Enact Holdings, Inc. (ACT) Earnings Call Transcript & Summary

So good afternoon, everyone. Thank you for joining us. For those who haven't met, I'm Mihir Bhatia. I cover consumer finance, specialty payment companies here at Bank of America. Here, we have Enact Holdings. Enact is a mortgage insurance company that was spun out of Genworth. We're very pleased to be joined by the CEO, Rohit; and CFO, Dean. In terms of the format, what we'll do is Rohit is going to kick it off with some introductory remarks. Then I have a few prepared questions I'll ask, and then we can save some time for audience questions at the end. So why don't we kick it off with, firstly Rohit and Dean, thank you for joining us. But Rohit, if you want to kick it off with your...

Sure. Mihir, thank you for having us. Thank you and good afternoon, folks. So I'll take a few minutes to just introduce Enact. While we have been in business for a long period of time, we are a relatively new player in public markets, so I thought it would be the right thing to actually give some background. So Enact is an U.S. private mortgage insurance company. We started providing mortgage insurance in 1981. And we did that with a clear purpose, to put people in houses and keep them in those homes. Now over the last 5 years, we have actually helped 1.2 million households get into homes and achieve the dream of home ownership. 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 U.S. Now in September 2021, we became a public company through a spin-off from our majority shareholder, as Mihir said, a milestone that provided us a launching point to -- for us to actually realize the full power of our platform. Today, we serve over 1,800 active lending customers, including all of the top 20 mortgage originators, providing them with a compelling value proposition to help them achieve their growth objectives. Now we have built ourselves into a market leader by pursuing our cycle-tested growth and risk management strategy. We seek to expand and deepen our customer relationships by differentiating ourselves to the strength of our platform and providing a compelling value proposition and best-in-class experience. We do maintain a strong balance sheet and earnings profile by ensuring a strong capital level, high underwriting standards, and prudently managing risk using proprietary analytics and tools, utilizing our credit risk transfer program. We also work to deliver attractive risk-adjusted returns by leveraging our risk assessment and pricing tools and pursuing a disciplined capital allocation framework designed to support existing policyholders, invest and attract new business opportunities and return excess corporate capital to shareholders. We just reported our quarterly results about a week ago, and I will point you to our release for the details, but I would like to actually say that our execution was very much in line with our strategy that I just outlined, and it was an extraordinary year for our business. Just to give you a few highlights, we ended the year with Insurance-in-Force of $248 billion driven by rising persistency that reached 86% in fourth quarter, and our new insurance written that reached $66 billion in fourth quarter for the year. We generated record net income of $708 million, and our return on equity was a robust 14% for fourth quarter. We continue to operate from a point of financial strength. We ended the year with PMIERs ratio of 165% and executed 3 excess of loss reinsurance transactions during the year. Today, approximately 90% of our risk in force is covered by our CRT program. Finally, we returned over $250 million to shareholders through a combination of our recently launched quarterly dividend, our share buyback program and our second special dividend since our IPO. I know investors are always looking to understand what's next. So let me take a second to share some of my high-level thoughts there. Market dynamics from our perspective overall remain complex, while employment is strong and household balance sheets are healthier than pre-pandemic levels, inflation, and rising interest rates pose risks. However, we do believe, we are well-positioned to navigate these dynamics. We have taken steps that will reduce our expenses by 6% this year in 2023, and we'll make sure we remain nimble on that front. We also continue to see opportunities to prudently invest in our business and pursue new business opportunities that provide the right balance of risk and reward while maintaining our financial strength and returning capital to our shareholders. Looking over the long term, though we expect strong underlying demand as a population of first-time home buyers increase, it is estimated that the average size of 33 years old, the median age for first-time home buyers will be $4.8 million between 2023 and 2025. MI companies stand to benefit from this generational tailwind. So at a time when home prices and increases in the cost of living are pressuring people's ability to buy -- we believe that private mortgage insurance becomes an even more important tool for home buyers seeking to qualify for a mortgage. To wrap up, we believe we are well-positioned for 2023 and beyond and continue to operate from a position of strength. We feel confident in our ability to navigate current dynamics while prudently pursue other opportunities. Our portfolio is resilient with high levels of embedded equity. We are committed to protecting our balance sheet with strong capital levels, including a low debt-to-capital ratio of 15%, a mature CRT program with 90% of our risk covered and adequate reserves, and we'll continue to create value for shareholders and return capital to our shareholders. With that Mihir, I'm happy to start our chat with questions.

Great. Thanks. That's a very good overview. And maybe just you mentioned in that about the current origination environment. And I was curious, maybe that's a good place to start just from the perspective of what are you hearing from originators? Maybe we can just focus a little bit on the high LTV segment, the high loan-to-value segment that really that's where you guys play. So maybe focusing on that, what are you hearing from originators, from builders, from some of your customers? Just where are we? Are they seeing any up ticks?

Yes. So absolutely, Mihir, I would say, from a macro perspective, as we said on our earnings call, we think that there's going to be pressure in the origination market, and it's driven by the factors that I just talked about. At the most macro level, consumers are seeing the pressure coming from higher mortgage rates, ever-to-date home price appreciation, and broader inflation. On the other side of the equation, we are seeing a very robust labor market and at the same time, consumer balance sheets are still stronger than they used to be pre-pandemic level. So those are the counterbalances when it comes to the consumer picture. We saw the impact of that in the second half of '22 in terms of origination market. Our view is that, that will play out during 2023. We are not going to get into predicting where the 10-year treasury yield would be or where the spreads would be, that has not been an easy exercise in recent times, but what we would say is our expectation is origination market would be lower, if you look at Mortgage Bankers Association, Fannie Mae and Freddie Mac estimates purchase market is going down in '23, forecasted to go down in '23 and because MI market is correlated to purchase market, we would expect a similar decline. I think in recent -- just to turn to your question about recent dynamics, we have seen in recent weeks, the activity trend up. Black Knight data, some of the builder data is pointing to that. It's tough to call whether that's because of interest rates coming down a little bit or that's just seasonality showing up early. So I would say there's a little bit more time before we do a victory lap on that one.

Sure. Maybe expanding just a little bit further. One of the topics that we've seen historically is demographics tends to drive a lot of home purchase behavior, right? As you mentioned, the purchase market is expected to -- at least the forecast for now are for it to come down. Contrast to that is the fact that there are some real demographic tailwinds for housing, that I think you've talked about in the past. So I guess, how do you think about that push and pull? Like maybe as you think 2, 3 years out, any thoughts on like you expect the market to grow up? Again, like assuming nothing crazy happens with interest rates.

Yes. So I would say absolutely. Our view is that while we have near-term uncertainty driven by all the factors I just talked about, this is the strongest time we have seen in the last decade in terms of first-time home buyers reaching the peak first-time home buying age of 33 years old. And there are more people getting to that age in these 4 years, 22 through 26 than they have been in the last decade. So the fundamental demand is there. The need for housing is there. It's a matter of at what point of time consumers feel like they're well-positioned to buy a home. Given the rise in interest rates, it was tough to tell in 2022, will consumers by next month, next quarter or next year, but the demand is absolutely there. The qualification is absolutely there. So it's a matter of time. I would say, in our business, one unique aspect of mortgage insurance business is, the same dynamics that are impacting those consumers in terms of mortgage rates or inflation, it's the same thing that's playing out for our Insurance-in-Force. So while there is pressure on the new originations and that volume might be lower, our persistency is higher on the existing book because rates are higher. On our call, we talked about only 2% of our policies are in the money for a refinance using a 50 basis point economic incentive. So that tells you that, that persistency increase, which was at 86% at Q4 is an offset to those lower originations, as the market dynamic shifts that can be an offset from a revenue stabilization perspective.

How high can persistency go?

Yes, it's a good question, Mihir. We get that quite often. And it is difficult to pinpoint to be perfectly honest I think, what we typically point the market to is how high has it gone in the past. So we've experienced persistency upwards of 90%, persistency for a singular quarter in our historical experience. I think it is important to note the facts and circumstances are a little bit different and make it that much more difficult to predict in terms of how high it can go, given that we have a high concentration of very large new books that were underwritten at very low-interest rates, rather than try to actually pinpoint that it's something that we haven't had experience in, we point the market back to what we have seen and again, not that, that is a cap, certainly, but that is the highest it's been in our historical periods.

Now one of the things we've seen at this conference, where we had a financials conference, a lot of talk about market cycles and business cycles, people -- unemployment has stayed really low. It tends to be a leading indicator somewhat of a predictor of what happens with delinquencies, claims on most consumer loan type products. You've talked about soft saving expenses and things like that in the micro. But like just maybe philosophically talk about when you think about managing the company as a whole, how do you think about them? How much does the macro play into it? And how do you go about that, balancing, you don't want to cut too much to get to the other side?

Yes. I would say we look at every aspect of our business and at the end of the day, we are in a cyclical business that our product is very correlated to unemployment. So we look at what our prediction is, where the market is headed, not only at a country level, but also at a geographic level and at a consumer level. So I think we've been taking all those actions. Second quarter of 2022, we announced that we have been increasing prices in the market. When we started increasing prices, our initial actions were to address vulnerable segments. So both vulnerable segments from a consumer perspective and vulnerable segments from a geography perspective. So first 2 quarters, we increased price much more in that way than trying to figure out what parts of our portfolio would be most vulnerable in the scenario. One of the downside scenarios plays out. And by fourth quarter, we started increasing pricing much more broadly. And as I mentioned on the earnings call, we not only increased price in fourth quarter, we kept increasing price in January. So we think that the industry and us, we are operating in a prudent way that given the uncertainty in the economy, we are beginning to move the price up, and that should help us offset any pressure on new insurance written. In addition to that, I think from a balance sheet perspective, as I mentioned in my opening remarks, we have kept our balance sheet prudent. So whether it's a matter of our debt-to-capital ratio, having a revolving line of credit access, and obviously, having the right buffers, liquidity and capital buffers both at the holding company and the operating company, we are just operating from a point of strength, which gives us confidence that irrespective of the scenario that plays out, we are positioned in a good way. And then I would say from a portfolio resiliency perspective, we have been very disciplined about adding credit risk transfer programs, whether that's reinsurance coverage or ILN coverage. So 90% of our book is covered by CRT in some way shape or form. So if there is deterioration in the economy, and we do see any impact on our book, then those structures would kick in.

I want to hit a couple of those things. We will start with pricing. That has been a big focus of our investor conversations over the last year, 2 years. And the message was certainly encouraging on the most recent earnings calls, not just from you, but across the industry. It sounds like everyone is taking pricing. I guess the question is, have we reached -- have they bottomed for now? And is the outlook from here likely given the macro headwinds? Is it likely to be higher from here or at least stable? Have we achieved stability in pricing for now?

I can start on new insurance written pricing and then Dean can chime in on the portfolio pricing because that's a more difficult question. So on the new insurance written pricing, as I mentioned that we have an increasing price in the second quarter, that pricing is definitely trending in the upward direction, and we are pricing both broadly as well as on risk attributes. So I would say that pricing not only has bought on, it's beginning to go up, and we'll see where the pricing heads in the market, but we are definitely making moves in the segments where we think we need more price. I'll let Dean comment on the Insurance-in-Force.

Yes. So to Rohit's point, on base premium rate on the portfolio basis, a lot goes into that, the level pricing, the NIW, persistency levels that we just talked about are difficult to predict. Credit mix shifts as well as some other variables make base premium rate on the portfolio level, difficult to predict even in stable times. Obviously, with the macroeconomic uncertainty, the smaller -- the change in the NIW trajectory, the change in persistency as well has been pretty rapid, much more difficult to predict in the current market environment. What we tried to do was talk about our view that it was slowing. It's certainly the compression on base premium rate on a portfolio level is slowing. We expect it to be lower than it was last year. I think the additional -- that was about 2.4 basis points last year. So we expect it to be inside of that. Look, the real maybe more refined guidance, even though it's not precise, would be if the conditions are favorable, so NIW levels and pricing persist, if persistency remains elevated, we could see flat or flattish sequential change in base premium rate on a portfolio level. If those goes less favorable, we could see some modest declines. But we definitely see it slowing, and that was in the vein of the guidance we were trying to provide to the market.

With most of the NIW most of the MI -- mortgage insurance companies having reported, it certainly looks like you gained a fair amount of market share in the fourth quarter. You did that despite taking some price, it sounds like. So I guess the question is, do you know what drove that? Was it -- like I guess one thing from the outside that we've struggled with a little bit with these black box pricing mechanisms is just sort of more macro. How does the originator decide which insurer is getting a particular loan, right? Is it just whoever has the cheapest price on that loan? Or is there more to it? Is there something you can do other than price to get more business -- once you're on the approved panel?

Yes. I think it's a very good question, and we get this question a lot. I would just start off by saying our broad mindset ever since we went IPO and talked to investors was we believe in charging the right price for the right risk. And our mindset is if you're getting the right price for a loan that basically aligns our view on base case and stress case and we go after that business. I think in terms of lender allocation of MI business, the first and most important thing is getting on the panel itself. So we feel very good about that, having been in the business 40 years, having a very tenured sales force with great relationships. We have disclosed that we are doing business with 1,800 lenders on an active basis. So this means we had 1,800 -- around 1,800 lenders that gave us business during the last 12 months. So that gives us access to a broad market. I think from that point of time, it's a matter of just your participation and how much of that business do you like and is within your risk appetite. And I would say the time during which we used to measure the company's shares on a quarter basis is actually like not the right way to do it maybe at this point of time. For the last 4 years, I think the entire industry has a meaningful amount of volatility on a quarter-on-quarter basis. So when we look at our market share, we look at our market share much more on a trailing 12-month basis. And if you look at our market share on a trailing 12-month basis for the last 4 years, we have had one of the most stable shared trajectories in the market. And that's a testament to our strategy, whether it's leveraging our strength of balance sheet, whether it is leveraging our value proposition, but driving that outcome with share not being a strategy, share being an outcome itself. So I would say the fact that we started raising price middle of the year and lost some share, -- the second quarter, I think we were at 14.5%. Third quarter came up a little bit, but it was still in that 14% to 15% range. And as other MI companies increased price, some of that share came back to us, I think that's a dynamic but for the total year, I think we ended up at 16.5%, which seems very much aligned with the range where we have been.

And then last -- before leaving the discussion on pricing and market share, I do want to touch on FHA.

Sure.

Right, because the private insurance does compete with the FHA. This has probably been the longest, most previewed. There's going to be a rate cut at some point coming.

It's only 2 years.

We know you waited 2 years plus on when that comes. I guess how are you thinking about that? Any updates there? Anything you're expecting? What is even the playbook when there is one announced? Like do you expect it to have an effect on your business?

Yes. So I would start off by saying that in the last 5 or 6 years, the overlap between private mortgage insurance and FHA has reduced a lot. So FHA and private mortgage insurance play more complementary roles in the market than they used to. And it starts off by just the fact that private mortgage insurance primarily participates in loan to values up to 95%. We have business in higher than 95% segment, but not that much. On top of it, we are on much higher FICOs in terms of where most of our business gets written. FHA, on the other hand, is primarily 97% loan-to-value and much lower FICOs. So as a result of that, just the overlap has diminished over a period of time. On top of it, you have lenders who actually after global financial crisis, stopped originating FHA loans because given the nature of False Claims Act, they just didn't feel comfortable with the contingent liability. So we are in a market where with those inefficiencies in place, if FHA price cut does happen, and you're right, the discussion started in January of 21, you would essentially see some impact on MI market size, but not a meaningful impact. We have thought of that impact as -- well, I should caveat that by saying it's still not clear how FHA could do a price cut, they could do the upfront anvil or even life of loan, depending on what they do, our estimate is that, that could be low single-digit percentage of MI market, and that would still imply that a lot of lenders are doing it efficiently, which is not the way they do it. So we don't think that this is a meaningful portion. And the last thing I would point to is the pricing changes done by FHFA and GSEs in October and January actually make the GSE execution a bit more competitive in some of those loan to values and FICOs. So in the event that FHA does a cut, it would have a lower impact than it would have had in absent -- absence of those changes.

Got it. Great. Then maybe switching to the credit side. We talked a little bit about some of the macro challenges on the NIW side, but obviously, those translate to the credit side. So how do you expect delinquencies and claims to play out over the next 12 to 18 months?

Yes. Good question, Mihir. So first of all, I'd start with credit is performing very well. You look at our delinquency rate. You look at our new delinquency rate, both are back at pre-pandemic levels, which I think is indicative of very good credit performance. There's probably a bunch of different factors that play into that, everything from the strength of the underwrites. So the manufacturing quality of the loans that are being originated today all the way through the credit profile of the loans that we insure. And even on the macro side, even though there are some market uncertainties, the labor market has been particularly strong. I think all of that is supportive of the credit performance that we've seen to date. If we pivot and start thinking about 2023 credit performance, I really think there's 2 factors that are going to drive credit performance across our portfolio. First is the fact that we have large new books that are aging through their normal loss development pattern. It's possible and maybe likely that those will generate more delinquencies as they go through their normal progression of the loss curve. That isn't a reflection of a deterioration in credit performance, that's just a natural progression of loans going through, again, their normal loss development pattern. And then the second one that's probably more important is the macroeconomic environment. So -- and especially as Rohit talked about the employment and labor market, component of the macroeconomic environment, how is that going to play out? Is that going to result in a soft landing? Is that going to be developed into recessionary pressures, I think that outcome, that driver will ultimately determine how credit performs over the course of 2023. Our focus, as Rohit has mentioned a couple of different times, is positioning ourselves from a position of strength, irrespective of how that happens. So when we think about that, we think about maintaining a strong balance sheet, maintaining a strong balance sheet, both in PMIERs sufficiency, both in percentage of dollars and 165 and $2.1 billion of sufficiency. We think a bit about being well-reserved and having a prudent measured approach to our loss reserves. And then on the credit risk transfer, maintaining a successful and mature credit risk transfer program that if losses were to develop, then [ seed ] those losses to third parties. So that's really how we're thinking about it. And I think that will be the major driver in 2023.

On claims, they remained quite low, the claim payments numbers. Just can you talk about some of the factors driving that? Is that delinquencies curing at higher rates? Is it just your foreclosures and uptake just taking longer and longer -- what's driving that such low claim payments.

Claims have been incredibly difficult to predict, probably for some of the programs that are out there, the new programs that are out there, at least the proliferation of those programs, the wider use of those programs go back to forbearance and the ability to get into a forbearance state for up to 18 months as well as foreclosure moratoriums, both of those have made predicting claims very, very difficult. I think what we've been encouraged and what we've seen in our own experience, what's been encouraging is the performance of those 2021 and 2020 COVID-related delinquencies from a cure perspective. We continue to see through time, elevated cures relative to both our original expectations and then our revised expectations through time. So if you go back to that 2020 COVID delinquency cohort, we had about 80,000 new delinquencies come in, in the kind of second quarter through fourth quarter 2020. 98% of those have cured. I mean it goes well beyond our original expectations. Some of that is the success of the forbearance plans and the foreclosure moratoriums. Some of that, no doubt, I think you made reference to home price appreciation. That's clearly a tailwind that allows borrowers even if they are in a financially challenged position if they have an embedded HPA, it gives them the opportunity to sell out of that potentially with no claim. So there's a myriad of, I think, reasons, but I think the underlying or maybe the overarching perspective is that cure activity has continued at elevated levels and continuing beyond our expectation. It's led to the roughly $270 million of reserve releases that we've made primarily on those 2021 and prior delinquencies.

Out-of-home price appreciation. Can you help us understand how much of a benefit is it? And specifically, I'm thinking of your earnings, you said 90% of delinquent loans are like 20% equity, right? Given that kind of cushion, shouldn't loans cure much at a much higher rate than you have historically? And I guess the second part of that question would be how does that play into your reserve setting or does it at all?

Yes. So you got it right. 90% of our delinquencies have a 20% mark-to-market equity and 77% of our overall policies has that same 20% mark-to-market equity in it. So I think it's a tailwind. Much like we just talked about in the last question. It certainly has given the borrower that sits in a delinquent state an opportunity to cure in a different way to sell out of the property. I think it also provides both frequency and severity benefit for future delinquencies that might ultimately come down the pike. I think when it comes to reserve setting, I think what we've tried to do in our reserves is take a very measured and prudent approach to really, again, create that positioning, that balance sheet strength for whatever macro -- for the macroeconomic uncertainty that we're kind of facing into so that we're positioned to be able to maintain a strong balance sheet, irrespective of whether recessionary pressures develop or otherwise.

Maybe on expenses, you've talked about, I think, in your prepared remarks, there was 6% expense decline in 2020. Where are you finding these efficiencies?

So I think there are several different things contributing to it. First thing, it starts with an intention of making sure that we are managing our expenses prudently at all times. So as we've talked about the uncertainty of the environment, the impact on origination market, we were very mindful that we need to manage expenses more carefully. In addition to that, I think the technological innovations we have done and the investment we've done over the years has actually generated underwriting and other functional productivity benefits. So that comes through over the years. So that was normally in our run rate. I think 2 other things to mention, one was, we executed a voluntary separation program. So given the reduction in market estimates and volume estimates, we intentionally said we need to actually operate as a more efficient company. And then lastly, given the fact that it's been kind of 15 months, 16 months from our spin-off from Genworth, we had a shared services agreement and as part of that shared services agreement, we were on our schedule to pay a certain amount of expenses to Genworth for those shared services. Since that journey started, we have actually separated many of those services, services where we want to be self-reliant and as a result, we were able to lower that allocation for 2023 from $20 million to $15 million. So when you combine all of that, even in an inflationary environment and a strong job market, we were able to give a guidance of $225 million for 2023, which would be that 6% reduction.

Great. Maybe on Genworth, how does the large ownership stake that Genworth has impact Enact? Like just talk about the pluses, minuses on your -- firstly does it have an effect on your day-to-day? And then just generally on your pluses and minuses of having such a large sole owner.

So I would say Genworth did a great job in designing our initial public offering because from a tax efficiency perspective, Genworth essentially designed the economic ownership of 81.6% staying with Genworth. Genworth had a large tax loss asset and that tax loss asset could be earned by using Enact earnings with the tax consolidation. And I would say, given the earnings we have created and the record income, we talked about for 2022, that has inured to the benefit of Genworth shareholders. And at the same time, Genworth made a very intentional choice on making the governance of Enact very intentionally more independent. So it starts off with 8 out of 11 Board of directors are independent, all our committee chairs are independent. On top of that, we actually created a committee, which is called Independent Capital Committee, it can only have independent directors and the sole purpose or existence of this committee is to make sure that any capital actions that we execute on cannot harm minority shareholders. Not only did that sit well with our shareholders, it actually sat very well with the rating agencies and regulators. So by creating that governance structure, Genworth has intentionally kept the governance touch very light and focused on maximizing the value of Enact in its entirety. And I think Genworth has that as one of their strategic priorities, and we have definitely driven the company in that direction.

On capital returns and just your priorities there, obviously, last year, very good to see that agreement you'll sign with Genworth, where you can now do buybacks because one of the push backs we've got on the stock had historically been -- well, they have to do dividends even if it's too cheap and right, everyone went to business school, everyone went in the same finance classes and knows that buybacks are more efficient. You -- with that agreement where Genworth will sell you the shares -- portion of shares, that solves that criticism, if you will. So now that you're maybe operating like the competitors and similar efficient capital. What are the priorities and returns?

Yes. I would agree with you that the share repurchase plan was an important tool to add to our kind of capital initiatives toolbox, and we do rethink about all of the 3 tools, the regular quarterly dividend, the share repurchase and the special dividends as tools that we look at facts and circumstances to apply when it's most compelling, I think, at the end of the day. Look, returning capital to shareholders is a key pillar of our capital prioritization framework. That remains intact. I think from an approach, we're going to continue to use those 3 tools. We're going to continue to use the kind of the same cadence that we've used in the past, regular quarterly dividend, share repurchases opportunistically through time. And then looking at the end of the year at a special dividend based on business performance, based on macroeconomic conditions, based on the regulatory landscape at that point in time. I do think even without a prescribed guidance -- a prescribed number, there are some things that are known in the marketplace. It really represents a floor for investors to expect from Enact. The quarterly dividend is roughly $0.14 per share or $23 million quarterly. I think investors should expect that through the course of 2023 -- as well, the share repurchase program has about $75 million at the end of the year, still remaining. Now, the full program is kind of still intact. I think, again, assuming that the share repurchase gets implemented in 2023 investors should expect that component as well. That gets you to about $160 million, $170 million as a very strong foundational floor for return of capital to shareholders over the course of 2023. And then in addition to that, we're going to come back in the second half of the year, look at the business performance, look at the macroeconomic conditions, the regulatory landscape and make a determination of what the appropriate amount of a special dividend to shareholders for 2023. Again, look, we -- you made reference, we had a good year in 2022. We returned $250 million to shareholders. What I would say is as long as business performance and macroeconomic conditions remain kind of in that reasonable range in a similar -- in a similar vein to 2022, I think investors should expect a similar amount of capital return in 2023.

Got it. Is that the right PMIERs question number? Like what's the target? Does it change as we enter a softer economic environment?

I wouldn't say there's a right, honestly. I think it's facts and circumstance based. We look at -- and we haven't given a prescribed target start with that. But we have talked about the considerations that we weigh in thinking about what is the right at the moment, PMIERs sufficiency. So think about business performance, think about macro, but think about both prevailing and prospective, macroeconomic performance, think about competitive landscape. So there are customers that still use PMIERs as a de facto assessment of counter party strength and whether they want to do business with a certain MI or not. So again, it's kind of that mosaic approach and weighing all those considerations to determine what the right PMIERs efficiency levels are at any point in time. What we have said is we're comfortable given -- and this is -- this goes back to the pandemic. In the pandemic, we were comfortable operating at above 150% because of the pandemic and the uncertainty associated with that. And now we sit in a different macro but with still macroeconomic uncertainties. And I think we're still very comfortable operating at 150% or higher PMIERs sufficiency again, to position the balance sheet from a point of strength.

I think I would just add that in just the industry construct in terms of how PMIERs works, given the penalty that we actually get when a loan goes delinquent, where the capital factors go almost 8x higher, 4 or 2 payments default, I think in good times, you can actually have a target. But in an uncertain economic environment, you almost want to focus on the loss coverage to Dean's point, versus a capital target. And that's how we think about it.

Got it. Before -- maybe why don't I check, we have about 2 minutes left I have one more question, but if anyone has any questions -- any questions from the audience? It doesn't look like it. So why don't I go ahead? My last question was just going to be -- maybe take a second to just go ahead and highlight what are investors missing? We look -- I look at MI across the board, no matter which MI you take, but including [indiscernible] trading, earning mid-teens ROEs trading at book value or sub book value what our investors missing?

I think there's been a significant transformation on mortgage, residential mortgage as an asset class and then mortgage insurance as an industry. I think that has not been acknowledged by investors and by the market yet. So if you go back to 2013, prior to 2013, which was a global financial crisis construct, the credit underwriting environment was different, the capital environment was different, the pricing environment was different and now you look at the current environment, you have the concept of Dodd-Frank bill, which basically drives the boundaries of what the credit box is and even though we have seen meaningful reduction in origination volume, you have not seen an expansion of the credit box. The credit quality has been -- really good, underwriting quality has been really good. So we finally, I think are realizing that there is a mortgage asset class, which looks meaningfully different than what it did during global financial crisis. Then you come closer to our industry, and you realize that looking at PMIERs, which is a risk-based capital standard, our risk-based pricing deployed in the market where we deploy millions of cells of pricing every day based on market conditions and our view of the risk, that is meaningfully different. And then lastly, you look at our credit risk transfer program that provides significant volatility protection. I think all those things create a business case for evaluation and essentially a recognition that the market and the MI sector is much more different. The difference between that argument and the proof point might be a cycle. So as we navigate through different environments and continue to produce really good results, I think that hopefully draws that bridge.

Great. We do have a question. Where do you own the [indiscernible] there? And if you own the [indiscernible] there, like where is the attachment point and where is the detachment…

Yes. So the attachment and detachment are typically inside the PMIERs tier. So think about attaching at roughly a 3% of risk. So I think 3% claim rate, going up to about 7%. The reason detachment point, the reason for the 7%, that's a proxy for the PMIERs requirements on new business. And so we try to maximize the efficiency of the capital credit for that credit risk transfer transaction in the context of PMIERs. So -- and yes, we typically retain a stub that can be -- it depends on the vintage. It can range from anywhere from -- it can get big depending and it shrinks through time as we layer on additional CRT on a particular book. We typically end up with a 10% -- 5% or 10% stub in that mezzanine tier retention.

Great, I think we're out of time, so we probably stop there. Thank you so much to both of you.