects the lowest concentration of new delinquencies in forbearance plan since the start of COVID-19. Our claim rate on new delinquencies for the quarter was 8%, consistent with the claim rate for new delinquencies over the first half of 2021.

As reflected on slide 12 of our investor presentation, we reported approximately 7,400 new delinquencies in the quarter, which was less than half of the new delinquency level seen a year ago. New delinquencies were up approximately 8% sequentially driven by seasonality. For the quarter, our new delinquency rate of 0.8% is consistent with pre-pandemic levels of development and is indicative of the ongoing economic recovery.

On the same slide we've included a view into the [effort] to date care performance of COVID-19 new delinquencies or those new delinquencies since April of last year. To date approximately 86%, 81% and 76% of delinquencies from the second, third and fourth quarter, respectively, have now cured. These cumulative cure rates have continued to increase through time and may accelerate as borrowers reach completion of their forbearance plan terms.

Our third-quarter total delinquencies of approximately 29,000, and the associated delinquency rate of 3.1%, reflect the fifth consecutive quarter of improvement in both measures driven by the continuation of cures outpacing new delinquencies. We made no changes in the third quarter to aggregate reserves on prior delinquencies.

We continue to assess the resolution of COVID-19 delinquencies with a focus on the approximately 56% of our delinquencies subject to forbearance plans as we consider the appropriateness of our loss reserves over time. At present, our loss reserves reflect our best estimate of ultimate claims on our total delinquencies.

Lastly, the embedded equity position of our delinquent policies is substantial with approximately 97% of our delinquencies having an estimated 10% or more mark-to-market equity using an index based house price assessment. We believe this embedded equity can serve as a potential litigant both to the frequency of claim as well as the potential future loss for delinquencies that ultimately progress the claim.

Turning to expenses, operating expenses were $59 million and the expense ratio was 24% in the quarter as compared to $67 million and 27% respectively in the second quarter of 2021. This was driven primarily by lower corporate overhead associated with the execution of the shared services agreement with our parent, Genworth Financial, and lower strategic transaction preparation costs and restructuring costs in the current quarter compared to the second quarter of 2021.

Operating expenses were materially flat year-over-year. In addition to operating expenses, the third quarter of 2020 reflected about half of the approximate $13 million quarterly interest expense given the timing of our debt raise in August of last year.

Turning to capital and liquidity, we are committed to maintaining a strong balance sheet aligned with our investment grade ratings. As Rohit mentioned, our PMIERs sufficiency increase to 181%, or approximately $2.3 billion above the published PMIERs requirements, compared to 165% and $1.9 billion in the second quarter of 2021.

The sequential improvement in PMIERs sufficiency was driven in part by the completion of an insurance linked notes transaction which added approximately $370 million of PMIERs capital credit, as well as elevated lapse from prevailing low interest rates, strong business cash flows and lower delinquencies. These drivers were partially offset by the significant amount of NIW we wrote in the quarter and the amortization of existing reinsurance transactions.

As of quarter end, we had approximately $1.6 billion of PMIERs capital credit and approximately $1.8 billion of loss coverage provided by our credit risk transfer program, which provides cost efficient PMIERs capital and reduces future loss volatility by ceding risk to both traditional reinsurers and the capital markets.

Our PMIERs sufficiency includes the benefit from the 30% multiplier for COVID-19-related delinquencies, which reduced PMIERs required assets by approximately $570 million before giving effect to reinsurance benefits. The benefit from the 30% multiplier has declined over the past four quarters as more COVID-19-related delinquencies resolve in cures.

Turning more broadly to our balance sheet, at quarter end our GAAP equity was $4.2 billion, invested assets totaled approximately $5.4 billion. Cash and cash equivalents were approximately $450 million. Long-term debt was $740 million, and our debt to capital ratio was a conservative 15%. Combined with our PMIERs sufficiency levels, these metrics demonstrate why we are confident in the strength of our balance sheet to support our business go forward and deliver value to shareholders.

Our insurance financial strength ratings were recently upgraded as a result of our successful IPO. Each of S&P, Moody's and Fitch upgraded the insurance financial strength rating of GMICO, our flagship mortgage insurer, by one to two notches in recognition of the enhanced governance and access to capital we now possess. Each rating agency's rating and outlook is reflected on slide 14 of the investor presentation.

In regards to our capital allocation strategy, we will continue to pursue a balanced approach that maintains a strong balance sheet, pursues investments to enhance our business prospects and returns excess capital to shareholders.

As it relates to a potential 2021 dividend, we are continuing to assess the economic and business conditions, including the resolution of forbearance-related delinquencies, in support of distributing a fourth-quarter dividend to shareholders.

To date, this review has been supported. If this remains the case, we intend to recommend a $200 million 2021 dividend during the fourth quarter to the Board for its approval. I will now turn the call back over to Rohit for closing remarks.

Thanks, Dean. Before turning it over for your questions, I'd like to provide some thoughts on the current regulatory environment in Washington DC. We continue to advocate for the expanded use of private mortgage insurance among policymakers in Washington.

We actively work with Capitol Hill, the administration, regulators, housing finance trade groups and consumer advocates to develop solutions that achieve the shared goal of increasing the accessibility, affordability and sustainability of homeownership.

We have found a great deal of consensus around these principles and are encouraged by the recognition of the role we play, particularly for the first time homebuyers, in the housing finance economy. At Enact we are proud of the big role we play in helping families achieve their dreams of owning a home and creating a path for them to build wealth through homeownership.

Let me leave you with a few key takeaways on slide 16. We are very pleased with our performance. Driven by our strong execution and against a market backdrop that remains favorable, Enact produced another very strong quarter. We are a market leader with the right solutions and a highly experienced management team and we are successfully executing against a strategy that will drive growth, manage risk and generate strong return.

None of this would've been possible without the hard work and dedication of our employees and I want to thank them for their continued commitment. Working together, we believe we are well-positioned for continued growth and value creation as we fulfill our vital role in helping people achieve their homeownership goals. I will now turn the call back to the operator to take us into Q&A. Operator?

(Operator Instructions). Rick Shane, JPMorgan.

Thanks, guys, for taking my questions this morning. Look, I think the interesting thing that's occurring right now is the migration through default to payment. And I'm curious when you look at the metrics, and we are sort of in this unprecedented time and the impact of forbearance, is it -- do you think at this point that payments are -- losses are simply being deferred? Or is there increasing indication that we're going to see much lower migration and that losses are actually going to be averted?

Thank you very much for the question, good question. Let me just start with the trends that we are seeing and dovetail that into a little bit of the forbearance. First of all, our forbearance trends show that newly reported forbearances continue to decline and that's really happening as the economy continues to improve.

And then to your perspective, total delinquencies -- including delinquencies and forbearance are declining as cures continue to outpace new delinquencies. Our view has been pretty consistent through this that we believe delinquencies and forbearance -- and that represents over half of our total delinquent inventory -- they may cure at an elevated rate, and they may do that for really two reasons.

I think forbearance gives borrowers time, time to reestablish their financial footing. In addition, forbearance gives borrowers more options to cure. And that includes payment deferral. And our experience to date is payment deferral, which is really a new loss mitigation tool as part of the pandemic. It has accounted for most of the forbearance exits that we've seen to date. It's running at about a 4X clip relative to workouts.

I think we continue to assess how those remaining forbearances are going to play out -- as they progress towards their term completion, rather, as we assess really the most likely of outcomes. But to date our assessment has been really consistent with our initial assessment when we applied a claim rate expectation at the initial delinquency.

And again, much like I said, I think that's an important assessment as it relates to forbearance because of the high concentration that they represent in our overall delinquent population. So, I'd kind of go back to the comments we made at the beginning of this pandemic, that we do expect those to resolve at an elevated cure rate and that remains the case today.

Terrific. And if I could just ask one last quick question. Can you just sort of walk through the persistency on a monthly basis? Because we have seen a lot of fluctuations in interest rates. If you can talk about what you saw during the third quarter, perhaps even an update as we enter the fourth quarter and we're a month in?

Yes. Our persistency ticked up, much like you saw as -- I think interest rates, quite frankly, remained pretty depressed throughout the quarter. They only really ticked up above 3% at the end of September. So, we attribute the uptick in persistency really as a reduction, a lowering of the amount of opportunities for refinance.

So, fewer and fewer of our in force policies have interest rates that are above the prevailing market rates. That has come down pretty meaningfully year-over-year. And so, I think that's really the driver of persistency changes both year-on-year and quarter-over-quarter basis.

I think what you saw was a little bit of a mixed bag throughout the quarter itself. So, July persistency was probably at its highest and it marginally came down August through September. But you are really in pretty small numbers. The range is pretty tight. There's about 3 points of persistency difference within the quarter, within the months within the quarter. So, not a wide -- while there is some variation, not a wide variation month to month to month within the quarter.

Rick, this is Rohit. The one thing that I would add to Dean's first comment on persistency is that there is a direct correlation with the opportunity in our portfolio going down in terms of number of consumers who still have mortgages, let's say, about 50 basis points above the prevailing market rate. In addition to that, the recent interest rate increase, at least in the month of October, would lead to a higher persistency. So, that historical correlation continues to exist.

Great. Thank you for taking my questions. And I just want to acknowledge there's been a tremendous amount of work to get you guys to this point where we are all having this conversation and look forward to continuing going forward.

Thanks, Rick.

Bose George, KBW.

Good morning. Also my congratulations on your first quarter as a public company. Actually I wanted to first ask just about the dividend. Just wanted to explore that a little more. Right now -- at the end of the second quarter your surplus looks like it's over $200 million, so it allows for the dividend this year.

But can we talk about how you think the surplus will trend in 2022? And are you likely to need to request a special dividend to -- if you want to keep the dividend distribution similar next year, is the plan to try and maintain a similar run rate, assuming market conditions permit that?

Thanks for your question, great question. So, I will start off by just saying, as I said in my prepared remark,s we look at a balanced capital allocation approach that supports our existing policyholders, invests to grow the business and then returns capital to shareholders.

So, capital returned to shareholders is going to be a key aspect of our disciplined capital allocation strategy. I'm going to ask Dean to just give you more color on both the fourth-quarter dividend and the way we think about longer-term return of capital.

Yes, so Bose, appreciate the question. I think you rightly point out our unassigned surplus stands at just over $200 million. At the end of the third quarter, our total policyholder surplus is in excess of $1.5 billion. So, after the $200 million dividend, assuming we execute that in the fourth quarter, for the moment unassigned surplus does come down.

I would expect that we would be working collaboratively with North Carolina Department of Insurance, our domiciliary regulator, on any future capital returns. And it's likely after a $200 million dividend that unassigned requires us to go back and seek their approval for dividends beyond 2021.

Okay, great. That's helpful. But the expectation or what you would like to do is maintain at that level going forward, assuming you can -- if market conditions allow and you can work the regulators on that?

Look, near-term we're focused on the fourth-quarter dividend. Our assessment has really focused on the resolution of forbearances and making sure that they are resolving in-line with our original expectations. That assessment has then supported the date of a fourth-quarter dividend. And if that remains the case, we would expect that we'd be making a recommendation to the Board for a $200 million 2021 dividend later this quarter.

I think really, honestly, our focus, Bose, on the medium-term is really around the potential initiation of some dividend policy. As you know, we launched our IPO without a stated dividend policy, but we gave guidance that, assuming business and economic conditions remain on their current trajectory, that we could initiate a regular common dividend as early as 2022. So, we are continuing to make that assessment on business trajectory as well as economic recovery and that's been more of our focus in the medium-term.

I would say the only -- we're not going to give dividend guidance on this call. I think maybe giving you some historical perspective on what we've done dividend wise could just give you -- inform your view on how we thought about this in the past.

So, if you look back to our 2019 dividend, which was obviously done on a pre-pandemic basis, the dividend is about $250 million. And if you look at that on a dividend payout ratio, I think that would probably take you upwards to 45%, to a high 40% dividend ratio. I think that just gives you some historical context on how we've thought about dividends in the past if you want to -- if that might help dimension our perspectives looking backwards.

Okay, great. That's very helpful. Thanks. And then just one other quick one. Just on the operating expenses going forward, should that be more like a low $50 million number if we pull out some of those unusual items?

Yes, so, I think we had expenses of $59 million, an expense ratio at of 24 in the quarter. I think we talked about the favorable variance prior quarter being driven largely by corporate overhead, a reduction in corporate overhead as a result of the execution of the shared services agreement. And then we called out specifically $3 million lower of strategic transaction preparation costs as well as restructuring costs.

So, I would say, taking the $59 million down, that get you to $56 million if you simply exclude the $3 million of, again, strategic transactions and restructuring. I think as you think about that on a go-forward basis, we haven't provided expense or premium guidance, so I'm not going to get into specific pro forma expense dollars or ratios, but I do think we can talk in terms of expense drivers to give us a directional sense.

First of all, we're not going to have the costs associated with those two things, the transaction preparation costs as well as restructuring beyond 2021. So, that's going to decrease the run rate heading into 2022. But we're also still in the process of standing up public company activities and that is going to have costs associated with it. That's going to serve to increase our run rate on expenses, really especially in the short-term.

And then lastly, like we've talked about, the shared services agreement does cap corporate overhead and codifies a reduction in that corporate overhead beginning in 2023. It is about a $5 million reduction annually, 2023 through 2025, and that's going to serve to decrease our run rate of expenses over the medium- to longer-term. So, I hope that provides some context on expense drivers and where that might go go-forward.

Okay, great. That's very helpful. Thanks a lot, guys.

Doug Harter, Credit Suisse.

I was hoping you could talk about the competitive dynamic in the industry during the quarter and how you view relative price competition today.

Thanks, Doug. Very good question. So, we believe overall the MI market is competitive yet constructive. And our returns remain within our risk-adjusted return appetite. The healthy MI industry dynamics have also enabled us to continue to write new business in a large market at attractive low to mid-teen returns in the third quarter of 2021.

And at the end of the day, we are an experienced underwriting company and we are going to focus on charging the right price for the right risk to drive value for our shareholders and put qualified borrowers into homes. So, we find the general narrative constructive as we think about our participation in the market.

And I guess as we look forward to 2022, and as the total size of the market is likely to be smaller, I guess how do you think that factors into the relative competitiveness of the market?

Yes, Doug, very good question. As we think about the originations market, one thing I would point to just looking back is there has been a transition in the origination market this year itself. So, if you think about market dynamics that are in play, it is low interest rates, robust home prices and then obviously that driving some balance in housing affordability while we continue to see a shortage of housing supply.

But we believe the third quarter origination market was still over $1 trillion, and this was the fifth quarter of origination market being at that number. But within the $1 trillion of originations, we did start seeing a translation to purchase originations in 2021 compared to 2020.

So, that is a good dynamic for our industry, that even though the origination market might be declining, given the penetration private mortgage insurance industry has in the purchase market relative to refinance market, which is almost 4 times. So, out of every 100 purchase loans we get four times more private MI loans than 100 refinance loans. That is going to be supported even moving forward.

So, difficult to provide a guidance on origination market size at this point, because that's partially tied to interest rates, interest rate projections in the future. But I would say given the strength of the originations market and within that purchase market and first-time homebuyers fueling that increase, we are optimistic about the size of the MI market being very strong in the foreseeable future.

Geoffrey Dunn, Dowling & Partners.

Dean, you referenced the relative new notice is around 80 basis points this quarter. I wanted to see what your thoughts are on how to think about notice development going forward as forbearance on a notice basis is increasingly behind us. But as you noted, two-thirds of your book is 2021 and you're going to start hitting that peak season maybe [into] 2022, 2023 at least on the 2020 book.

Coming into COVID it looked like something in the range of 60 or 80 basis points might have been, quote-unquote, normalized. But how do you think about development from here given such a young concentration and considering the credit environment that we've been experiencing not just this year but for the past several years?

Yes, Geoff, thanks for the question, good question. I would characterize credit performance as really continuing to trend favorably, a lot of the things you just pointed out. But let's just start with the quarter. Losses up to $34 million versus $30 million prior quarter. That was really driven by a seasonal increase in new delinquencies.

We think typically about the transition from the second to third quarter as somewhere in the 10% to 15% increase in new notices. We saw 8% [BPQ], and so generally in line, maybe modestly favorable to normal seasonality.

I think it's important as well to reference that the new [delq] rate is at pre-pandemic levels. The 0.8% that you referenced, I think that does reflect the overall economic recovery that is underway. In addition to that, cures continue to outpace new delinquencies. This is the fifth quarter in a row where that has happened.

And then lastly, new delinquencies subject to forbearance are at their lowest level since the start of the pandemic. And again, I think that's another sign of the ongoing economic recovery.

The last thing I'll point to, Geoff, as we just think about the trends and what could impact them go forward is, given the rise in HPA, 97% of our delinquencies have an estimated 10% or more mark-to-market equity. We think that -- in terms of the resolution of our existing delinquencies, we believe that can serve as a potential mitigant to both the frequency and severity of claims.

So, I think when you put all that together -- and I know I combined new notices and the resolution of existing delinquencies. But I think it all adds up to credit trends that are heading in the right direction as we transition into the Q4 timeframe.

And just one other thing, Geoff, I'll add to Dean's list on new notices is, in the current environment, as we have seen over the last 18 months, the forbearance program that was designed for this pandemic has been unique and has its own impact on new notices. Because from a consumer perspective, there's very little downside in actually participating in that program.

So, as that program comes to an end you will start seeing normal behavior from consumers and terms of they go delinquent when they are in financial stress of some kind. Whereas during the pandemic some of those numbers have had noise in them because we saw performing consumers go into the forbearance and then keep making payments. So, that's another dynamic that will be in transition as we come out of the pandemic.

Ryan Nash, Goldman Sachs.

I echo the others' comments and congratulations on a successful IPO. Maybe just to start, Rohit, you talked in the slides about the ratings upgrade should continue to enhance your competitive position. Can you maybe just expand on those comments, how you think this could potentially support new business wins and market share gains over time?

Yes, Ryan, thank you for your question, very good question. So, as we talked about this during our IPO, we have operated on somewhat of an unlevel playing field in the past, especially with customers who are sensitive to credit ratings.

So, think about these customers being depositary institutions typically that put a portion of their loans in their portfolio. So, all the way from national banks, regional banks, community banks and credit unions. And either for governance reasons or for ratings reasons, our share in that segment of the market has been depressed over the past four years or so.

So, since our IPO and since we got ratings upgrades from Fitch, Moody's and S&P, we have had very constructive discussions with that segment of the market with those specific customers and we continue to make very good progress. And we would anticipate in the coming time in the next few quarters we will start think the benefit of that in our production run rate. So, we are seeing progress in line with our expectations and I would say that is heading in the right direction.

Got it. Maybe a follow-up to one of the questions that was asked before. You mentioned several times the percentage of the portfolios that have policies above current rates. Just any sense for how that has trended over the last couple of quarters, where it stands and what could that mean for the go-forward persistency, particularly if we continue to see interest rates rising in the coming quarters? Thanks.

Absolutely, Ryan. So, I think the dynamic that Dean talked about was simply that in our insurance in force, as policies have lapsed, the policies that are now still in the money in terms of being able to refinance has continued to be lower, as well as we are writing new books, as you notice, in third quarter with interest rates hovering below 3%.

So, that is just -- that puts less portion of our policies exposed to higher chances of lapse. And I would say as that continues to happen, you will just see persistency tick up in our portfolio, as long as the prevailing interest rates in the market are higher than what consumers in our portfolio have on their policies. So, that phenomenon will play out just like it plays out historically.

Ryan Gilbert, BTIG.

My first question actually is on the payout ratio. And Dean, I appreciate your commentary there. Just broadly, is it fair to think about a maybe 40% to 50% payout ratio as the number that this business can support in an overall good housing market?

Ryan, thanks for your question. So again, I wouldn't -- I didn't give that 2019 historical experience as per se guidance. I wanted to give it as context for how we previously thought about dividends in a more stable economic environment, which differs than how we're thinking about dividends in the fourth quarter of this year. So, I just want to make that distinction from that perspective.

So, Ryan, one thing I'll add to Dean's comment -- I absolutely agree that we were pointing to 2019 dividends as having mid-40s payout ratio. If you look at $200 million potential dividend in fourth-quarter 2021 compared to over the first three quarters of income run rate, you would come up with high 30s payout ratio, which reflects where we are in the cycle in terms of recovery from the pandemic.

Two considerations that we would give in terms of sizing for future, instead of providing a quantitative guidance. The first thing, we would want to make sure that we have a high degree of confidence in the sustainability of regular common dividend. As Dean mentioned, we would think about putting a regular common dividend policy as early as 2022. So, think about that aspect of capital return having a high confidence from a management board perspective.

Second, in addition to that, we would look at the industry landscape at that point of time and where peer dividend yields are at the time, and that will help us quantify what portion of our dividend is a regular common dividend as well as special capital return either in terms of special dividend or share buyback.

Okay, that's great. Really helpful, thank you. My second question is on forbearance exits. I think we've seen in some of the surveys that there's some percentage of borrowers who are exiting forbearance without a loss mitigation plan in place. So, I'm wondering if you had any insight or color into what you are seeing in your own delinquency book? Is it a function of the borrowers not qualifying for forbearance or had they not -- just not been in touch with the servicer? Or -- any insight would be really helpful?

Good question, Ryan. From a forbearance perspective, we've had about 100,000 forbearances in our insured portfolio. Not all of those have been delinquent. About -- in rough estimate about a third of those have remained current through time. And the remaining have gone delinquent.

We have seen forbearance exits happen in a lot of different ways. About a third of those forbearances have canceled their for -- have actually canceled their forbearance. The others have exited through either a payment deferral, which, again, represents the vast majority of our exits to date, retention workouts, self-cures.

And then to your point, there are some level of forbearances exiting without workout. That represents a pretty small percentage of our overall forbearance exits. That's about 2.5% of total of those total forbearances.

I think the causation is (technical difficulty), whether that's a timing issue or whether that's lack of an ability to continue to service the loan. And that really goes into what we were talking about as the forbearance assessment in advance of supporting a fourth-quarter dividend.

It's those types of details that we are working with to get underneath the hood a little bit more, working with servicers to understand what is the causation of exiting without workouts and what is therefore the likelihood of that potentially -- of those loans potentially going to claim.

Mihir Bhatia, Bank of America.

Thank you for taking my questions. I also will add my congratulations on completing your first quarter as a public company. Maybe to start, I want to just make sure I understand what the capital return or the dividend that you're speaking about. You're talking about the dividend of $200 million that's going to go to the holdco right?

Does the holdco have any reason to hold onto that or is the idea that that entire $200 million would then get returned to shareholders? And what I would love to hear a little bit more on is just how you are thinking of how that return would be. Is there any kind of corporate imperative to do a little -- because of [general] needs or whatever, to do a little bit more weighted towards dividends versus a buyback?

Yes, Mihir, good question. So, first of all, I would say as it relates to -- I'll just answer your last question first. As it relates to dividends versus share buybacks, I think in the short-term we are predisposed to dividends. Over the longer-term I think we'll continue to look at analytics like intrinsic value and where we see dislocation between the share price and the prevailing market value. We could have a transition to a preference for share buybacks, noting we'll have to be cognizant of the amount of flow we have in the market as well.

I think in terms of dividend -- yes, so I think you should expect the dividend is a pass-through to shareholders. So, coming out of our operating subsidiary into the holdco and on to shareholders, that's clearly aligned with our intent and hopefully aligned with our communication to date.

Remember, holdco has $290 million, approximately, of cash. So, holdco doesn't have any reason to hold on to additional cash at this point. We have sufficient amount of resources to service our debt for the foreseeable future.

Yes, I just wanted to make sure on that. Great. In terms of the claim rate for the quarter -- I apologize, I may have missed it. But did you give the claim rate that you've assumed for the quarter?

Yes, the claim rate, Mihir, is 8%, consistent with the first half of the year as well.

Great. And then just last question I had was just on the forbearances. I appreciate that yours are running higher than new delinquencies, obviously heavily impacted by the COVID forbearances that are curing. But may we just talk about your expectations at the start of the pandemic for what the claim rate on those would be, just remind us of that? And then how -- where are we in that process? Like [should] we assume 5% (inaudible)? Thank you.

Good question. We haven't differentiated the claim rate between forbearances and non-forbearances. We talked in the aggregate and through time we've given the claim rate of -- at least through 2021 of 8%. So again, that's the claim rate on both forbearance and non-forbearance.

Through the assessment of forbearances that we're doing in part to continue to evaluate our loss reserve adequacy and in part in support of a fourth-quarter dividend, what we've seen to date is that forbearance performance is consistent with the original claim rate expectations that we set at the time of delinquency. So, that's really the assessment to date. We continue to -- that assessment is ongoing and we continue to evaluate, but that is the current view.

Understood. And then does the fact that so many -- I mean, I guess maybe you expected the vast majority of the forbearances to cure using payment deferrals. Is that right? And that can't be used for other delinquencies, right? It has to be only for a COVID delinquency, like servicers or you guys don't have any -- maybe you see great performance out of that and you say, hey, that's another loss mitigation tool. But that's not actually an option rate for any non-forbearance delinquency?

Payment deferral is limited to forbearances and payment deferral was a new kind of option -- loss mitigation option created during the pandemic itself.

Got it. And the way it's being used is in line with your expectations?

That's right.

Aaron Cyganovich, Citi.

Thanks. Just would like to hear a little bit from the competitive dynamics around credit underwriting. It seems as though that most folks were managing their risk through higher pricing through the pandemic. And your credit stats from new insurance written looked pretty steady over the past two years. Is there any signs of any of your competitors loosening credit standards at all?

Hi, Aaron. Very good question. So, I what I would say is the [credit box] has been pretty tight driven by the implementation of qualified mortgage rules back in 2013-2014 timeframe, GSE guidelines and on top of that our own credit policies. So, no changes in the market that are meaningful.

At certain times, if we see an opportunity in a certain cohort to actually onboard risk at the right price and it's within our return appetite, we'll do that. So, you might see some fluctuations in single dimension risk in our book or in our competitors' books, but beyond that no expansion of credit box that we see at this point.

At this time there are no further questions. I would like to turn the call back over to Mr. Rohit Gupta for closing remarks.

Thank you, Lisa, and thanks to everyone who joined today. This is certainly an exciting day for our Company. We appreciate your interest in Enact and look forward to engaging with you and keeping you updated on our journey. With that we will wrap up the call.

This concludes today's conference. You may now disconnect.