Enact Holdings, Inc.

Hello and welcome to ENAC's 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 Cole, Vice President of Investor Relations. You may begin.

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. ANAC 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 return 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 US housing market. Against this backdrop, our capital position and credit performance remain key strengths. At quarter end, We reported PMIR 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, Anacri continues to build momentum as we participate in single and multifamily GSE CRT transactions. Anacri 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 return 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, ANAC 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 GFCs, 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.

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 two points sequentially and down one 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 seeded premiums. Our base premium rate of 39.8 basis points was down .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 at 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 to 225 million excluding reorganization costs. We continue to operate from a strong capital and liquidity position reinforced by our robust PMIRS sufficiency and the successful execution of our diversified CRT program. PMIRS sufficiency was 165% or $2 billion above PMIRS requirements at the end of the second quarter. As of June 30, 2025, Our third party CRT program provides 1.9 billion of PMIRES capital credit. Let me now turn to capital allocation. During the quarter, we paid out 31 million or 21 cents per share through our quarterly dividend. Today, we announced the third quarter dividend of 21 cents per common share payable September 8th. In addition, we bought 2.4 million shares for $85 million in the second quarter of 2025. Through July 25th, we purchased 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.

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.

Thank you. At this time, we'll conduct the question and answer session. To ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. The first question comes from the line of Doug Carter with UBS. Your line is now open.

Thanks, and good morning. I was hoping you could talk about the seasoning of the recent origination vintages and how you think some of the regional home price weakness might affect the seasoning of those newer vintages.

Good morning, 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 decline.

Yeah, so, Doug, good morning. You know, just lifting up real quick, I'd say overall credit performance remains very strong through the second quarter. Lots of reasons for that. You know, meaningful embedded HPA across our insured portfolio is certainly one of the reasons, but also we're operating in a pretty resilient economy. And the U.S. consumer remains pretty strong, whether it's employment, wage growth, balance sheet, and the like. So credit, you know, that backdrop of credit performance being strong, I think, should color any evaluation of loss performance for the quarter. I think in terms of geographies, certainly at a national level, very similar to what I said in terms of credit performance, very good performance. Home inventories remain healthy with housing supply. Think at about four and a half months, that's below the six month level that we consider as an equilibrium. I would say there are some markets where inventories have risen and created some softness in a particular market. I think the most notable example, given the Wall Street Journal article from a couple of weeks ago, is Cape Coral, where inventories have risen sharply and supply is outpacing demand. I think in this particular instance, Cape Coral makes up a very small part of our overall portfolio, but maybe thinking about that more broadly, you know, in geographies where supply has grown or is trending higher, we adjust our pricing to reflect the impact of not just current home prices, but future home prices into our pricing equation. Our risk-based pricing approach applies what we believe is the right price for the right risk for both credit attributes and macroeconomic assumptions, including future home prices, again, embedded into our pricing levels given our assessment of any particular market.

And, Doug, I would just add to Dean's comment, 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 depreciation versus a 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.

Great. I appreciate that. Thank you.

Thanks, Doug.

Thank you. Thank you. Our next question comes to the line of Rick Shane with JP Morgan. Your line is now open.

Good morning, guys. Thanks for taking my question. 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 and You know, we're now halfway through 2025 and, you know, 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's 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.

Yeah, good morning, Rick, and 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. uh my market size in 2024 just for context was around 300 billion dollars uh our view uh 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 uh have probably suppressed uh 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 two things that we are keeping an eye on, definitely mortgage rates, because that drives consumer affordability. So when mortgage rates are hovering close to seven percent for a thirty 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. short answer, relatively similar levels to 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 abates. 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?

Yeah, 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, 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-enforced 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.

Great. Thank you so much for taking my questions this morning.

Thank you, Rick.

Thank you. Your next question comes to the line of Mihir Bhatia with Bank of America. Your line is now open.

Hi, good morning, and thank you for taking my question. I wanted to just start with the delinquency outlook. I appreciate what you said about the credit fundamentals for housing credit still appear to be quite supportive, but maybe a two-part question there. The first is, Are you seeing, you know, the headlines obviously talk a little bit more about home prices not being so great, and you talked a little bit about supply, but I guess compared to six months ago or a year ago, are you seeing any kind of change? Has your view on housing credit changed? Is the headlines that we are seeing actually showing up in your data in any way in terms of stress for homeowners? So as we think about the outlook for delinquencies, is that something we should keep in mind? Because it looks like things have just been moving with typical seasonality. And on that point, just given the different vintage sizes, typically you see an increase of about 20 basis points in delinquencies, I think in new notices in the third quarter. Should we expect something similar here, or is there something going on with the large vintage sizes entering peak loss years that we should keep in mind? Thank you.

Good morning, Mayor, and thank you for your question. Some of the last part of your question might be too precise for me, so I'll hand it off to Dean. But let me start on kind of how we think about the two main points you talked about. First thing I would start off with just is consumers. And I would say, as I said in my prepared remarks, we still see the labor market being strong and balance sheets for our borrowers continue to be resilient in this environment. While there's uncertainty in the economy about impact of tariffs on corporations and consumers, we have not seen any meaningful impact of that on our borrowers yet. And just in terms of how we think about resiliency of our borrower in our portfolio, we actually run reports on a quarterly basis, taking a sample of our insurance in force to see what we think of consumer credit grid. And at the end of second quarter, we continue to see that metric actually perform well. So that tells us that right now our border on our insurance and force is in good shape. So that's why when you listen to our comments on consumers being strong, that's what's driving it. In addition to the data we shared on our new delinquencies and our new delinquency trends being in line with our seasonal trends, I would say I'm very focused on talking about our borrowers because we do acknowledge that in non-prime space, we have seen stress in different asset classes all the way from credit cards to autos and even mortgages. But in the prime space, in the conventional space and our borrowers, we continue to see good performance. The second thing you talked about was regional home price decline. So to Dean's previous comments, I would say we have seen some regional home price depreciation in April and May. So if you think about a rolling kind of home price trend on a three-month basis, you see flat home prices. But again, if you think about this slowdown from an HPA perspective, it's very comparable to what we saw in summer of 2022. which was also a time where we saw economic uncertainty being heightened and consumers being actually more mindful of making big purchases. We still believe that demographic trend from a housing perspective is robust, and there are definitely certain unique factors today, trade policy uncertainty and any implications of that on labor market. But we continue to be optimistic about household balance sheets and demographic trends that are supportive of our sector. Now, let me turn it over to Dean on the seasonal trends on performance.

Yeah. So, Mihir, thanks for the question. And some of this is going to echo points that Rohit made, but let me see if I can add some color. First of all, just in terms of new delinquency development, our new DELC rates, are very consistent with prevent pandemic levels. I think that's driven by that strong labor market wage growth and the like that Rohit made reference to. And then from a cure performance, we continue to see elevated cures relative to expectations. I think that's driven largely by the meaningful amount of embedded HPA across our insured portfolio. You know, just in terms of what we're seeing maybe more recently in terms of new delinquency accident quarters and speaking about this particular quarter itself, we continue to see meaningful embedded home price appreciation on new delinquencies that are developing this quarter. You know, our performance experience shows that HPA is a significant mitigant to loss. It increases the probability to cure. It reduces the probability of rolling the claim. And HPA, again, based on our experience, the impact of that is really linear. So every point of embedded HPA helps to reduce the probability of ultimately rolling the claim. Obviously, more is better. Higher is better. We do put some stats in our earnings presentation about how much of our portfolio and how much of our delinquencies have at least 10 percent embedded equity in their respective portfolios. And I think that's just a nice amount of cushion to protect against some of the softness that's developing in local markets that Rohit made reference to earlier.

Got it. Both your comments were quite helpful there, so thank you for that. Maybe just, I'll get in queue after this again, but maybe just any update on the Washington front. Obviously we hear a lot of, I guess, a lot of news, a lot of tweets, but anything on the ground changing from a regulatory standpoint that's impacting your business in a meaningful way? Thank you.

Uh, yeah, so we are very engaged on the Washington front. As I've said in previous calls, we have very strong relationships with the 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.

Thank you. Thanks for taking my questions.

Thank you.

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone.

The next question comes from Bose George with KBW.

Your line is now open.

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

Yeah, I think it's – Bose, thanks for the question. I mean, it's definitely – HBA overall has slowed. And in some markets, as we've been talking about, it's declined. So you have seen some slowing, let's say, over the last 12 to maybe even 18 months. At the same time, when you look at it in the aggregate over the course or over the total of the new delinquencies that were reported in the current quarter, it's still substantial. And still, we believe, serves as a meaningful mitigate to the probability of ultimately going to claim.

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

Yeah. 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, you know, ultimately impact the performance trajectory of delinquencies rolling to claim on a go-forward basis. You know, that uncertainty has ebbed and flowed through time, but I still think today you know, we're operating with a high degree of uncertainty in the current environment. You know, 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 three years, there's about roughly 250 million of annual reserve release over those three 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 go 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 that appropriateness of that 9% and potentially make a change.

Okay, great. Thanks a lot. Thanks, both.

Thanks, both.

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

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

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