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

Hello, and welcome to Enact's Second Quarter Earnings 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 Finance. 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 Hardin 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. Before assessing our second quarter results, I would like to begin by saying that our thoughts are with Tom McInerney, who is a valued member of our Board and strong support of Enact. We wish Tom a full and speedy recovery. I also want to express my support for Jerome Muffin as he steps into the role of Interim President and CEO of Genworth. Jerome has been an important member of Genworth's leadership team as well as Enact's Board of Directors for many years. and I'm confident he will provide thoughtful and steady leadership during this time, and I look forward to our continued partnership. Turning to our results. Enact closed the first half of 2026 with another strong quarter, reflecting the disciplined execution of our strategy, resilient credit performance and our continued focus on long-term sustainable value creation. As a result of our strong performance, we are updating our 2026 capital return expectations to between $550 million and $600 million, up from our prior guidance of $500 million. I will discuss this in more detail shortly. For the second quarter, we reported adjusted operating income of $177 million or $1.06 per diluted share. Adjusted return on equity was 13%, and we generated strong new insurance written of $15 billion, resulting in insurance in force of $274 million. The macro and housing environment remain dynamic as elevated interest rates, geopolitical developments and policy uncertainty continued to contribute to market volatility. At the same time, the U.S. economy was resilient, supported by a healthy labor market and generally stable household balance sheet. Within housing, underlying demand fundamentals are strong and while higher mortgage rates continue to temper overall transaction volumes, purchase application activity benefited from the spring selling season. From a credit perspective, our portfolio is performing well, with recent books performing in line with our expectations. Consistency remained elevated at 80% during the quarter. This is supported by the rate environment with approximately 57% of loans in our portfolio getting mortgage rates below 6%. Looking ahead, we continue to believe the long-term fundamentals supporting the housing market remain intact. -- and we are confident that private mortgage insurance will continue to play a critical role in responsibly expanding access through sustainable homeownership while creating attractive opportunities for Enact. Our insurance in force portfolio remains resilient with a risk-weighted average credit score of 746 and a risk-weighted average loan-to-value ratio of 93%. Layered risk was 1.1% of risk in folks. Pricing remained constructive in the quarter while our participation was strong and our dynamic risk-adjusted pricing engine is enabling us to prudently target the right risk at the right price on a granular level as market conditions evolve. As we continue to leverage technology to enable better risk selection and improve operational efficiency, we are pleased to announce that in addition to our pricing engine, we recently launched our Enact Loan Level Assistant or ELLA. This new tool is our internal underwriting innovation that applies generative AI to help underwriters make smarter underwriting decisions. By reviewing loan documents, identifying inconsistencies and surfacing relevant insights more efficiently and our reduces repetitive thought, improves risk selection and allows our underwriters to spend more time applying their expertise to making underwriting decisions. While it's still early is launch, adoption has grown rapidly, and we believe ELLA will create a strong foundation for future efficiency improvement. Turning to losses. New delinquencies were down 9% and cures were down 9% sequentially, consistent with seasonal trends and total delinquencies declined 1%. Our strong Q performance was driven by favorable credit trends and effective loss mitigation efforts. This drove a reserve release of $37 million in the quarter, resulting in a loss ratio of 14%. Credit performance remains strong, and we are well reserved across a range of scenarios. We delivered another quarter of prudent expense management with operating expenses down year-over-year despite the inflationary environment. Dean will discuss the key drivers of this strong performance and our improved expectations for 2026. We continue to execute against our capital allocation priority maintaining a strong resilient balance sheet to support existing policyholders, investing to drive organic growth and operating efficiencies, funding attractive new business opportunities such as Enact and returning excess capital to shareholders. At the end of the quarter, our PMIERs sufficiency ratio was 151%, providing significant financial flexibility and our credit and investment portfolios were in excellent shape. Our strong capital position is further reinforced by our CRT program and the backing of our undrawn credit facility. We also continue to execute on our growth and diversification strategy. Enact delivered another quarter of strong performance, generating attractive risk-adjusted returns while remaining both capital and expense efficient. Finally, our strong performance supports continued robust returns to shareholders. During the quarter, we returned $127 million through share repurchases and dividends. As I mentioned, we have now increased our capital return expectations to between $550 million to $600 million for 2026. This upward revision reflects our commitment to returning excess capital to shareholders while maintaining a strong balance sheet. I'd now like to take a moment to recognize our culture and our people. For the fourth time since our IPO, Enact was recognized as one of the best places to work by the Triangle Business Journal. We have always taken pride in fostering an environment where teams can do their best work for our customers and stakeholders and are pleased to have received this recognition again. Turning to recent housing policy announcements. As I mentioned last quarter, Enact supports the FHFA and GSE's ongoing efforts to modernize credit evaluation in ways that responsibly expand access to sustainable homeownership. During the quarter, we began participating in the market's limited rollout of VantageScore 4, although its financial impact during the quarter was immaterial. We remain committed to supporting our customers and staying operationally aligned as initiatives are implemented and scaled in the market. Overall, we had a great first half of 2026 that positions an Enact for long-term success. With that, I will now hand the call over to Dean.

Thanks, Rohit, and good morning, everyone. We delivered another strong quarter of performance. Adjusted operating income was $177 million or $1.26 per diluted share compared to $1.15 per diluted share in the same period last year and $1.21 per diluted share in the first quarter of 2026. Adjusted operating return on equity was 13.2%. 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 $15 billion in the quarter, up 19% sequentially and up 15% year-over-year as rates remained elevated and seasonal dynamics played out across the period. Persistency was 80% in the quarter, flat sequentially and down 2 points year-over-year on lower prevailing mortgage rates. While rates increased over the quarter, our portfolio remains resilient with 12% of our mortgages in our portfolio having rates at least 50 basis points above June's average of 6.5%. At the same time, 57% of loans in our portfolio carry rates below 6%. Primary insurance in force was $274 billion in the quarter, up $1 billion or approximately 1% from the first quarter of 2026 and up $4 billion or approximately 2% year-over-year. Total net premiums earned were $245 million, up $2 million sequentially and flat year-over-year. The sequential increase is primarily driven by premium growth from attractive adjacencies and growth in primary insurance in force. Our base premium rate of 39.1 basis points was down 0.3 basis points sequentially. As a reminder, our base premium rate is impacted by several factors, including macro factors driving refinancing activity and tends to modestly fluctuate from quarter-to-quarter. Our net earned premium rate was 34.1 basis points, down 0.2 basis points sequentially and aligned with the decrease in base premium rate. Investment income in the second quarter was $73 million, up $2 million or 3% sequentially and up $7 million or 11% year-over-year. Our new money investment yield was over 5% and contributed to an increase in the average portfolio book yield to 4.6% 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. During the credit, we continue to see strong loss performance across our portfolio. New delinquencies decreased sequentially to 12,300 in the quarter from 13,500 in the first quarter of 2026, in line with expected seasonal trends. Our new delinquency rate for the quarter remained consistent with prepandemic levels at 1.3%, down 20 basis points from the first quarter of 2026 and an increase of 10 basis points from the second quarter of 2025. Our rate decreased 4 percentage points sequentially to 50% in line with seasonal trends and remains elevated. We maintained our claim rate on delinquencies at 8%. Total delinquencies in the second quarter decreased sequentially to 24,300 from 24,700 and the delinquency rate was flat sequentially at 2.6%. Losses in the second quarter of 2026 were $33 million, and the loss ratio was 14% compared to $37 million and 15% in the first quarter of 2026 and $25 million and 10% in the second quarter of 2025. The current quarter reserve release of $37 million from favorable share performance and loss mitigation activity compares to a reserve release of $39 million in the first quarter of 2026 and $48 million in the second quarter of 2025. Operating expenses in the second quarter of 2026 were $52 million, and the expense ratio was 21% compared to $49 million and 20% in the first quarter of 2026 and $53 million and 22% in the second quarter of 2025. In the second quarter of 2026, we took actions that resulted in a $1 million reorganization charge that is excluded from our adjusted operating income. Based on first half performance and full year 2026 outlook, we now forecast 2026 expenses, excluding reorganization costs to be in the range of $205 million to $210 million. We continue to operate from a strong capital and liquidity position, underpinned by our robust PMIER sufficiency and the successful execution of our diversified CRT program. Our PMIER sufficiency was 151% or $1.9 billion above PMIERs requirements, and our third-party CRT program, provides $1.5 billion of PMIERs capital credit at the end of the quarter. Turning now to capital allocation. During the quarter, we paid out approximately $34 million or $0.24 per share through our quarterly dividend and bought back 2.2 million shares at an average price of $42.58 for $93 million. Through July 31, we've repurchased an additional 0.7 million shares for $30 million. Today, we announced the third quarter dividend of $0.24 per common share payable September 17, 2026. As Rohit mentioned earlier, we're increasing our 2026 total capital return guidance to be in the range of $550 million to $600 million, reflecting our continued strong financial position and confidence in our business. As in the past, the final amount in form of capital return to shareholders will ultimately depend on business performance, market conditions and regulatory approvals. Overall, we are pleased with our performance through the first half of the year. As we look ahead, our disciplined approach to risk management, strong balance sheet and financial flexibility position us well to navigate the evolving environment while continuing to deliver value to our shareholders. With that, let me turn the call back to Rohit.

Thanks, Dean. Enact is positioned to succeed through market cycles and by combining disciplined underwriting, a strong balance sheet, powerful capital allocation and continued investment in innovation, we are building an even stronger franchise for the long term. As always, our mission to responsibly help more people achieve the dream of homeownership remains at the center of everything we do. Operator, we are now ready for Q&A.

[Operator Instructions] Your first question comes from the line of Mihir Bhatia with Bank of America.

I wanted to start by just asking maybe about the base premium yield. I mean it's relatively steady, but it is inside, maybe the third decimal coming down a little bit through the for the last few quarters. Where do you expect that to settle out? And just any expectations you could guide us for like the rest of the year? Just -- and maybe related to that, if you want to just comment on competitive intensity that you're seeing?

Yes, Mihir, it's Dean. I'll start with the answer on base premium rate trajectory and Rohit will, I'm sure, pick up from a competitive perspective in the market. I would say despite the modest first half pressure, our base premium rate outlook really remains consistent with our 2026 guidance that we gave at the beginning of the year that we expect it to be relatively flat versus 2025. I think that could have a slight downward till kind of like we saw in 2025, but I would characterize that very much in line with the original guidance of relatively flat. I think we've talked about in prior periods that there's always going to be some quarter-over-quarter volatility, that metric is influenced by a bunch of different variables. We've talked about NIW levels. We've talked about NIW mix, specifically as it relates to purchase refi, which can change the nature of the risk and change the nature of the pricing, lapse, what book years are lapsing and then things that aren't always associated with premium rate like delinquent premium accrual. I think we saw some of that volatility play out this quarter. But overall, in terms of the impact on our overall guidance, I think it remains consistent to generally flat versus 2025. Rohit, do you want to take a competitive environment?

Yes. Thanks, Dean. Thank you for your question. So I would just say MI market continues to be dynamic, but remains constructive from our vantage point. Pricing, as we have mentioned in the past, was competitive, but remains at levels that in our view still reflect somewhat elevated levels of economic uncertainty. . And from a pricing return perspective, they remain attractive from a vantage point on a risk-adjusted basis and accretive to economic value. So we are very happy with the $15-plus billion of NIW we wrote in the quarter and the returns at which we wrote that NIW.

Can I just follow up on that, Rohit? Could you maybe quantify the ROE on new business today? And how does that compare to, I don't know, maybe the 2023, 2024 vintages?

Mihir, I think I'm going to have a tough time giving you any ROE guidance. We have not been providing ROE guidance either in a range or any kind of point estimate. I would say that we find the ROEs accretive to shareholder value. And we've talked about this in the past that we price NIW on a conditional basis, so not only from a consumer and loan attribute perspective, but down to each geography. . So just given the granularity of our pricing and returns as well as the competitive nature of the market and the opaque pricing environment, it's tough to provide guidance on ROE quantitatively. But hopefully, the qualitative pillar helps.

Yes. Okay. Maybe I'll ask one more and then just jump back in the queue. Just on the credit outlook from here. I think new notices fell default rate was down a little bit. I guess, any guidance, any commentary on how you expect that to trend from here, just talk some of the factors that are driving that strength? And if we should -- how you expect default rates to trend from here?

Yes. Thanks, Mihir. I'll take that. This is Dean again. I think you characterized the market, the credit market appropriately. We see credit performance remaining strong. and that is across both new delinquency development and cures. Both news and cures were down sequentially. I think in our prepared remarks, we made the reference that that's really consistent with normal seasonality and as you transition from Q1 to Q2 of any particular year. If we peel the onion back a little bit, we continue to assess performance across a variety of borrower and loan attributes. We don't see any material deviation from our pricing expectations when we set price and onboard the risk. So I think across the risk continuum, we continue to see performance remains strong and really, again, not deviate from our expectations when we onboard the risk and price and ultimately price the policy. I guess it's one of the -- certainly one of the underpinnings of strong care performance has been home price appreciation. That's a key driver of share performance to date. I think we continue to see strong embedded HPA across our policies in force as well as our delinquencies. So 88% of our delinquencies continue to have mark-to-market equity of 10% or more. And I'd say just as you think about short to medium term, I think that underpins ongoing strong core performance, again, in the -- kind of in the short to medium term. We talked about Del grade a little bit last quarter. as it relates to both the impact of some of the newer vintages contributing more delinquencies as they age up their normal loss development pattern. And of course, some of those newer vintages don't have as much HPA. And that HPA, I think that could be a contributor do an uptick in delinquency rate as we move forward in time. And then just in the short term from a Del grade perspective, while we got the benefit of seasonality over the first half of the year. Second half seasonality tends to -- you see an uptick in new delinquencies. And so I think it's reasonable to expect an uptick in Del grade from at least first half levels in the short term from a del grade perspective.

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

I just a follow-up on credit. Can you just talk about when you see delinquencies speaking just from a normalized seasoning of the portfolio?

Yes, Bose, it's Dean again. I think much like we talked about just on that last answer, I think second half seasonality, you're going to see an uptick in Del rate or potentially uptick in del rate given the second half seasonality that we would expect vis-a-vis the first half. And then as you transition into 2027, you have different seasonality. So start to have a positive impact on cures, new docs and ultimately, that having an influence on Del grade. So from a timing perspective, I think you're going to see a little bit of pressure to del rate over the course of the second half of 2026 and then from there, a lot of that's going to be dictated by macroeconomic drivers, what the macroeconomic trajectory is, and that will be a pretty big influence on delq inventory and ultimately delq rate go forward. But from a seasonality perspective, you're going to see those 2 seasonality kind of drivers play out, a little bit of pressure in the second half and then a pivot as we enter into 2027.

Okay. No, that makes sense. But if the macro remains stable, just with the newer books that have less HPA for you and everyone in the industry, does it suggest that there is going to be sort of an uptrend just in normalized deliquencies as they become a bigger part of the inventory. Is that fair?

Yes. I think we talked about the more recent books having aged through a more moderate home price appreciation path -- they've also been originated in a purchase heavy market, which has modestly higher risk characteristics, a little higher LTVs, a little higher DTIs. So I think it's fair to expect those vintages to produce more new delinquencies as they age up their normal loss development curve. Again, like you posed the question, all things being equal. The good news there is we price for that risk when we onboard it. And to date, from a new vintage perspective, I think Rohit made reference in his prepared remarks, we're not really seeing any deviation from our pricing expectations. But yes, I think those new books are going to produce more delinquencies given their makeup and given the macroeconomic environment that they've aged through to date vis-a-vis what we saw in 2020 and 2021 vintages is by way of example, they have a tremendous amount of embedded HPA.