Enact Holdings, Inc. (NASDAQ:ACT) Q2 2022 Earnings Conference Call August 2, 2022 8:00 AM ET
Company Participants
Daniel Kohl – Vice President of Investor Relations
Rohit Gupta – President and Chief Executive Officer
Dean Mitchell – Chief Financial Officer and Treasurer
Conference Call Participants
Mihir Bhatia – Bank of America
John Kilichowski – Credit Suisse
Tommy McJoynt – KBW
Geoffrey Dunn – Dowling & Partners
Rick Shane – JPMorgan
Ryan Gilbert – BTIG
Operator
Good morning, and welcome to the Enact Second Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
I would now like to turn the conference over to Daniel Kohl. Please go ahead.
Daniel Kohl
Thank you, and good morning. Welcome to our second quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer; and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business, our performance and progress against our strategy. Dean will then discuss the details of our second quarter results before turning the call back to Rohit for closing remarks.
After prepared remarks, we will take your questions. The earnings materials we issued after market closed yesterday contain Enact’s financial results for the second quarter of 2022 and a comprehensive set of financial and operational metrics are available on the Investor Relations section of the company’s website at www.ir.enactmi.com, under the section marked quarterly results.
Today’s call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations and projections, as of today’s date that are subject to risks and uncertainties, which may cause actual results to be materially different.
We undertake no obligation to update or revise any such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statement in today’s press release as well as in our filings with the SEC, which are available on our website.
Also, please keep in mind, the earnings materials and management 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.
Rohit Gupta
Thank you, Daniel. Good morning, everyone, and thank you for joining us. The second quarter was another strong period of performance for Enact. Continued execution of our strategy combined with reserve releases due to elevated cure activity resulted in record adjusted net operating income of $205 million or $1.26 per share, up 54% from the same period last year, and a return on equity of 20%. I’m proud of how we have continued to navigate this environment and would like to thank our team for all their great work.
During the quarter, we continue to enhance Enact’s competitive differentiation while maintaining strong capital levels and delivering attractive risk adjusted returns. Beyond our record results, Moody’s recent decision to upgrade Enact Baa2 to Baa1 as additional evidence of our continued success. This marks the second time since our IPO that we have received an upgrade from Moody’s and we believe it reflects our execution, financial performance and the strength and flexibility of our balance sheet.
The upgrade enhances our ability to compete in the market by creating additional opportunities for customer engagement to support our production goals. On this front, we continue to win new business and expand relationships during the quarter, delivering innovative, technology driven tools and solutions designed to meet the unique needs of our customers.
We wrote $17 billion of new insurance written in the quarter in a slowing housing market, while the persistency of our portfolio increased to 80%. The recent and sudden rise in interest rates has affected overall mortgage origination volumes, however, our industry is highly correlated with the purchase market and thus we have not been meaningfully impacted by the significant decline in refinance activity. We also benefit from increased persistency, which has been positively affected by the same rise in rates. Importantly, 98% of our portfolio has mortgage rates at least 50 basis points below current market rates and we expect this to have a positive impact on persistency moving forward.
These factors combined to drive sequential growth in our insurance in-force, which reached another record at $238 billion, demonstrating the resiliency of our business model. I’ve spoken in the past about our commitment to pursuing high quality business that targets the right price for the right risk. The pricing environment during the quarter remain competitive though constructive.
Given the increased economic uncertainty, we kept our rate engine pricing relatively stable while also making targeted changes to manage our overall risk. This approach is aligned with our stated goal of pursuing discipline growth and we remain confident in our ability to write new business that delivers attractive returns and creates value for our shareholders across economic scenarios. We continue to prudently manage our risk and the credit quality of our portfolio remains strong. The weighted average FICO score in the quarter was 743 and the average loan to value ratio was 93%.
And thinking about portfolio risk going forward, I would note that we have written large 2020 and 2021 books that have experienced substantial increases in equity as a result of strong home price appreciation trends, a dynamic that should both support increased persistency and decrease risk. This was evident in the second quarter, as we saw a record 70% of our policies realized mark to market equity of at least 20%.
In addition and as expected, our layered risk concentration decreased sequentially from 1.6% to 1.5% of risk in-force. Our $96 million reserve release in the quarter improved our loss ratio to negative 26% and was a result of our risk management and loss mitigation efforts, healthy consumers and strong home price appreciation, leading to favorable resolution of long-term forbearance plan.
Total delinquencies continue to decline on a year-over-year basis and the second quarter was a eighth consecutive quarter in which cures outpaced new delinquencies. New delinquencies also improved sequentially in line with seasonal trends. We ended the second quarter with 93% of our risk in-force covered by credit risk transfers and PMIERs sufficiency ratio of 166% or $2 billion of sufficiency.
During the quarter, we further enhanced our financial strength and flexibility by entering a $200 million revolving credit facility at attractive terms. Our strong regulatory capital levels, robust balance sheet and access to capital puts us in an excellent position with enhanced financial flexibility.
Our PMIERs performance speaks to our execution against another key aspect of our strategy, maintaining a strong balance sheet to support our existing policyholders, while also pursuing a balanced approach to capital allocation. During the quarter, we paid our inaugural quarterly dividend with the next dividend expected to be paid in September subject to requisite approvals, economic and market conditions and business performance.
In addition to our quarterly dividend, we expect to return additional capital to shareholders by the end of 2022 subject to requisite approvals and based on assessment of economic conditions, market dynamics and business performance. Dean will discuss this in more detail in a few minutes.
I’ll now take a moment to discuss recent market dynamics. We believe the market continues to be supportive for our industry. However, we recognize that the sudden and significant increase in rates and the potential impact of inflation along with the continued economic uncertainty will drive near-term volatility. Having said that, there are also areas where we see strength.
The labor market is robust. Household savings remains above pre-pandemic levels, and there has been homeowner equity built up through strong home price appreciation. In addition, recall that a major driver of current housing market dynamics during this cycle has been the housing supply. While there is evidence that the inventories have started to improve in some areas, they remain at low levels, providing an offset to the reduction in demand we have seen from higher rates and affordability pressure.
Finally, the demographic trends driving demand haven’t changed. First time home buyers will continue to provide a tailwind over the long-term as a significant number of new potential homeowners reach peak age for home buying. The dynamics affecting our markets remain multiple and complex and we will continue to plan for all scenarios. Through our credit risk transfer program and other initiatives, we have significantly reduced a risk embedded in our portfolio while also providing our balance sheet with additional production capacity that we will continue to utilize to drive prudent growth in our insurance in-force.
For example, we have increased prices in certain geographies, we believe are potentially more vulnerable to weaker economic conditions should they develop. And for loans with certain stacked risk factors. As part of our ongoing monitoring of consumer and housing metrics, we will continue to evaluate future actions.
To be clear, we are taking these actions because we are committed to responsible growth, not because of performance. Overall, we are entering the second half of the year operating from a position of confidence with the right strategy, a resilient, well-positioned business, a strong balance sheet and substantial access to capital.
The long-term drivers of our markets remain favorable despite near-term dynamics that are creating the potential for multiple scenarios. And our focus at Enact is to ensure we are operating under a framework that allows us to continue to successfully execute in all of them and create value for our stakeholders.
With that, I’ll turn it over to Dean.
Dean Mitchell
Thanks, Rohit. Good morning, everyone. We delivered very strong financial results in the second quarter of 2022. GAAP net income was $205 million or a $1.25 per diluted share as compared to $0.80 per diluted share in the same period last year and $1.01 per diluted share in the first quarter of 2022.
Adjusted operating income in the quarter was also $205 million or $1.26 per diluted share as compared to $0.82 per diluted share in the same period last year and $1.01 per diluted share in the first quarter of 2022. Adjusted operating return on equity was approximately 20%.
Turning to key revenue drivers. New insurance written was $17 billion for the quarter, down sequentially from $19 billion in the first quarter and down from $27 billion in the second quarter of 2021 driven by lower originations given the recent increase in interest rates. As Rohit referenced, while new insurance written is coming off historically high levels in 2020 and 2021, it remains robust and above pre-pandemic levels for the quarter. New insurance written for purchase transactions made up 96% of our total NIW in the quarter up from 92% last quarter.
In addition, monthly payment policies made up 93% of our quarterly new insurance written up from 91% last quarter. With rising interest rates persistency increased again during the second quarter to 80%, up from 76% last quarter and 63% in the second quarter of 2021.
In addition to rising mortgage rates, the increase in persistency was driven by a continued decline in the percentage of our in-force policies with mortgage rates above current market rates. Given the rise in interest rates throughout the second quarter, we would expect persistency to improve prospectively, which is a positive for the embedded value of our in-force insurance portfolio of which 87% is comprised of monthly policies.
Insurance in-force reached a new record of $238 billion, up 9% from the second quarter a year ago and up 2% sequentially. Year-over-year increase was driven by the combination of new insurance written and increased persistency.
As reflected on Page 11 of our earnings presentation, our base premium rate of 42.5 basis points was up 0.2 basis points sequentially and down 2.5 basis points year-over-year. As we’ve noted before, changes the base premium rate can deviate from the long-term trend in any given quarter, driven by changes in new insurance written persistency, the purchase refi mix, credit mix and premium refund estimates.
Our second quarter results were consistent with this and are not indicative of a sustained change in the trajectory of base premium rate for the remainder of the year. As such, we are maintaining our guidance of a 4 basis point decline and base premium rate for the full year 2022, we will continue to monitor and revise this guidance as necessary.
In addition to changes in base premium rate, our net earned premium rate also reflected lower single premium cancellations and higher seated premiums in the current quarter. Net premiums earned were $237 million, up 1% sequentially and down 2% year-over-year. The sequential increase in net earned premiums was primarily driven by growth of our insurance in-force and the sequential improvement in base rate, partially offset by the lapsing of older higher price policies as compared to our new insurance written, lower single premium cancellations of $8 million in the current quarter and higher seated premiums in the current quarter of $20 million from the expanded use of our credit risk transfer program.
Investment income in the second quarter was $36 million, up 2% sequentially and 3% year-over-year, primarily as our larger portfolio was offset by lower bond calls during the quarter in a rising interest rate environment. Given the rise in rates, our new money yield for the quarter increased to approximately 4.4% as we invest in the higher rate environment.
In addition, the rise in rates has continued to increase the unrealized losses in our investment portfolio. We do not however expect to realize these losses as we have the ability to hold these securities to maturity or market values trend to par value. The average duration on our investment portfolio is less than four years. So the progression to par value occurs over a relatively short period of time.
Turning to credit. Losses in the quarter were a benefit of $62 million as compared to a benefit of $10 million last quarter and $30 million in the second quarter of 2021. Our loss ratio for the quarter was a negative 26% as compared to a negative 4% last quarter and 12% in the second quarter of 2021.
The benefit and losses and loss ratio in the quarter was driven by favorable cure performance, primarily on 2020 COVID-related delinquencies, which was above our prior expectations and resulted in a $96 million reserve release in the quarter. Cures on COVID-related delinquencies have been aided by favorable resolutions of forbearance programs, home price appreciation, and our loss mitigation efforts.
And as a result, cumulative cure rates have continued to increase through time. New delinquencies decreased sequentially to approximately 7,800, but increase from year ago levels driven by the higher new delinquencies from recent large books that have – that are aging and going through their normal loss development pattern. The decrease in new delinquencies from the prior quarter is in line with pre-pandemic seasonality levels.
In addition, our new delinquency rate for the quarter was 0.8% consistent with pre-pandemic levels and reflects the continuation of positive credit trends. Our claim rate estimate on new delinquencies for the quarter was approximately 8%. Second quarter total delinquencies of approximately 19,500 and the associated delinquency rate of 2.1% represent ongoing improvement in both measures, driven by the continuation of cures outpacing new delinquencies.
Cures in the quarter of approximately 10,800 decreased slightly as compared to the prior quarter and represented a cure ratio of 138%. Additionally, claims activity remained low with under a 100 claims totaling approximately $5 million paid in the second quarter. The embedded equity position of our delinquent policies remain substantial with approximately 97% of our delinquencies as of the end of the quarter having an estimated 10% or more mark-to-market equity using an index based house price assessment.
As I’ve noted in the past, this can serve as a potential mitigant both to the frequency of claims and the potential future loss for delinquencies that ultimately progressed to claim and we saw additional evidence of this trend during the quarter.
Turning to expenses. Operating expenses for the quarter were $61 million and the expense ratio was 26% as compared to $57 million and 24% respectively in the first quarter of 2022 and $67 million and 27% respectively in the second quarter of 2021. We still feel comfortable with a total year guidance of $240 million in expenses for 2022.
Moving to capital and liquidity. Our PMIERs sufficiency remain very strong in the second quarter at 166% or approximately $2 billion above the published PMIERs requirements, compared to 176% or $2.3 billion in the first quarter of 2022. This reflects the approximately $243 million distribution made by our flagship insurance subsidiary Enact Mortgage Insurance Corporation in the quarter to our holding company.
At quarter end, we had approximately $1.5 billion of PMIERs capital credit, and approximately $1.7 billion of loss coverage provided by our credit risk transfer program. Approximately 93% of our insurance in-force is covered by our credit risk transfer program at quarter end. During the quarter, we entered into a five-year $200 million senior unsecured revolving credit facility, which further enhances our financial flexibility.
In addition, our conservative debt to capital ratio of 15% provides meaningful incremental borrowing capacity, though, we don’t foresee meaningful change in our capital structure at this point. Post quarter close, we received an upgrade from Moody’s to Baa1 from Baa2. We’re pleased that the strength of our performance and the actions we’ve taken to enhance our financial position continue to be recognized in the marketplace.
As Rohit mentioned, we made our inaugural quarterly dividend payment during the quarter, which was $23 million. On a full year basis, we remain committed to returning $250 million of capital to shareholders, which includes both quarterly dividends and return of excess capital subject to requisite approvals.
So to recap the quarter, we generated very strong results in a dynamic macroeconomic environment. As we enter the second half of the year, we believe market conditions remain supportive overall, and we remain focused on achieving our goals while maintaining the flexibility to adapt to changes as necessary. Our strategy and competitive position, combined with our balance sheet strength and financial flexibility, position us to continue creating value for our shareholders.
With that, I’ll turn it back to Rohit.
Rohit Gupta
Thanks, Dean. At a time when home price appreciation and increases in the cost of living on pressuring people’s ability to save for a down payment to purchase a home, private mortgage insurance becomes an even more important tool for homebuyers seeking to qualify for a mortgage. We play an important role in increasing the accessibility, affordability and sustainability of homeownership and remain committed to providing an industry-leading set of solutions to help consumers achieve this goal.
In the first six months of 2022, we have held 105,000 homebuyers qualify for a mortgage who otherwise might not have. As we enter into an uncertain time, our industry is playing a vital role in supporting families and the many other stakeholders in the housing sector. And we’ll continue to seek opportunities to contribute to the safety and soundness of the industry.
All in all, it has been a very strong first half of the year, and I’d like to again thank the Enact team for their contributions to our performance. We believe we are well positioned for the second half of 2022 and beyond. With record insurance in-force and a strong balance sheet, we are confident in our business and in our ability to achieve our goals.
We are now ready to take your questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question comes from Mihir Bhatia from Bank of America. Please go ahead.
Mihir Bhatia
Good morning, and thank you for taking my questions. I wanted to start with maybe just Rohit, you mentioned that you have taken some pricing actions recently. Maybe just more generally, I guess, how – is that like really the main lever you’re using to prepare for the – for a downturn or a slowdown in the economy? Just trying to understand what has changed that led you to take that? Is it changes in your – in the consumer outlook, consumer finance outlook? Is it changes in HPA? What are you seeing that’s prompting you to take some of those actions, which – obviously, everyone is very focused on just will there be a recession? How will that affect housing? So just trying to understand what you’re seeing there? Thank you.
Rohit Gupta
Yes. Good morning, Mihir. So very good question. Let me kind of start by saying, as I stated in my remarks, that we are still seeing a good balance in the housing market and a market that is constructive for our industry. But we – at the same time, we are acknowledging the pressure that the consumer is facing, a homebuyer is facing from sudden and sharp increase in mortgage rates, home prices that have continued to go up and at the same time, brought inflation.
On the other side, we continue to see consumers having savings that are still higher than pre-pandemic levels. We see a very strong labor market and a big driver in the last 12 months, 18 months has been a shortage of housing supply, which continues to be at 2.6 months across the country. So, I would say that’s kind of how we see the housing market as it stands right now. But at the same time, given the macroeconomic factors, the geopolitical risk that the country and the world is facing, we believe that we are in an environment that has more uncertainty moving forward.
So essentially, our pricing action, as you mentioned, both in terms of keeping our pricing in our risk-based engine generally flat in the quarter and then beginning to increase pricing in certain stack risk factors and certain geographies was driven by the fact that those areas could be more vulnerable in the event that the environment deteriorates.
To be very clear, this is not driven by performance concerns. This is driven by making sure that we are bringing our portfolio kind of closer to the core as we think about that portfolio, navigating through a variety of scenarios. And that is just one tool we have here, Mihir. I think if you look at our broader portfolio, as I mentioned and Dean mentioned, our insurance in-force was written in a very good credit policy environment, very good underwriting environment, and our largest books in 2020 and 2021 have meaningful home equity built in front of them. So 90% of our portfolio has 10% equity, 70% of our portfolio has 20% equity.
For newer books, I talked about the pricing actions. We continue to use our credit risk transfer program. We did two transactions in the first half at attractive terms, which has driven 93% of our insurance in-force, being covered by our CRT program.
And lastly, Mihir, I don’t want to forget the actions we are taking to also bolster our balance sheet and our ratings. So, we got a second upgrade from Moody’s since our IPO. We also put in place a credit facility recently. That gives us additional flexibility, and we continue to operate with a low financial leverage, which gives us additional flexibility in the event we need it.
So, I think that’s how we think about different factors on how to position our business for whatever scenario plays through. But from a consumer perspective, it’s not that we are seeing anything in our performance. I think we talked about our actual delinquency rates being at pre-pandemic levels, the books we are writing is kind of higher than 2019 level. So that’s how we look at the environment.
Mihir Bhatia
Got it. Thank you. That is very helpful. And then just maybe, you mentioned bolstering your balance sheet, adding some more flexibility and of course, the ratings upgrade. So maybe just overall, have the capital allocation priorities changed? How are you thinking about capital return? Is it still dividend bolstered by special dividends, thoughts around share buyback or other investing in growth maybe beyond MI? Just how are you thinking about all those things? And those are my questions. Thank you.
Rohit Gupta
So Mihir, let me just start by saying that the actions we have taken are much more on how we think about our business long term. So putting in place the credit facility was something that was part of our journey post IPO. So, we put that in place. And we had also talked about keeping our financial leverage low as we think about our business. So those were just long-term priorities. And I would start by saying that we are not changing our capital allocation priorities. And I’ll let me ask Dean to talk about the capital allocation priorities that we’ve shared in the past.
Dean Mitchell
Yes. As Rohit mentioned, Mihir, returning the capital to shareholders, balanced with growing our business and our risk management priorities kind of remains the key framework, key priority for us as we look to drive shareholder value through time. We mentioned on the call that we’re committed to returning $250 million of capital to shareholders this year. That includes both quarterly dividends as well as a return of excess capital, obviously subject to requisite approvals, economic conditions and business performance.
If we think about excess capital in the forms that, that might take, I think that – we continue to believe that special dividends and share buybacks are available to us as a future means to return capital to shareholders. I think we have to acknowledge that we do have a limited float constraint. So any share buyback program would need to be, what I call, tailored kind of to our facts and circumstances, but we certainly believe that’s a possibility that a tool in our toolbox, so to speak. So that’s effectively how we’re thinking about that.
And I guess the last thing I should say on share buybacks, obviously, that needs to be considered in the context of intrinsic value in the current share price as we looked and assess the nature of – and the benefits of potentially implementing a program like that. So that’s how we think about it, Mihir, and hopefully, that gets at your question.
Mihir Bhatia
Yes. Thank you. Thanks for taking my questions.
Operator
The next question comes from Doug Harter from Credit Suisse. Please go ahead.
John Kilichowski
This is John Kilichowski, on for Doug. First question, I just kind of want to get your thoughts around reserve activity for the rest of 2022, given the favorable COVID cures and HPA we’ve seen?
Dean Mitchell
Yes. So good question. We’ve – much like you said, in the current quarter, we continue to see cumulative cure rates, especially on 2020 COVID-related delinquencies, exceed our original expectations coming into the quarter. That was the primary driver of the $96 million reserve release in the quarter. Those – that cure activity has been largely driven by the favorable resolution of forbearance – loans and forbearance. Home price appreciation, I think, is also a mitigant. And then our loss mitigation efforts. Again, those things are the underpinning, if you will, of the elevated cure performance that we’ve seen relative to expectations.
In terms of the go-forward perspective, much like at any quarter point, our reserves represent our best estimate of ultimate claims on our existing delinquencies. That said, if we continue to see favorable performance relative to the expectations that underlie our reserves will consider that as we think about future reserve activities.
I think just stepping back and maybe elevating the discussion. The approach we tried to take on from a reserving perspective is one of being measured, one of being prudent, one of really trying to ensure that any reserve actions we’re taking in the quarter don’t get unwound in the future by the necessity of having to post reserves go forward. So that’s the kind of overarching approach we’re taking and the one I expect us to continue to take going forward.
John Kilichowski
Great. Thank you.
Operator
The next question comes from Tommy McJoynt from KBW. Please go ahead.
Tommy McJoynt
Hi good morning guys. Thanks for taking my questions here. So you mentioned some increased pricing in certain geographies that might be more susceptible to perhaps correction in prices. Any way to frame the magnitude or just even the percentage of geographies that those pricing changes might have applied to?
Rohit Gupta
Yes, Tommy, very good question. So I would say – that is part of our commercial strategy. So it’s something that we are not going to talk about on a public call. I can give you an idea that if you look at just risk attributes that are more vulnerable in an unfavorable economic environment, that’s how I would frame kind of where we took actions, both from a stack risk factors as well as from a geographic perspective.
So on geography, an easy example would be Boise, Idaho. It’s a small – it’s a very small portion of our insurance in-force, but the dynamics in that area basically make that an area that has had very high appreciation in the last year or so and in the event that trend was to turn, can that be supported in terms of the local housing market. So I would say if you look at our disclosures in our quarterly financial supplement, you’ll be able to see concentrations moving around. Those are driven by actions we have taken in terms of moving pricing in the right places.
Tommy McJoynt
Okay. And with those price increases, why wouldn’t there be an impact on the full year base premium guide that you gave? Or were those either already kind of factored into the full year guide last quarter? Or maybe is there some offset that we’re not thinking about?
Rohit Gupta
Yes. So Tommy, I would just think about the NIW we right and the size of our insurance in-force portfolio. So the premium guidance we have given is on our entire insurance in-force premium rate and the NIW we wrote as an example, in the most recent quarter, was $17.5 billion. So just think about the impact of $17.5 billion or the accumulated NIW in the year on a portfolio that was $238 billion. So it’s not that it won’t have an impact, but that impact plays through over a period of time. So we are still comfortable with the guidance we gave on the base premium rate of four basis point kind of walk from fourth quarter 2021 to fourth quarter 2022.
Tommy McJoynt
That makes sense. Thank you.
Operator
[Operator Instructions]. The next question comes from Geoffrey Dunn from Dowling & Partners. Please go ahead.
Geoffrey Dunn
Thanks, good morning. First question, are we ever going to see a material acceleration in paid claims as the forbearance plans truly go away? Or has it just been that successful where we’re just going to see a gradual climb eventually versus maybe what we would have thought a year ago?
Dean Mitchell
Yes, Geoff, good question. Thanks for it. Yes, so obviously, claim activity in the current quarter, very de minimis, 90 claims, $5 million of claims paid. I think in our discussions with servicers, they’re still adjusting to the elimination of the foreclosure moratorium, working through the CFPB requirements for homeowners assistance and the types of solutions they need to bring to bear prior to foreclosure.
And I think when they think – what we’ve heard at least from servicers is that, that activity could start to pick up in the beginning of 2023, maybe at earliest fourth quarter of this year, but more – probably more likely the beginning of 2023 is the expectation for when claims to the extent they do develop are likely – are more likely to develop out of this COVID period.
Geoffrey Dunn
Okay. And then I wanted to ask a bigger picture question on reserving, but your answering that kind of feeds into. Obviously, what we’ve seen with COVID and in part, which was a reaction to the Great Recession, is a lot more proactive efforts, particularly on the political front to keep people in their homes, its forbearance plans, et cetera.
In addition, if we’re going into a recession, you have a book of business that I’m not sure we’ve ever seen before, 3% contract rates on the majority of the book, big equity buildup. How do those factors feed into how you think about your reserving assumptions when we eventually encounter this next wave of credit pressure? It’s not something you have historical trends for. So how do you translate that into how you reserve incrementally over the next two, three years?
Dean Mitchell
Yes. So – over the next two, three years, okay. Let me answer it in the here now real quick, and then I’ll pivot to the next two to three years. So much like I said, Geoff, on the earlier question, we’re taking a measured approach to reserving, what we believe to be a prudent approach with an eye towards making sure that any reserve actions aren’t unwound later on by having to repost reserves.
And I do think that contemplates both the performance trends that we’re seeing as well as the macroeconomic environment that we’re operating in and that which we expect to operate in prospectively. So I think that’s – maybe you see some of that come through in the pace at which we’re taking reserving actions today.
I think your question prospectively, I think going forward, we could see the potential for some competing dynamics affecting credit performance where we have, as Rohit kind of described, a very large, well underwritten high-quality portfolio with meaningful embedded HPA, but that begins to age through a pretty complex, at least as it stands now and potentially pressured, macroeconomic environment. And as he kind of laid out, I think that could produce multiple paths, multiple scenarios for both the economy and portfolio credit performance overall.
And our focus has been less on predicting the discrete scenario and much more about taking actions now to position us and really put us in a position of strength for whatever scenario does come down the pipe. So I think the actions that Rohit referenced raising price, increasing our financial flexibility through revolver and through programmatic CRT use, through additional cash buffers, through operational readiness. I mean those are all the things that we’re focused on, less about prescriptive exactly what scenario and what credit performance is going to come and more about being prepared for, again, kind of whatever comes down the pipe.
Geoffrey Dunn
Okay. It sounds like if there’s a prudent approach here, we might move into like almost a property casualty-type reserving model where prudent reserving has a stronger upfront, but all these changing dynamics maybe create a more consistent possibility for development down the road, would that surprise…
Dean Mitchell
I think, Geoff, that’s a good way to think about it. Obviously, our reserving methodology relies on actual experience. What we might have to do, depending on the scenario that plays out is not rely on the COVID playbook because I think this was a unique environment and a unique crisis, but actually look at which previous downturns look similar to what we are going through.
And then to your point, there are so many mitigants both in our performing book in terms of good credit underwriting and embedded equity. And then even in our delinquent book where 97% of our delinquencies have 10% equity in front of them. So I think we’ll have to marry some approaches here to figure out what’s the right reserving approach for us.
Rohit Gupta
And Jeff, I would say we’ve always relied on both experience and judgment and establishing reserves. So I don’t think that’s going to be any different, how that’s applied, maybe different based on facts and circumstances.
Geoffrey Dunn
Okay. Thank you.
Rohit Gupta
Thank you.
Operator
The next question comes from Rick Shane from JPMorgan. Please go ahead.
Rick Shane
Hey guys. Thanks for taking my questions. Look, you’re going to see an interesting bifurcation in your portfolio between vintages. We think about the 2020, 2021 vintages that are likely to have incredibly high persistency and a lot of embedded home price appreciation versus the 2022 vintages where ultimately there’s going to be an opportunity in all likelihood for refinance so shorter durations and obviously, less HPA. You’ve talked a little bit about tightening some of your programs, but I’m curious if there are other strategic or tactical approaches, when you think about a portfolio that sort of becomes barbelled in terms of duration. Does it make sense, for example, to do more single premium in this environment where knowing that – not knowing, but with the possibility that those policies are gonna be a lot shorter, it becomes a lot more economically attractive to do that.
Rohit Gupta
Yes. Good morning, Rick. So very good question, I would say while there’s bifurcation between 2020 book, 2021, both of them having lower interest rates, as well as more embedded equity and then 2022 obviously being relatively new in terms of embedded equity. I would start by saying that there are more similarities between books, that they are all very well underwritten books in terms of quality of credit. And even for the first half of 2022, the interest rates on that book are still kind of below current market rates, just because there’s a lag between market rates and when that loan closes and lands on our book.
So I think we think about those books performing in our expected cases and some alternate cases as they develop. And to your point, as we think about places where we find the right value, we do look at all those factors that under different scenarios and for different books, which economic scenario can play out. And where do we find the most value? So, without talking about our commercial strategy, I would just say that we look at points where we can maximize our value of new business which is a representation of both returns, as well as kind of those returns being above our cost of capital and the volume we can get on those buckets.
So the approach is exactly in concert with what we are talking about. And then in addition to that, our programmatic credit risk transfer program also makes sure that as we onboard books, we are actually buying coverage on all books, whether they have embedded equity or they don’t to make sure that if one of the alternate scenarios plays out, then we also have loss coverage that is off balance sheet.
Rick Shane
Got it. Okay. And with that in mind, is there any difference in terms of how you think about ILN or anything like that, given the potentially lower persistency?
Rohit Gupta
Yes, I think Rick, we really think about our credit risk transfer program as programmatic. So I think probably less variation as it relates to the potential weighted average life on the policy and more about getting programmatic coverage, not having to pick winners and losers as it relates to book years simply getting coverage, or if and potentially when a stress emerges. So I think that’s probably more on the CRT side, the kind of approach we take, which maybe differs a little bit on the front end commercial side, where we’re looking at the right risk for the right price.
Rick Shane
Got it. Okay. Very helpful. Thank you, guys.
Rohit Gupta
Thank you, Rick.
Operator
[Operator Instructions] Our next question comes from Ryan Gilbert from BTIG. Please go ahead.
Ryan Gilbert
Hi. Thanks. Good morning. Dean, I was hoping you could expand on your comment around market conditions remaining supportive overall, are you talking about like the production volume that you’re seeing coming through or credit performance, any additional color there would be helpful?
Rohit Gupta
Yes. Good morning, Ryan. This is Rohit, I’ll take that one. So I would just say that from a production perspective, we wrote $17.5 billion off new insurance written in second quarter in a slowing housing market. But at the same time, our NIW continues to be in-line with or higher than pre-pandemic levels and obviously 2020 and 2021, so elevated levels of originations in the entire mortgage market, just with their interest rates being historically low. But as we compare our current production in the first half, we have written $36 billion of new insurance written for the same time period in 2019 as an example, we wrote $25 billion in production.
So from a market trend perspective, we see the volumes returning to pre-pandemic levels to a certain degree, these are dependent on other factors. The production levels are dependent on other factors like mortgage rates. We saw mortgage rates go up pretty high towards the end of June. In the last few weeks, they have actually navigated down to 5.3%, which has a direct impact on consumer sentiment in terms of buying homes, as well as affordability index. So we are monitoring all those factors, and we do think that the volume in 2022 is trending to pre-pandemic levels and that’s normal to expect. We couldn’t have sustained the levels in 2020 and 2021 forever.
And I think what we are focused on is much more the fundamental trends long-term. So if you think about the factors we have talked about from a first-time home buyer perspective, we have a lot more Americans getting to the average first-time home buying age in the next four years, then there have been in the last decade, whether those consumers are buying a home next month, next quarter or early 2023, that’s tough to tell because that is dependent on the macro factors I describe. But the fundamental trends for the industry is going to be very strong. And I think one benefit just to point out less related to new insurance written, we have seen a benefit in our persistency within trust rates being higher of our insurance and force, which is majority monthly policies is taking around longer, which gives us more stability in our premiums.
Ryan Gilbert
Okay, great. Thanks. That was helpful. My second question is on reinsurance as we move into the second half of the year, do you feel like you have the reinsurance that you need for the full year in place, or would you like to add additional reinsurance in the second half? And maybe you could just update us on where you’re seeing best execution between traditional reinsurance versus ILN markets? Thanks.
Rohit Gupta
Yeah, Ryan, good question. So much like the prior answer, I would just come back and reference that we’re a programmatic user-sourcer of credit risk transfer projection. And so I would expect us to continue to access either the traditional reinsurance market or the capital markets. I think, one of the benefits of our CRT design is we do have diversification of capital sources, which allow us to kind of point that engine towards the best execution given the prevailing market dynamics. The capital markets have previously gapped out a little bit. I think they still remain pretty wide relative to recent history and we’ll find out as we enter into the traditional reinsurance market, how competitive it is with the capital markets. But my expectation just from historical is when there is any volatility or variation or a disruption in the market, the capital markets are early on that disruption and probably gap-out a little wider in the traditional reinsurance markets, stay a little bit more stable.
So that’ll give you some sense of probably where we’re focused, at least in the here and now. And the bigger point is we’ll continue to be a programmatic user of our credit risk transfer program.
Ryan Gilbert
Okay. That’s helpful. Thanks very much.
Rohit Gupta
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Rohit Gupta for any closing remarks.
Rohit Gupta
Perfect. Thank you. Thank you all. We appreciate your interest in Enact and look forward to speaking with you throughout the year. Have a good day.
Operator
Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
Be the first to comment