Enact Holdings, Inc. Q2 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Enact’s Q2 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Daniel Kohl, Vice President of Investor Relations. Please go ahead.

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 performance and progress against our strategy. Dean will then discuss the details of our quarterly results before turning the call back to Rohit for closing remarks. We will then take your questions. The earnings materials we issued after market closed yesterday contain our financial results for the quarter, along with a comprehensive set of financial and operational metrics. These are available on the Investor Relations section of our website. Today's call is being recorded and will include the use of forward-looking statements. These statements are based on current assumptions, estimates, expectations, and projections as of today's date. Additionally, they are subject to risks and uncertainties which may cause actual results to be materially different, and we undertake no obligation to update or revise such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today's press release as well as in our filings with the SEC, which will be available on our website. Please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures. Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation, and our upcoming SEC filing on our website. With that, I'll turn the call over to Rohit.

Thank you, Daniel. Good morning, everyone. Our second quarter results concluded an excellent first half of 2024. We remain focused on our priorities of driving profitable growth, maximizing efficiency, and creating value for our shareholders. Our disciplined execution across each of these translated into strong financial performance. During the quarter, we reported adjusted operating income of $201 million, up 21% sequentially and 13% year-over-year. Adjusted EPS was $1.27, adjusted return on equity was a solid 17%, and Insurance In-Force was a record $266 billion, up 1% sequentially and up 3% year-over-year. As we mentioned last quarter, we continue to navigate through a complex operating environment. The U.S. economy is holding up well with a strong labor market and household balance sheets that remain healthy overall. While macro factors such as inflation, higher interest rates, and geopolitical conflicts remain potential risks, there are a number of positive trends supportive of housing and credit. Delinquency rates for prime mortgage borrowers are consistent with pre-pandemic levels. Our manufacturing quality continues to be strong, and our portfolio retains high embedded equity. Overall, we are confident that mortgage insurance will continue to be a crucial resource for both buyers and lenders alike. Higher rates continue to benefit persistent fee, which again offset the effect of a higher rate environment on origination volumes and help drive Insurance In-Force growth. The credit quality of our insured portfolio continues to be strong. At quarter end, the risk weighted average FICO score of the portfolio was 745. The risk weighted average loan-to-value ratio was 94%, and layered risk was 1.3%. Pricing remained constructive in the quarter, and we maintained our commitment to prudent underwriting standards. Our pricing engine allows us to deliver competitive pricing on a risk-adjusted basis, and we continue to underwrite and select risk prudently while generating attractive returns. The delinquency rate in the quarter was 2%, flat as compared to last quarter and consistent with our expectations. During the quarter, we released reserves of $77 million driven by favorable credit performance and our effective loss mitigation efforts. Based on continued strong cure performance and our current market expectations, we reduced our claim rate on new and existing delinquencies from 10% to 9% during the quarter. We believe we remain well reserved for a range of scenarios. Dean will have more to say on this shortly. We continue to operate from a position of financial strength and flexibility. At quarter end, our PMIERs sufficiency was 169% or $2.1 billion of sufficiency, and approximately 77% of our Risk In-Force was subject to credit risk transfers. We continue to execute against our CRT strategy during the quarter with an additional excess of loss transaction further reducing our credit risk and enhancing our capital efficiency. During the quarter, we issued $750 million in senior notes, further strengthening our financial position by allowing us to refinance near-term maturities and saving $2 million in annual interest expense. This was our first investment-grade debt issuance as a public company and the largest investment-grade debt issuance in the industry in over a decade. The strength of our capital position and cash flows has allowed us to continue executing against our capital allocation priorities, which are supporting existing policyholders, growing our current business, investing in attractive new business opportunities and returning excess capital to shareholders. During the quarter, we repurchased $49 million of shares. As of June 30, we have completed our $100 million share repurchase program and have $238 million remaining in our recently announced $250 million authorization. We also distributed $29 million to shareholders via our quarterly dividend. We now expect our total capital return to be between $300 million and $350 million in 2024, reflecting our continued strong performance and balance sheet. Finally, we have continued to pursue strategic opportunities to extend our platform into compelling adjacencies that enhance our return profile, differentiate our platform, and leverage our core competencies. A year ago, we successfully launched Enact Re, expanding our platform into the GSE credit risk transfer market. During the quarter, we continued to participate in the GSE CRT transactions that came to market. Since its inception, Enact Re has performed well, maintaining a strong underwriting and attractive return profile. Enact Re is sufficiently funded to support its growth for the foreseeable future and remains a long-term capital and expense-efficient growth opportunity. Finally, I would like to take a moment to touch on our culture. At Enact, we strive to create a culture that encourages collaboration and are committed to maintaining an engaging work environment where our teams are at their best. I'm pleased to announce that during the quarter, Enact was recognized as one of the best places to work by the Triangle Business Journal. We appreciate this acknowledgment of our leadership in the workplace and a testament to the strength of our team. Overall, we are pleased with our excellent performance in the first half of 2024. Looking ahead, we are focused on executing against our strategic priorities and are committed to maximizing value for all of our shareholders. With that, I will now turn the call over to Dean.

Thanks, Rohit. Good morning, everyone. We delivered another set of strong results in the second quarter of 2024. GAAP net income for the second quarter was $184 million or $1.16 per diluted share compared to $1.04 per diluted share in the same period last year and $1.01 per diluted share in the first quarter of 2024. Return on equity was 15%. Adjusted operating income was $201 million or $1.27 per diluted share compared to $1.10 per diluted share in the same period last year and $1.04 per diluted share in the first quarter of 2024. Adjusted operating return on equity was 17%. As I explain the drivers of this quarter's performance, I'll highlight the differences between net income and adjusted operating income. Turning to revenue drivers. Primary Insurance In-Force increased in the second quarter to a new record of $266 billion, up $2 billion sequentially and up $8 billion or 3% year-over-year. New insurance written was $14 billion, up $3 billion sequentially and down $1 billion or 10% year-over-year. Persistency was 83% in the second quarter, down 2 percentage points sequentially and down 1 percentage point year-over-year. The sequential decline in persistency is aligned with historical seasonality as we transition to the spring selling season. Given the current level of mortgage rates, persistency remains elevated, and this marks the ninth quarter in a row of persistency at or above 80%. Only 4% of the mortgages in our portfolio had rates at least 50 basis points above the prevailing market rate. We anticipate that elevated persistency will continue to help offset lower production in the current higher-rate environment. Net premiums earned were $245 million, up $4 million or 2% sequentially and up $6 million or 3% year-over-year. The sequential and year-over-year increases in net premiums were driven by Insurance In-Force growth, and our growth in attractive adjacencies consisting primarily of the Enact Re's GSE CRT participation. These increases were partially offset by higher ceded premiums. Our base premium rate of 40.3 basis points was up 0.2 basis points sequentially and flat year-over-year. As a reminder, our base premium rate is impacted by several factors and tends to modestly fluctuate from quarter to quarter. Our net earned premium rate was 36.4 basis points, up 0.1 basis points sequentially as higher ceded premiums partially offset the increase in base rate. Investment income in the second quarter was $50 million, up $3 million or 5% sequentially and up $9 million or 17% year-over-year. Higher interest rates have increased our investment portfolio yields. And as our portfolio rolls over, we anticipate further yield improvement. We remain focused on high-quality assets and maintaining a resilient A-rated portfolio. As we previously stated, while we typically hold investments to maturity, we will selectively pursue income enhancement opportunities. During the quarter, we executed a strategy resulting in $8 million of pretax losses in exchange for higher future investment income, which is excluded from our adjusted operating income. While we will continue to evaluate and pursue similar opportunities as appropriate, this does not change our view that our investment portfolio's unrealized loss position is materially non-economic. Turning to credit. Losses in the second quarter of 2024 were negative $17 million, and the loss ratio was negative 7% compared to $20 million or 8% respectively in the first quarter of 2024 and negative $4 million and negative 2% respectively in the second quarter of 2023. The sequential and year-over-year decrease in losses and the loss ratio were primarily driven by a reserve release of $77 million, reflecting favorable cure performance and the lowering of our claim rate expectations from 10% to 9%. Our new delinquency rate remained consistent with pre-pandemic levels and for the quarter was 1.1% compared to 1.2% sequentially and 1% in the second quarter of 2023. Total delinquencies in the second quarter decreased sequentially to 19,100 from 19,500. The primary delinquency rate decreased 5 basis points sequentially to 2%, in line with pre-pandemic levels. Turning to expenses. Operating expenses in the second quarter of 2024 were $56 million and the expense ratio was 23% compared to $53 million and 22% respectively in the first quarter of 2024 and $55 million and 23% respectively in the second quarter of 2023. We also initiated a voluntary separation program during the second quarter that resulted in a restructuring charge of $3 million, which is excluded from our adjusted operating income and represents approximately a 1 percentage point impact in the expense ratio for the quarter. We remain focused on operating efficiency and still expect our expenses excluding these restructuring charges to be in the range of $220 million to $225 million for 2024. Moving to capital. We continue to operate from a strong capital and liquidity position, reinforced by our robust PMIERS sufficiency and continued successful execution of our diversified CRT program. During the quarter, we secured $90 million of additional excess of loss reinsurance coverage to reduce credit risk and enhance our capital efficiency. As of June 30, 2024, our third-party CRT program provides $1.8 billion of PMIERs capital credit. During the quarter, we also elected to exercise cleanup calls on two CRT transactions covering the 2014 through 2019 books and the 2020 book. These two transactions account for approximately 15% of our Risk In-Force. We exercised these cleanup calls in part because they provided nominal loss coverage and PMIERs credit, and the associated loans have high embedded equity, which reduced the probability of loss. As a result of these commutations, at the end of the second quarter, 77% of our Risk In-Force was subject to credit risk transfer, which is down from 90% at the end of the prior quarter. We further strengthened our balance sheet during the quarter through our $750 million debt offering. We used the proceeds to refinance our 2025 notes, which extends our maturities and will result in $2 million in annual interest expense savings. The transaction resulted in $11 million of debt extinguishment costs, consisting of approximately $8 million in debt redemption costs and approximately $3 million in accelerated debt issuance costs in the quarter, both of which are excluded from our adjusted operating income. Turning to capital allocation. We continue to execute against our capital prioritization framework, which balances maintaining a strong balance sheet, investing in our business and returning capital to shareholders. During the quarter, we paid $29 million or $0.185 per common share through our quarterly dividend, reflecting a 16% increase as previously announced. Today, we announced the third-quarter dividend of $0.185 per common share payable September 9. Additionally, we continue to focus on accelerating our share buyback participation and repurchased 1.6 million shares at a weighted average share price of $30.43 for a total of $49 million in the quarter. In July, we've repurchased an additional 0.4 million shares at a weighted average share price of $31.01 for a total of $13 million repurchased. During the quarter, we completed our $100 million share repurchase authorization. And as of July 26, 2024, there was approximately $226 million remaining on our $250 million repurchase authorization. The strength of our capital position allows us to balance investing in the business with returning capital to shareholders. We now expect to return approximately $110 million through our common dividend in 2024. Additionally, we expect to return between $190 million and $240 million through our share buyback program. Collectively, these result in an expected 2024 capital return between $300 million and $350 million, reflecting our consistent performance and strong balance sheet. As in the past, the final amount and form of capital return to shareholders will depend on business performance, market conditions, and regulatory approvals. Overall, we are incredibly pleased with our performance in the first half of 2024. We believe we are well positioned for the second half of the year and beyond, and we'll remain focused on prudently managing risk, maintaining a strong balance sheet and driving solid returns for our shareholders. With that, I'll turn the call back to Rohit.

Thanks, Dean. As I reflect on our performance and look to the second half of 2024 and beyond, I continue to be encouraged by the long-term dynamics of our market. Our product continues to help people responsibly achieve the dream of homeownership in a complex environment. Our dedication to this principle underpins all aspects of our business and drives our efforts to deliver exceptional value for all of our stakeholders. Operator, we are now ready for Q&A.

Your first question comes from the line of Soham Bhonsle from BTIG.

Hey, guys. Good morning. Hope you’re doing well. Just the first one on NIW. It looked like it was lower versus some of your peers that reported this quarter. So I was just wondering if there are any errors or factors that maybe you stepped away from or anything discernible to note there?

Thank you for the question. So no, there was nothing different this quarter. There is some level of volatility that happens quarter-to-quarter. And obviously, we still don't have one peer who has reported in the market, so it's tough to tell where we are on market share. But the way we see the market from a pricing perspective, we saw pricing being constructive. We think that the four peers out of five who have reported are in a tight range. Four peers actually have a $13 billion handle in terms of NIW. So it seems like most people were kind of pretty close. We are comfortable with our participation in the market. We like the approximately $14 billion of NIW we wrote in the quarter and the guidelines, the pricing that we're getting on that, we are really happy with that.

Okay. Great. And then on the lower claim rate, credit is obviously still very good. Consumer seems in a good place. But it does seem like the consumer is slowing on the edges, and if you look at just inventory that's potentially building in some of the large markets, like Texas and Florida, these are some of the risks that we're seeing, but I guess you did take it down. So wondering how you're looking at this or assessing those risks going forward? And how sustainable do you think the lower claim rate can be?

Yes, Soham. Thanks for that question as well. I think we previously discussed there were a couple of potential catalysts for the reassessment of the claim rate. First relates to the economic uncertainty and a reduction in economic uncertainty. Second, we gave more consideration to the sustained delinquency performance and elevated cure performance that we've seen over time. Those would both be potential catalysts for the reassessment of the claim rate. This quarter, we really relied on both of those and made the change from 10% to 9%. We believe the economic uncertainty is reduced, but that doesn't mean that it's completely gone away. Our 9% claim rate still reflects the ongoing presence of uncertainty, but that range has certainly narrowed.

In terms of inventory buildup as well as consumer softening, I think we are definitely keeping an eye on it. We have seen some volatility. If you think about the second half of 2022 and early 2023, we saw that volatility in the market, but eventually, the trends came back to more fundamental trends, which we believe are driven by several macro factors. On the housing side, there is less inventory in the market than there are people who are interested in buying homes. We think that, at least the number is somewhere around 2 million homes short in the market compared to people who actually want to buy. While the inventory has risen recently in June and is kind of closer to 4 months, it's still below the long-term average.

Okay. Great. I guess, Rohit, just if I could squeeze one in. I think as we get into the back half of the year, investors are sort of thinking about how MI could be viewed in the context of a new administration potentially. If you could just spend a minute and talk about potential ramifications, whether that's ending conservatorship or just going to more of a free market sort of approach? Anything there would be great.

Yes. That’s a very good question, Soham. I would say MI is well positioned on both sides of the aisle. From a consumer perspective, we are a product that actually helps consumers achieve the dream of homeownership. We help consumers get on the path of wealth accumulation through homeownership, which over the last 30, 40 years has been one of the biggest factors driving the buildup of wealth. So from our mission and purpose perspective, if you think about a Democratic administration, our priorities are very aligned. If you think of the number of first-time homebuyers, we are helping to put into homes in a low affordability environment. In the most recent quarter, 60-plus percent of our consumers were first-time homebuyers. If you think about a Republican administration, from a product perspective, we are also putting private capital ahead of taxpayer risk. So whether it comes to us competing with the FHA program in terms of putting private capital ahead of FHA, we are serving a good purpose there. The odds of GSE reform are difficult to call at this point in time because a lot of things have to line up for the reform to happen just given the number of considerations in play.

Next question is from the line of Rick Shane from JPMorgan.

Hey, guys. Thanks for taking my questions this morning. Look, one of the most interesting evolutions over the last two or three years has been the understanding or appreciation that a lower volume, high persistency environment is actually potentially more favorable than a high volume, lower persistency environment. As we shift potentially in rates and could see a pickup in mortgage volumes, I'm curious how you guys are thinking about this?

Yes, Rick, thank you for your question. I would say, given the composition of our portfolio, and we disclosed some details from a mortgage rate perspective on Slide 9 of our earnings presentation, I think the portfolio is very well positioned. A good portion of our existing book does not have refinanced incentive even if mortgage rates fall. From a market perspective and a potential perspective for our business, I think an ideal scenario is as mortgage rates come down and affordability gets better, we start getting a much higher origination market for the MI industry because a lot of consumers who are on the sidelines are first-time homebuyers. We actually have a growing market, but at the same time, our insurance in force has more stickiness because consumers have a low enough rate that they are not refinancing out of their mortgage from a rate perspective.

Got it. And could you see a scenario where some of the less affordable and riskier portions of your portfolio boil off a little bit faster and those borrowers actually move into more affordable mortgages?

Absolutely. That is always possible, Rick. We have a lot of data where we can model those scenarios and look at which consumer cohorts have a higher propensity to refinance. And that's baked into our expectations when we run the business.

Your next question is from the line of Bose George from KBW.

Hey, good morning, everyone. This is actually Alex, on for Bose. Maybe just to start relating to the updated capital return guide. I was wondering if you could maybe discuss the drivers of the higher guidance and maybe specifically if this is being driven by better return expectations versus maybe slower growth expectations?

Yes, Alex. Thanks for the question. I really don't think it's the latter but let me go to the drivers. A lot of the considerations for why we increased from a discrete number to the range of $300 million to $350 million starts with business performance. I think business performance has been very strong. The economic environment is another key consideration, and I talked about some modest improvement from our perspective on the economic environment that led to the reduction in the claim rate this quarter. Regulatory conditions are conducive to increasing from a discrete number to a range. The form of that will be dictated by several factors.

Yes, Alex, just to completely agree with Dean. Given the NIW numbers we have delivered, we need a little bit more information to assess market size. But the guidance we had provided for MI market size at the beginning of the year is actually very much in line with where we believe MI market size is trending at this point in the year. We have mentioned before that we launched Enact Re last year. We continue to grow that business, and we have described that as growing that business in months, quarters, and years, not in a very short term. So completely agree that this is driven by business performance versus slower growth.

Okay. Great. That all makes sense. I have another follow-up regarding capital return. Considering how our shares are trading compared to our peers, they do appear somewhat undervalued right now. Is there a specific price-to-book ratio you consider that might lead us to increase capital return through special dividends instead of share repurchases, given the current trading environment?

Yes, Alex, on our share buyback program, we look at a lot of different factors. Obviously, price to book is one, forward price to book is another. We have our own view of intrinsic value, so we kind of triangulate those views and others as we think about setting the appropriate targets for share buyback as a means to return capital. I'm not going to prescribe a certain current period price to book. We still have the perspective that we have a preference for returning capital via share buybacks, assuming market conditions accommodate.

Your next question is from the line of Mihir Bhatia from Bank of America.

Hi, good morning. Thanks for taking my questions. I wanted to start first just on the premium. You mentioned the premium environment is constructive. I guess the question really is, have premium rates troughed for now? Do you expect the base premium rate to just slowly grind a little bit higher as the new loans come in? Or is there a potential still for declines in the premium rate?

Yes, Mihir, thanks for the question. I think we've talked about this several times in the past, but base premium rates are impacted by a number of different variables. Our view is that base rates will continue to stabilize, and we'd expect flattish base premium rates throughout the year. So I wouldn't equate that to a bottoming out.

Okay. Did you provide the market size for the NIW market? I believe you mentioned it was similar to last year last quarter. Is that still your perspective?

Yes. So we gave a market expectation for the full year, which was generally in line with 2023. I believe 2023 was $285 billion. As we navigate towards the end of the year with recent rate movements, you could see some upside to that. Right now, I think that $285 billion or somewhere close sounds pretty good.

Okay. And then I guess the last question is just on the voluntary separation program. I just wanted to understand, what is the driver of that? Is it just efficiency improvements? Or is the market has been a little slower to come back than you had maybe anticipated?

Yes, Mihir. This is not the first voluntary separation program. We are very expense conscious and are always working towards making our business efficient through the right processes and the right investments. We have invested in our business and our technology and processes for the last 10 years.

Yes, the only thing I'd add to that, Mihir, to pick this up right where Rohit left off is that $3 million restructuring charge isn't counted in our full-year guidance of $220 million to $225 million for 2024.

One thing I should say to round out the answer, if you think about our Insurance In-Force, we are now at the highest Insurance In-Force we’ve ever had, $256 billion. And from an employee count perspective, our business has never been more efficient.

Your next question is from the line of Geoffrey Dunn from Dowling.

Thanks. Good morning. Dean, can you disclose the amount of development that was in the current period provision this quarter?

Yes. Losses on new were $60 million in the quarter.

Yes. How much of that was development related to the claim rate going from 10% to 9%?

Yes. If you break out the $77 million into its parts, about $56 million of that is related to elevated cure activity, and about $21 million is related to the reduction of our claim rate from 10% to 9%. We booked new delinquencies at the 9%.

Got it. All right. And then more of a macro question. What are some of the softer MSAs you're watching right now?

Yes, Jeff, this is Rohit. It's tough to give guidance on specific geographies. That’s part of our commercial strategy. We do deploy our pricing and risk appetite strategy at an MSA level. We use all the way data from that as well as economic activity data at an MSA level to project where markets might be going.

And then last question, can you talk a little bit about how execution looks between the traditional XOL versus ILN markets? It seems like we're still kind of on the XOL side of things. I'm just curious how ILNs are matching up?

Yes. We haven’t been in the ILN market for a couple of quarters now. But both markets are performing very well. There's a little bit of imbalance between supply and demand. We have lower NIW over the most recent periods. New investors in the ILN market space are providing additional capacity, and that's driving some favorability in terms of pricing. Our CRT plans for the second half of the year are probably pretty limited. We'll reconsider unless we do something more opportunistically.

There are no further questions at this time. I would now like to turn the conference back to our speakers for any closing remarks.

Thank you. We appreciate everybody's interest in Enact. We will be hosting a fireside chat with JPMorgan tomorrow, and we will be attending the JPMorgan Future of Financials Forum in mid-August. We look forward to seeing you at one of these events. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect.