Earnings Call Transcript - ACT Q4 2025

Operator, Operator

Hello, and thank you for joining us. Welcome to Enact's Fourth Quarter 2025 Earnings Conference Call. I will now hand the call over to Daniel Kohl. Please proceed.

Daniel Kohl, Executive

Thank you, and good morning. Welcome to our fourth 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 the 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, CEO

Thank you, Daniel. Good morning, everyone. Enact delivered a very strong finish to 2025 that reflected the disciplined execution of our strategy, robust credit performance and our commitment to shareholder value creation. For the full year, we reported adjusted operating income of $688 million or $4.61 per diluted share. We returned over $500 million of capital to shareholders and the year-end adjusted book value per share increased 11% to $37.87. Before discussing the quarter, I want to take a moment to highlight some of our accomplishments in 2025. In a complex housing environment, we helped over 134,000 borrowers buy a home and over 16,000 borrowers keep their home. We continue to innovate our risk selection and pricing capabilities, leveraging advanced modeling and machine learning to deploy the latest version of our pricing engine, Rate360. We generated $52 billion of new insurance written and ended the year with record insurance in-force of $273 billion. We maintained our commitment to expense discipline with full year operating expenses at $217 million, excluding restructuring charges. We delivered record levels of capital returns to our shareholders, and we enhanced our financial flexibility by entering a new $435 million revolving credit facility and protected our forward books at attractive cost of capital through new CRT deals. Our execution continued to be recognized by the market, evidenced by receiving multiple credit ratings upgrades. Finally, Enact received multiple industry and local awards, a testament to our commitment to excellence and providing an exceptional employee experience. Taken together, these accomplishments underscore the progress we made in 2025 and reinforce our confidence in Enact's long-term strategy. Turning to our fourth quarter results. We reported adjusted operating income of $179 million or $1.23 per diluted share, while adjusted return on equity was 13.5%, and we generated robust new insurance written of over $14 billion, driven by an increase in refinance originations as mortgage rates declined. However, 59% of loans in our book have rates below 6%, providing support for continued elevated persistency. The long-term drivers of housing demand remain strong, and we are confident that mortgage insurance will continue to play an essential role for both buyers and lenders. Pricing remained constructive in the quarter, and our dynamic risk-adjusted pricing engine, Rate360 is enabling us to prudently price risk with discipline as market conditions continue to evolve. Our insurance in-force portfolio remains resilient with risk-weighted average FICO score of 746. The risk-weighted average loan-to-value ratio was 93% and layered risk was 1.2% of risk in-force. Cure performance continues to outperform our expectations, driven by favorable credit performance and effective loss mitigation efforts. This resulted in a net reserve release of $60 million in the quarter, partially driven by a claim rate reduction from 9% to 8%. Dean will touch more on this shortly. We also continue to advance our capital allocation priorities of supporting existing policyholders by maintaining a strong balance sheet, investing in our business to drive organic growth and efficiencies, funding attractive new business opportunities and returning excess capital to shareholders. At the end of the quarter, our PMIERs sufficiency ratio was 162%, providing significant financial flexibility and our credit and investment portfolios are in excellent shape. Our strong capital position is further reinforced by the effective implementation of our CRT program and the backing of our credit facility. We continue to make steady progress against our strategic initiatives, advancing innovation in the MI business and continuing to expand into attractive adjacencies. Enact Re continued to perform well and participated in attractive GSE single and multifamily deals in the quarter while maintaining strong underwriting standards and generating attractive risk-adjusted returns. Enact Re remains a long-term growth opportunity that is both capital and expense efficient. Finally, as it relates to capital returns, during the fourth quarter, we returned $157 million to shareholders through share repurchases and dividends. We remain committed to our capital allocation priorities, and we are pleased to announce our 2026 capital return expectations of approximately $500 million. Additionally, we issued a press release last night announcing that our Board of Directors authorized a new share repurchase program that is the largest in Enact's history. In closing, we believe we are well positioned to continue navigating the uncertain macro environment, supporting our customers and delivering sustainable value for shareholders, none of which would be possible without the hard work and talent of our employees, and I would like to take a moment to thank them for their continued efforts and contributions. With that, I will now hand the call over to Dean.

Dean Mitchell, CFO

Thanks, Rohit, and good morning, everyone. We are pleased with the very strong results we delivered in the fourth quarter of 2025, which concluded an excellent year for Enact. Adjusted operating income was $179 million or $1.23 per diluted share compared to $1.09 per diluted share in the same period last year and $1.12 per diluted share in the third quarter of 2025. Adjusted operating return on equity was 13.5%. For the full year, adjusted operating income totaled $688 million or $4.61 per diluted share compared to $718 million or $4.56 per diluted share in 2024. A detailed reconciliation of GAAP net income to adjusted operating income can be found in our earnings release. Turning to the fourth quarter. New insurance written was $14 billion for the fourth quarter, up 2% sequentially and up 8% year-over-year. This new business is well priced, has a strong credit risk profile and is comprised of loans that are well underwritten to prudent market standards. Persistency was 80% in the fourth quarter, down 3 points sequentially and down 2 points year-over-year on lower prevailing mortgage rates. While mortgage rates have fallen recently, only 22% of our mortgages in our portfolio have rates at least 50 basis points above December's average of 6.2%, providing support for continued elevated persistency. The combination of solid new insurance written and lower but still elevated persistency drove primary insurance in-force of $273 billion in the fourth quarter, up $1 billion from the third quarter of 2025 and $4 billion or approximately 1% year-over-year. Total net premiums earned were $246 million, up $1 million sequentially and flat year-over-year. Our base premium rate of 39.6 basis points was down 0.1 basis point sequentially, in line with our expectations. As a reminder, our base premium rate is impacted by several factors and tends to modestly fluctuate from quarter-to-quarter. Given our current expectations for the MI market size and mortgage rates, we anticipate our base premium rate in 2026 to be relatively flat versus 2025. Our net earned premium rate was 34.8 basis points, down slightly sequentially, driven by higher ceded premiums. Investment income in the fourth quarter was $69 million, flat sequentially and up $6 million or 10% year-over-year. Our new money investment yield of approximately 5% contributed to an increase in the weighted average portfolio book yield of 4.4% for the quarter. 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. We continue to see strong loss performance across our overall portfolio. New delinquencies increased sequentially to 13,700 in the quarter from 13,000 in the third quarter of 2025, in line with expected seasonal trends. Our new delinquency rate for the quarter remained consistent with pre-pandemic levels at 1.5%, an increase of 10 basis points from the third quarter of 2025 and flat versus the fourth quarter of 2024. Total delinquencies in the fourth quarter increased sequentially to 24,900 from 23,400 as new delinquencies outpaced cures and the delinquency rate increased 10 basis points sequentially to 2.6%. Losses in the fourth quarter of 2025 were $18 million, and the loss ratio was 7% compared to $36 million and 15%, respectively, in the third quarter of 2025 and $24 million and 10%, respectively, in the fourth quarter of 2024. We reduced our claim rate in the quarter for new and recent delinquencies from 9% to 8% after factoring in the continued strong cure performance sustained throughout 2025. We believe the 8% claim rate is well aligned with the current macroeconomic uncertainties and remains consistent with our measured and prudent reserve philosophy. The net reserve release of $60 million in the fourth quarter was driven by favorable cure performance, our loss mitigation activities and the reduction in our claim rate assumption. This compares to reserve releases of $45 million and $56 million in the third quarter of 2025 and fourth quarter of 2024, respectively. We maintain our focus on disciplined cost management in 2025. Operating expenses for the fourth quarter of 2025 were $59 million, and the expense ratio was 24% compared to $53 million and 22%, respectively, in the third quarter of 2025 and $57 million and 24%, respectively, in the fourth quarter of 2024. For the full year, our operating expenses of $218 million or $217 million, excluding reorganization costs, were favorable to our updated guidance of approximately $219 million. For 2026, we anticipate an operating expense range of $215 million to $220 million, excluding any reorganization costs as we continue to prudently manage our expense base, balancing our continued focus to drive further efficiencies in our business while also investing in our growth initiatives. 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. Our PMIERs sufficiency was 162% or $1.9 billion above PMIERs requirements at the end of the fourth quarter. And as of December 31, 2025, our third-party CRT program provides $1.9 billion of PMIERs capital credit. Turning now to capital allocation. During the quarter, we paid out $30 million or $0.21 per share through our quarterly dividend, and we bought back 3.4 million shares at an average price of $37.66 for a total of $127 million. For the full year 2025, we returned $503 million to shareholders. $121 million through our quarterly dividends, and we repurchased 10.5 million shares at an average price of $36.25 for a total of $382 million. Through January 30, we have repurchased an additional 0.8 million shares for $31 million. For 2026, we expect capital returns of approximately $500 million. As in the past, the ultimate amount and form of capital return to shareholders will be dependent on business performance, market conditions and regulatory approvals. As we announced yesterday, the Board has authorized a new $500 million share repurchase program and declared a quarterly dividend of $0.21 per common share payable March 19. Overall, we are pleased with our performance in 2025, and we believe we are well positioned for another strong year in 2026. 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 to Rohit.

Rohit Gupta, CEO

Thanks, Dean. Looking ahead to 2026, our strong balance sheet, the portfolio's significant embedded equity and our disciplined operating approach position us to effectively navigate uncertainty and capitalize on long-term opportunities. Additionally, demographic tailwinds, particularly among first-time homebuyers, support long-term demand for housing and for private mortgage insurance. Finally, as housing affordability and supply constraints shape policy discussions, we continue to actively engage with our lending partners, the GSEs, the FHFA and the administration and believe we remain well positioned to navigate and adapt to an evolving policy environment. We remain committed to helping people responsibly achieve the dream of homeownership and deliver long-term value for all our stakeholders. Operator, we are now ready for Q&A.

Operator, Operator

Our first question comes from Doug Harter at UBS.

Doug Harter, Analyst

Appreciate the guidance on the capital return. In the past couple of years, you were able to exceed your initial capital return goal. Like how do you think about the sensitivities to that capital return goal for 2026? And what could cause that to come in better? Or what would be the factors that might cause you to need to slow it down?

Dean Mitchell, CFO

Yes, Doug, it's Dean. Thanks for the question. As we mentioned in our prepared remarks, we set a capital return guidance for the beginning of the year. We are very confident in delivering $500 million back to shareholders. However, we will continue to assess the dynamics in the marketplace, particularly our business performance and growth, as well as loss performance during 2026. We will also consider the macroeconomic environment, including the uncertainties that exist today. While we still feel confident in our ability to return $500 million, we will monitor how these factors evolve throughout the year, as they may have an impact. Additionally, we will look at the regulatory environment, including any developments related to PMIERs or state regulations, to determine if we need to adjust our planned $500 million capital return in 2026. For now, given these considerations, we are confident in our capacity to return $500 million to shareholders in 2026.

Operator, Operator

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

Mihir Bhatia, Analyst

I wanted to start actually where you ended that last answer, Dean, just about regulatory environment. Obviously, I think everyone has been hearing about a potential for an FHA rate cut, affordability agenda and other such things. Are there a few things that you guys are particularly paying attention to from a regulatory or government action standpoint that maybe are worth highlighting for investors that we should just keep an eye out for?

Rohit Gupta, CEO

Mihir, thank you for the question. This is Rohit. I would say we remain actively engaged with the new administration, and that includes treasury, FHFA, the GSEs as well as policymakers. And our focus continues to be on the topics that are in discussions. So on the most macro basis, we are talking about limited inventory challenges as well as affordability challenges. So as ideas come up, we actually provide our input on the pros and cons of those ideas, but also equally important in our market, we provide input on implementation of those ideas and what that entails. So the ideas like credit scores come up, what are the pros and cons of different credit score ideas, all the way to some of the recent ideas that are being discussed on the announcement of GSEs buying mortgage-backed securities, and on institutional investors buying single-family homes. So I would say those ideas are more in the water table as already announced. Any future ideas that come up, and there's a list of ideas that you mentioned that are in discussion, we are actively engaged on all those places. I wouldn't call out any specific idea which is high up on the list from an execution perspective. I think it's just a list of ideas right now. So that's how I would frame it.

Mihir Bhatia, Analyst

Okay. And then maybe just like a little bit more just from 2026 thoughts. What type of mortgage market are you planning for in 2026? What does that mean for NIW or insurance in-force? I think you talked about premium rate and OpEx, but just like what are you assuming for the mortgage market and NIW in that scenario?

Rohit Gupta, CEO

Thank you for the question. In this environment, with significant fluctuations in rates, especially mortgage rates, it's challenging to predict originations. That said, we analyze external forecasts to understand overall market originations and specifically look at purchase originations. Our assessment indicates that over 90% of the MI market size in 2025 will be from purchase origination. For 2026, various sources like Fannie Mae, MBA, and Moody's suggest an increase in purchase originations ranging from 8% to 24%. Based on these forecasts, we estimate a potential increase of about 10% to 15% in the mortgage insurance market from 2025 to 2026. This estimate relies on our current expectations for mortgage rates and affordability, but we recognize that the market remains fluid. As conditions change, we will revisit and adjust our forecast accordingly. At this time, this represents our most current outlook.

Mihir Bhatia, Analyst

Right. No, that's quite helpful. And just one last one for me, and then I'll get back in queue. Just on default rates, where do you think they trend from here? Is it just like you read stability and seasonality from here? Anything we should be keeping in mind, whether from a vintage seasoning, vintage size type of view?

Dean Mitchell, CFO

Yes, Mihir, it's Dean again. From a delinquency rate standpoint, we're observing expected trends. As the book years progress in their loss development patterns, newer portfolios are aging into higher delinquency rates, contributing more delinquencies overall. The portfolio's weighted average is now around 4.1 years, which is approaching the plateau in typical loss development patterns. Heading into 2026, we're seeing a slowdown in new delinquencies, aligning with our forecasts. The transition from 2023 to 2024 had a mid-teen increase in new delinquencies, while from 2024 to 2025, it dropped to mid-single digits, matching our expectations. Looking ahead from 2025 to 2026, we might see a continued moderation, with a slight year-over-year increase in new delinquencies, but at a reduced level—keeping in mind that the incremental increase was only 2,000 delinquencies, indicating we're working with relatively small figures.

Operator, Operator

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

Rick Shane, Analyst

Look, in some ways, you guys have 2 books. You have the sort of pre-'22 legacy book with credit that's going to be sort of best in a generation. You have a subsequent book that I think is evolving to be in line to better with your sort of underwritten expectations. As you look at the second part of that book, the front book, I am curious if you can sort of put credit performance in some terms versus your expectations, how are things tracking? But specifically, are there things that you are seeing within certain cohorts, whether it's DTI, LTV, geography that are stand out in terms of elevated risks?

Dean Mitchell, CFO

Yes, Rick, it's Dean. Thanks for the question. When we look at vintage performance, I want to mention that all of our recent book years have been performing as expected or even better than our pricing expectations. Specifically, from 2022 to 2024, these newer books have primarily been created in a purchase market, which tends to carry higher risk characteristics, including slightly higher loan-to-value and debt-to-income ratios compared to the refinance market. They have also experienced modest home price appreciation, and in some areas, even depreciation, when compared to earlier book years. We account for these factors in our pricing strategy. We set our prices based on our assessment of risk and our predictions about future home values, aiming to achieve an appealing return on equity. So far, the performance of new vintages aligns with the pricing expectations established at the time of policy inception. We continue to believe we are bringing in the right risk at the right price across all vintages based on the performance observed so far. Naturally, there are variations in risk attributes and geography, which we incorporate into our pricing. However, we have not encountered any results that deviate negatively from our expectations.

Rick Shane, Analyst

Got it. Is there anything going forward that you can share, understanding the need to be cautious about competitive factors? Are there any areas where you are being more careful regarding risk?

Dean Mitchell, CFO

Yes, we prefer not to disclose our pricing structure. However, there are some expected trends. Certain regions, particularly in the Sunbelt like Florida, Texas, California, and Arizona, have seen an increase in housing supply, leading to a moderation or decline in home prices. This contrasts with the Northeast, where low housing supply has resulted in meaningful appreciation of home prices. We are actively monitoring these housing markets to evaluate affordability and supply-demand dynamics, which will inform our approach to managing risk appropriately.

Rohit Gupta, CEO

And Rick, just to add to Dean's point, we have talked about this in the past and also mentioned it in our prepared remarks on the call. We have very deep analytics and a lot of capabilities even from a forecasting perspective to incorporate those views in our pricing, and we have the ability to make those pricing changes on a very frequent basis when we think those are appropriate. So to Dean's point, not only historically speaking, but also looking forward, we continue to incorporate that view of risk, performance, geographic differences or risk attributes at a loan level into our pricing. And now we have the mechanism to charge that price at a very granular level.

Operator, Operator

Our next question comes from the line of Bose George with KBW.

Bose George, Analyst

Actually, on expenses, you guys continue to do a good job there, kept it flat now for a few years and it seems to be the case again in '26. Is technology the main driver? And then longer term, could we see the expense ratio continue to decline as expenses stay flattish or at least increase by less than revenues?

Rohit Gupta, CEO

Thank you for your question, Bose. From an expense standpoint, you are correct that we have maintained flat expenses over the past couple of years. Since our IPO, our expenses have likely decreased by over $30 million annually. We continue to invest in technology and innovation to drive improvements across our business, enhance productivity, improve customer experience, and facilitate smarter decision-making. As we project our expenses for 2025 to come in below our original guidance, this is a result of realizing the benefits from our investments, and we expect to see similar trends in 2026. Providing long-term guidance on our expense ratio is more challenging. Our goal is to be prudent in managing expenses, and we aim to improve our expense ratio by growing our premiums through a larger, more profitable book while achieving efficiencies within the business. However, forecasting how premiums and expenses will evolve beyond 2026 is difficult. Directionally, you are correct, and as we move through 2026 and into 2027, we will offer updated guidance.

Bose George, Analyst

Okay. Great. And then just on the reinsurance transactions that you guys did, can you just talk about the attachment and detachment points? And then how is the pricing on that market, just the trend in pricing?

Dean Mitchell, CFO

Yes, let me start with the pricing and then discuss the nature of the agreement. We're experiencing significant demand in the traditional reinsurance market for mortgage credit default risk, which has positively impacted the terms of our recent reinsurance transactions, including coverage we've secured for both the 2026 book and the upcoming 2027 book. We've usually mentioned a cost of capital in the low to mid-single digits. Before these transactions, we were likely at the higher end of that range, but now, in our most recent deals, we are at the lower end of that spectrum. Regarding attachment and detachment, our goal with our CRT program and transactions is twofold: to provide cost-efficient capital relief and to protect the balance sheet from volatility. For our XOLs, this means we secure coverage within the PMIERs tier, typically attaching around 3%. While it may not always be exactly 3% of our risk in-force, it generally falls within that range, and we detach within PMIERs, which typically has requirements around 7% for new business. So, you can see how our transactions have developed over time, but generally, our attachment and detachment are around the points I just mentioned.

Operator, Operator

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Rohit for closing remarks.

Rohit Gupta, CEO

Thank you, Towanda, and thank you, everyone. We appreciate your interest in Enact, and I look forward to seeing many of you this quarter in Florida at UBS' Financial Services Conference on February 9 and at Bank of America's Financial Conference on February 10. We also plan to attend the RBC Capital Markets Global Financial Institutions Conference in New York on March 11. With that, we will wrap up the call. Thank you.

Operator, Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.