Earnings Call Transcript - ACT Q2 2025

Operator, Operator

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

Daniel Kohl, Vice President of Investor Relations

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 close 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.

Rohit Gupta, President and CEO

Thank you, Daniel. Good morning, everyone. Enact closed out the first half of the year with another strong quarter. Our results continue to reflect the disciplined execution of our strategy, robust credit performance and our ongoing commitment to creating long-term value for our shareholders. To that end, we are pleased to announce a meaningful increase in our expected capital returns for 2025 to approximately $400 million, which we will discuss in more detail later. For the second quarter, we reported adjusted operating income of $174 million, while adjusted earnings per diluted share was $1.15. Additionally, adjusted return on equity was over 13%. Insurance in force increased 1% year-over-year to $270 billion, and we generated robust new insurance written of over $13 billion. We continue to successfully navigate a complex macroeconomic environment. While certain indicators such as labor market resilience, moderating wage growth and the overall health of our borrowers remain strong, uncertainties persist. In particular, the lack of near-term clarity around trade policy and the potential implementation of reciprocal tariffs has introduced additional volatility to the outlook. Affordability continues to be challenged. And while home inventories have started to build up in certain geographies, there are more buyers than sellers at the national level. Having said that, our business is supported by strong demographic trends, especially within the historical first-time homebuyer segment. Overall, we continue to remain optimistic about the long-term health of the U.S. housing market. Against this backdrop, our capital position and credit performance remain key strengths. At quarter end, we reported PMIERs sufficiency ratio of 165%, providing significant financial flexibility and our credit portfolio remains in excellent shape. At the end of the second quarter, approximately 7% of our insurance in force had mortgage rates at least 50 basis points above June's average mortgage rate of 6.8% and the credit quality of our insured portfolio remains strong. The risk-weighted average FICO score of the portfolio was 746. The risk-weighted average loan-to-value ratio was 93% and layered risk was 1.2% of risk in force. Pricing was again constructive in the quarter, and we maintained our commitment to prudent underwriting standards. Our pricing engine, Rate 360, allows us to deliver competitive pricing on a risk-adjusted basis, and we continue to prudently underwrite and select risk. We saw favorable delinquency and cure performance during the quarter that followed typical seasonal sequential trends. Total delinquencies were down 1% sequentially, with new delinquencies also decreasing by 5%. Strong embedded equity, combined with our effective loss mitigation efforts helped drive robust cure performance with a cure rate of 52%. This drove a reserve release of $48 million, and our resulting loss ratio for the quarter was 10%. Credit performance remains strong, and we are well reserved for a range of scenarios. On the expense front, we maintained our disciplined approach to expense management while investing in technologies and processes that improve customer experience and our business operations. Despite the ongoing inflationary environment, our expenses, excluding restructuring charges, were flat year-over-year. We continue to advance on all capital allocation priorities to support existing policyholders by maintaining a strong balance sheet, invest in our business to drive organic growth and efficiencies, fund attractive new business opportunities to diversify our platform and return excess capital to shareholders. As it relates to diversification, Enact Re continues to build momentum as we participate in single and multifamily GSE CRT transactions. Enact Re remains capital and expense efficient and is contributing to our long-term earnings profile. As it relates to capital returns, during the second quarter, we returned $116 million to shareholders through share repurchases and dividends. And as I mentioned earlier, we are increasing our expected capital returns to approximately $400 million for the year. Before handing the call over to Dean, I wanted to take a moment to recognize our culture and our people. For the third year, Enact was recognized as one of the best places to work by Triangle Business Journal. We take pride in fostering an environment where our teams can thrive and do their best work in the service of our customers and stakeholders and are very pleased to have received this recognition. Overall, we are pleased with our performance through the first half of 2025. We are navigating a complex environment from a position of strength supported by robust new insurance written with excellent credit quality, a strong balance sheet and prudent expense management. Additionally, we are working closely with our lending partners, the GSEs and the administration to ensure we are well positioned to adapt to any regulatory changes. We were excited to see that MI premiums have become tax deductible again. With the support of a highly engaged team, we are focused on executing our strategy and maximizing value for our shareholders. With that, I will now hand it over to Dean to walk through our financial results in more detail.

Dean Mitchell, CFO

Thanks, Rohit. Good morning, everyone. Adjusted operating income was $174 million or $1.15 per diluted share compared to $1.27 per diluted share in the same period last year and $1.10 per diluted share in the first quarter of 2025. Adjusted operating return on equity was 13.4%. A detailed reconciliation of GAAP net income to adjusted operating income can be found in our earnings release. Turning to revenue drivers. New insurance written was $13 billion, up 35% sequentially and down 3% year-over-year. The sequential increase was primarily driven by mortgage origination seasonality from the spring selling season. Persistency was 82% in the second quarter, down 2 points sequentially and down 1 point year-over-year. Our portfolio remains resilient with 7% of our mortgages having rates at least 50 basis points above June's average of 6.8%. We expect elevated persistency will continue to help offset the potential impact of higher mortgage rates on the origination market. Given the combination of solid new insurance written and elevated persistency, primary insurance in force was $270 billion in the second quarter, up $2 billion or 1% from the first quarter of 2025 and $4 billion or approximately 1% year-over-year. Total net premiums earned were $245 million, flat sequentially and up modestly year-over-year. The year-over-year increase was primarily driven by premium growth from attractive adjacencies and the growth of our mortgage insurance portfolio, mostly offset by higher ceded premiums. Our base premium rate of 39.8 basis points was down 0.3 basis points sequentially, aligned with our expectation for base premium rate in 2025 to stabilize around 2024 levels. 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 35.2 basis points, relatively flat sequentially. Investment income in the second quarter was $66 million, up $3 million or 5% sequentially and up $6 million or 10% year-over-year. Our new money investment yield continued to exceed 5%, lifting our overall portfolio book yield. As previously stated, while we typically hold investments to maturity, we may selectively pursue income enhancement opportunities. During the quarter, we sold certain assets that will allow us to recoup realized losses through future higher net investment income. Turning to credit performance. New delinquencies decreased sequentially to 11,600 in the quarter from 12,200 in the first quarter of 2025, in line with expected seasonal trends. Our new delinquency rate remained consistent with pre-pandemic levels and for the quarter at 1.2%, a decrease of 10 basis points compared to the 1.3% in the first quarter of 2025 and 1.1% in the second quarter of 2024. The year-over-year increase was primarily driven by higher new delinquencies from the normal loss development pattern of newer books. We maintained our claim rate on new delinquencies at 9%. Total delinquencies and the delinquency rate of 2.3% in the second quarter were flat sequentially as cures kept pace with news. Losses in the second quarter of 2025 were $25 million and the loss ratio was 10% compared to $31 million and 12%, respectively, in the first quarter of 2025 and negative $17 million and negative 7%, respectively, in the second quarter of 2024. The current quarter's reserve release was $48 million, driven by ongoing favorable cure performance and loss mitigation activities. Turning to operating expenses. Operating expenses for the second quarter of 2025 were $53 million, and the expense ratio was 22% compared to $53 million and 21%, respectively, in the first quarter of 2025 and $56 million and 23%, respectively, in the second quarter of 2024. For 2025 operating expenses, we continue to anticipate a range of $220 million to $225 million, excluding reorganization costs. We continue to operate from a strong capital and liquidity position, reinforced by our robust PMIERs sufficiency and the successful execution of our diversified CRT program. PMIERs sufficiency was 165% or $2 billion above PMIERs requirements at the end of the second quarter. As of June 30, 2025, our third-party CRT program provides $1.9 billion of PMIERs capital credit. Let me now turn to capital allocation. During the quarter, we paid out $31 million or $0.21 per share through our quarterly dividend. Today, we announced a third-quarter dividend of $0.21 per common share payable September 8. In addition, we bought 2.4 million shares for $85 million in the second quarter of 2025. Through July 25, we repurchased an additional 0.8 million shares for $30 million. As Rohit mentioned earlier, we are increasing our 2025 total capital return guidance to approximately $400 million. 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 pleased with our performance in the first half of 2025, and we believe we are well positioned for the second half. We remain focused on prudently managing risk, maintaining a strong balance sheet and delivering solid returns for our shareholders. With that, let me turn the call back over to Rohit.

Rohit Gupta, President and CEO

Thanks, Dean. Looking ahead, we are confident in our ability to navigate complex and evolving macroeconomic environments. Our strong balance sheet, disciplined risk management and thoughtful approach to capital deployment provide meaningful flexibility as we execute our strategy. We remain grounded in our mission to help people responsibly achieve the dream of homeownership, which continues to guide how we serve our customers, support our communities and create long-term value for all our stakeholders. Operator, we are now ready for Q&A.

Operator, Operator

The first question comes from the line of Doug Harter with UBS.

Douglas Michael Harter, Analyst

I was hoping you could discuss the seasoning of the recent origination vintages and how you think some of the regional home price weakness might impact the seasoning of those newer vintages?

Rohit Gupta, President and CEO

Doug, this is Rohit. I will have Dean start on the performance of the recent vintages, and then I'll add color on the regional home price declines.

Dean Mitchell, CFO

Yes. Doug, to quickly summarize, overall credit performance has remained very strong through the second quarter. This is due to several factors, including significant home price appreciation within our insured portfolio, as well as a resilient economy. The U.S. consumer is doing well in terms of employment, wage growth, and overall financial health. Given this strong backdrop, I believe it reflects positively on our loss performance for the quarter. Geographically, at the national level, credit performance is similarly robust. Home inventories are healthy, with housing supply around 4.5 months, which is below the 6-month equilibrium threshold. However, there are some markets where inventories have increased, leading to some localized softness. A notable example is Cape Coral, where inventory growth has significantly outstripped demand. Although Cape Coral represents a small portion of our overall portfolio, we take such situations into account. In regions where supply is increasing, we adjust our pricing not only based on current home values but also by factoring in future price trends. Our risk-based pricing model ensures we set appropriate prices that consider both credit characteristics and macroeconomic forecasts, including anticipated home prices, thus embedded in our pricing strategy based on our market assessments.

Rohit Gupta, President and CEO

And Doug, I would just add to Dean's comment, I agree with everything that Dean said that as you think about consumers and the way they value shelter or homeownership, that continues to be very high. So we don't see a high correlation on a slight home price decline in a certain geography suddenly leading to consumers actually defaulting on their home. While there could be some performance differential between a market that has significant home price appreciation versus the market that's slightly declining, we still continue to see in our borrowers that borrowers are prioritizing mortgage payments over every other payment. So we still think that given the labor market is strong, given that consumer balance sheets for our borrowers continue to be resilient that, that is going to be indicated in our performance.

Operator, Operator

Our next question comes from the line of Rick Shane with JPMorgan.

Richard Barry Shane, Analyst

Look, Doug, I think, covered probably the most important and salient issue for the space at the moment. But I would like to talk about the addressable market. We're now halfway through 2025. And at least versus our expectations, new insurance written for the industry is coming in a little bit lower. We won't know until everybody reports if it's market share shift or it's TAM just being a little bit smaller. When you look at your numbers, what do you think is going on there? Is market share shifting? Or is there a little bit less demand, and that's what we're seeing in terms of NIW.

Rohit Gupta, President and CEO

Thank you for your question. So at the beginning of the year in February, when I provided our view on MI market size for 2025, I gave guidance that we expect MI market size to be generally similar to 2024. MI market size in 2024, just for context, was around $300 billion. Our view even right now is that, that statement is true, although we might have gotten there in a slightly different way than we expected. I think mortgage rates continuing to remain high, have probably suppressed purchase origination market compared to our original estimates. So that could be some headwinds in one direction. But then on the flip side, we have seen consumers continue to use private mortgage insurance in a meaningful way. So we still see that 2025 will be similar to 2024. And I would say the 2 things that we are keeping an eye on are definitely mortgage rates because that drives consumer affordability. So when mortgage rates are hovering close to 7% for a 30-year fixed mortgage, consumers are trying to figure out if they can afford that home in a prudent and safe way. The second thing that we continue to hear from our lending partners is the uncertainty in the environment related to tariffs and any cascading impact on corporations or consumers. We saw a similar behavior back in the middle of 2022. It actually reflected both in originations volume and even home prices flattening for a short period of time. And when that uncertainty abated, then consumers came back to the market. So I would say short answer, relatively similar levels through 2024. And then the things that we are keeping an eye on are consumers basically coming back to the market as the uncertainty around tariffs abate.

Richard Barry Shane, Analyst

Got it. And when you think about your capital planning, and obviously, the offset to that is that when NIW is a little bit softer, it tends to be correlated with higher persistency. Does that sort of what you've seen so far and potentially how it impacts your outlook impact your capital return plans? Does that contribute to the increase? Or is it really just driven by the higher ROEs?

Rohit Gupta, President and CEO

Yes. Thank you, Rick. So our capital return guidance is indicative of our actual performance, but we do take into account the macro environment, both today and prospectively. And as we always do, we will continue to evaluate the amount based on business performance, prospective market conditions and also on an opportunistic basis, our share price. So as you saw in our results, we continue to see strong credit performance, as Dean articulated, strong performance in our bottom line results, and that led us to increasing our full year return of capital guidance to approximately $400 million. The final amount and the form of capital return to shareholders will depend on how business performs from here on out. But I would say, as a reminder, since our IPO, we have returned over $1.3 billion to shareholders, and we continue to think in a very balanced way on our capital priorities, first allocating capital to our insurance in force and thinking about allocating capital to investing in the business and looking at adjacencies and lastly, making sure that we are always focused on returning capital to shareholders.

Operator, Operator

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

Mihir Bhatia, Analyst

I wanted to start with the delinquency outlook. I appreciate your insights on the supportive credit fundamentals for housing. However, I have a two-part question. First, with the headlines mentioning challenges in home prices and your comments on supply, I'm curious if, compared to six months or a year ago, you've noticed any changes in your perspective on housing credit. Are these headlines reflecting any stress for homeowners in your data? Regarding delinquencies, should we factor this into our outlook, especially since the trends seem to be following typical seasonal patterns? Additionally, considering the varying vintage sizes, it's common to see an increase of about 20 basis points in delinquencies and new notices during the third quarter. Should we anticipate a similar situation this time, or is there something to be aware of regarding the large vintage sizes entering peak loss years?

Rohit Gupta, President and CEO

Thank you for your question, Mihir. Some parts of your question might be a bit too specific for me, so I will pass it to Dean. However, let me address the two main points you mentioned. First, regarding consumers, as I mentioned earlier, we still observe a strong labor market and resilient balance sheets for our borrowers. Despite the economic uncertainty surrounding tariffs and their effects on corporations and consumers, we have not yet noticed any significant impact on our borrowers. In terms of our borrowers' resilience and our portfolio, we conduct quarterly reports that sample our insurance in force to evaluate consumer credit metrics. As of the end of the second quarter, those metrics are performing well, indicating that our borrowers are in solid condition. This is why we emphasize the strength of consumers, supported by the data on our new delinquencies and trends aligning with past seasonal patterns. While we recognize that there is stress in the nonprime sector, including credit cards, autos, and mortgages, we see good performance among our prime borrowers. The second point you raised was about regional home price declines. Referring to Dean's earlier comments, we have observed some regional home price depreciation in April and May. When viewing home prices over a three-month rolling basis, they appear flat. This slowdown in home price appreciation is similar to what we experienced in the summer of 2022, a period marked by heightened economic uncertainty and consumers being more cautious with big purchases. We still believe in the robustness of demographic trends related to housing, despite unique challenges like trade policy uncertainty and its implications for the labor market. We remain optimistic about household balance sheets and demographic trends that support our sector. Now, I will hand it over to Dean to discuss the seasonal performance trends.

Dean Mitchell, CFO

Yes, Mihir, thank you for your question. Some of my response will reflect points made by Rohit, but let me add some details. In terms of new delinquency development, our rates are aligned with pre-pandemic levels, driven by the strong labor market and wage growth that Rohit mentioned. Regarding cure performance, we are still observing elevated cures compared to expectations, largely due to the significant embedded home price appreciation in our insured portfolio. Specifically, for this quarter, we continue to see meaningful home price appreciation in the new delinquencies that are appearing. Our experience indicates that home price appreciation is an effective mitigant to loss. It increases the likelihood of curing and decreases the chances of a claim rolling over. Based on our experience, the relationship is linear; every point of embedded home price appreciation reduces the probability of rolling the claim. Naturally, more home price appreciation is better. In our earnings presentation, we provide statistics on how much of our portfolio and delinquencies have at least 10% embedded equity, which offers a substantial cushion against the softness in local markets that Rohit noted earlier.

Mihir Bhatia, Analyst

Got it. Both your comments were quite helpful. I’ll get in queue after this again, but could you provide any update on the Washington front? We hear a lot of news and tweets, but is there anything changing on the ground from a regulatory standpoint that is significantly impacting your business?

Rohit Gupta, President and CEO

Yes, Mihir. So we are very engaged on the Washington front. As I've said in previous calls, we have very strong relationships with the GSEs, FHFA and then across the housing ecosystem and with key legislators. So we continue to engage in the dialogue on all the topics being discussed. So whether it's guideline changes or any changes to the programs that exist with the GSEs as those announcements happen or as those initiatives start, we are actively engaged in making sure that we are continuing to create a housing finance system where we are supporting well-qualified consumers achieve the dream of homeownership. So as we think about specific initiatives, we can talk about any of these offline. But we are definitely in the actual working groups either directly or through trade associations. So that continues to be a productive dialogue.

Operator, Operator

The next question comes from Bose George with KBW.

Bose Thomas George, Analyst

Actually, Dean, just a quick follow-up on the comments you made about the embedded HPA this quarter. Just when you look at the trend on that the HPA on new notices, has there been a change in that over the last, say, year or so?

Dean Mitchell, CFO

Yes, thank you for the question. Overall, HPA has definitely slowed down, and in some markets, it has even declined. We have noticed a slowdown over the last 12 to 18 months. However, when we look at the total new delinquencies reported in the current quarter, it remains substantial. We believe it still serves as a significant mitigant to the likelihood of ultimately going to claim.

Bose Thomas George, Analyst

Okay. Great. And then actually, in terms of the default to claim, can you talk about the sort of the actual default to claim levels that you're seeing relative to that 9% that you're going to book it on new notices?

Dean Mitchell, CFO

Yes. So you correctly referenced, we do have a 9% claim rate on new delinquencies. I think we've stated this in the past, Bose, that, that 9% claim rate really isn't aligned with current performance trends. It's more a nod to the fact that we're operating in an environment of heightened economic uncertainty, and that uncertainty could ultimately impact the performance trajectory of delinquencies rolling the claim on a go-forward basis. That uncertainty has ebbed and flowed through time. But I still think today, we're operating with a high degree of uncertainty in the current environment. I think from a performance perspective, obviously, we've seen performance meaningfully better than that 9% claim rate. It's really been the underpinning of the reserve releases that we did in the current quarter, obviously, $48 million in the second quarter. But also if you look back over the course of the last 3 years, there's about roughly $250 million of annual reserve release over those 3 years. So we continue to see performance better than 9%, but we still believe the 9% is prudent in line with our prudent and measured approach to reserving, and appropriate for the here and now. What would change that going forward, Bose, is us looking at the future macroeconomic environment and saying that uncertainty has abated. That would cause us to come back and take a look at the appropriateness of that 9% and potentially make a change.

Operator, Operator

This concludes the question-and-answer session. I'd now like to turn the call back to Rohit Gupta for closing remarks.

Rohit Gupta, President and CEO

Thank you, Kathy, and thank you, everyone. We appreciate your interest in Enact, and I look forward to seeing many of you at the virtual JPM Future of Financials Forum on August 13. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.