Enact Holdings, Inc. (NASDAQ:ACT) Q1 2024 Earnings Call Transcript

Enact Holdings, Inc. (NASDAQ:ACT) Q1 2024 Earnings Call Transcript May 4, 2024

Enact Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Enact’s First Quarter 2024 Earnings Call. At this time all participants are in a listen-only mode. And after the speakers’ presentation there will be a question-and-answer session and instructions will be given at that time. 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. Please begin.

Daniel Kohl: Thank you, and good morning. Welcome to our First 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 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: Thank you, Daniel. Good morning, everyone. Our first quarter results marked a strong start to 2024. Our insured portfolio continued to grow. We operated with expense discipline, credit performance remained robust and we distributed more capital to shareholders through dividends and share repurchases than in any prior first quarter. This strong performance is a result of our commitment to our strategy, our strong position in the market and our focus on driving long-term value creation for our shareholders. Our execution can be clearly seen in our strong financial performance. Net income for the quarter was $161 million or $1.01 per diluted share. Return on equity was a solid 14% and insurance in-force increased 4% year-over-year to a record $264 billion, driven by persistency of 85% and new insurance written of $11 billion.

Our business continues to perform well as we navigate through a complex operating environment. The U.S. economy has been resilient with a strong labor market and healthy household balance sheet, while macro factors such as geopolitical conflicts, inflation and higher interest rates continue to pose potential risk. Having said that, delinquency rates for prime mortgage borrowers are consistent with pre-pandemic levels and our manufacturing quality remains solid. While higher borrowing costs have slowed origination, home prices continue to be supported by structurally lower housing inventory as well as strong demand. We continue to be optimistic about the pent-up demand in first-time homebuyer population as more Americans reach the average first-time homebuyer age, and we believe that mortgage insurance will remain an important tool to help buyers attain this important milestone.

I’ll also note that higher rates continue to benefit persistency which helps offset the effect of rates on origination volumes. The credit quality of our insured portfolio continues to be strong. At quarter end, the risk weighted average FICO score of the portfolio was 744 and the risk weighted average loan-to-value ratio was 93% and layered risk was 1.3%. Pricing remained constructed through the quarter and underwriting standards were rigorous. Our pricing engine allows us to deliver competitive pricing on a risk-adjusted basis, and we continue to underwrite and select risk prudently while managing to attractive returns. The delinquency rate in the quarter was 2%, down 9 basis points sequentially and consistent with our expectations. During the quarter, we released $54 million of reserves driven by favorable credit performance and our effective loss mitigation efforts.

We remain well reserved for a range of scenarios. We continue to operate from a position of financial strength and flexibility. At quarter end, our PMIERs sufficiency was 163% or $1.9 billion of sufficiency and approximately 90% of our risk in-force was subject to credit risk transfers. The strength of our capital position and cash flows allowed us to both reinvest in the business and return capital to our shareholders aligned with our capital allocation priority. We’ve executed on strategic opportunities to extend our platform into compelling adjacencies while maintaining a sharp focus on our core MI business. Enact Re continues to perform well and we continue to participate in GSE CRT transactions that came to market during the quarter. We remain pleased with the strong underwriting and attractive return profile of Enact Re. We returned $75 million of capital to shareholders in the first quarter, given the increased liquidity in our stock, we increased share repurchases in the first quarter to $49 million and remain committed to returning capital to shareholders.

This is also reflected in today’s announcement that we are increasing our quarterly dividend 16% to $0.185 per share as well as the Board’s decision to approve a new share repurchase authorization of $250 million. We continue to expect to deliver capital returns in 2024, similar to 2023 levels. I’m also pleased to note that during the quarter, S&P upgraded EMICO’s long-term financial strength and issuer credit rating to A- stable, and EHI’s long-term issuer credit rating to BBB- stable. This is the fourth upgrade from S&P since our IPO and demonstrates the strength of our business and execution by our dedicated team. Additionally, both Moody’s and Fitch upgraded us to a positive outlook reflecting our continued strong execution and positive financial results.

All in, our strong quarter is a testament to the dedication and hard work of our team, and I thank them again for their effort. Looking ahead, we remain committed to serving our customers and their borrowers, while maximizing value for our shareholders. With that, I will now turn the call over to Dean.

Dean Mitchell: Thanks, Rohit. Good morning, everyone. We again delivered strong results in the first quarter of 2024. GAAP net income for the first quarter was $161 million or $1.01 per diluted share compared to $1.08 per diluted share in the same period last year and $0.98 per diluted share in the fourth quarter of 2023. Return on equity was 14%. Adjusted operating income was $166 million, or $1.04 per diluted share compared to $1.08 per diluted share in the same period last year, and $0.98 per diluted share in the fourth quarter of 2023. Adjusted operating return on equity was 14%. Turning to revenue drivers. Primary insurance in-force increased in the first quarter to a new record of $264 billion, up $1 billion sequentially and up $11 billion or 4% year-over-year.

New insurance written was $11 billion up $1 billion sequentially and down $3 billion or 20% year-over-year. The year-over-year decline was primarily driven by a lower estimated MI market size and the lower estimated market share. Persistency was 85% in the first quarter, down 1 percentage point sequentially and flat year-over-year. Only 4% of the mortgages in our portfolio had rates at least 50 basis points above the prevailing market rate. In contrast, almost 80% of the mortgages in our portfolio had rates at or below 6%, well below prevailing rates, while rates remain elevated, we anticipate elevated persistency to continue, which will help offset lower production resulting from higher mortgage rates. Net premiums earned were $241 million, up $1 million sequentially and up $6 million or 2% year-over-year.

The sequential increase in net premiums earned was primarily driven by the growth in attractive adjacencies, which consist primarily of Enact Re’s GSE CRT participation. More broadly, insurance in-force growth was offset by higher ceded premiums resulting from the successful execution of our CRT program. The year-over-year increase was driven by insurance in-force growth and partially offset by higher ceded premiums and the lapse of older, higher-priced policies. Our base premium rate of 40.1 basis points was flat sequentially and down 0.4 basis points year-over-year. Remember that our base premium rate is impacted by several factors and tends to modestly fluctuate from quarter-to-quarter. We expect yields to stabilize around current levels in 2024.

Our net earned premium rate was 36.3 basis points, down 0.1 basis points sequentially, primarily reflecting higher ceded premiums in the current quarter. Investment income in the first quarter was $57 million, up $1 million or 2% sequentially and up $12 million or 26% year-over-year. Higher interest rates have increased our investment portfolio yields and as our portfolio rolls over, we anticipate further yield improvement. During the quarter, our new money investment yield exceeded 5%, contributing to an overall portfolio book yield of 3.7%. Our focus remains on high-quality assets and maintaining a resilient A-rated portfolio. While we typically hold investments until maturity, we selectively pursue income enhancement opportunities. During the quarter, we executed a strategy resulting in $7 million of pretax losses in exchange for higher future investment income.

We’ll continue to evaluate similar opportunities but this does not change our view that our investment portfolio’s unrealized loss position is materially noneconomic. Turning to credit. Losses in the quarter were $20 million compared to $24 million last quarter and negative $11 million in the first quarter of 2023. Our loss ratio for the quarter was 8% compared to 10% last quarter and negative 5% in the first quarter of 2023. Sequentially, our losses and loss ratio were driven by the current quarter delinquencies that reflect seasonal trends. Year-over-year, our losses and loss ratio in the current quarter were driven by the normal loss development of new large books and a lower reserve release. During the quarter, we continued to see favorable pure performance from early 2023 and prior delinquencies above our expectations, which resulted in a $54 million reserve release in the quarter as compared to reserve releases of $53 million and $70 million in the fourth quarter of 2023 and first quarter of 2023, respectively.

New delinquencies decreased sequentially to $11,400 from $11,700. Our new delinquency rate for the quarter was 1.2% compared to 1% in the first quarter of 2023 and flat sequentially. We continue to book new delinquencies at an approximate 10% claim rate, reflecting our prudent approach to reserving in the current macroeconomic environment. Total delinquencies in the first quarter decreased sequentially to $19,500 from $20,400. The primary delinquency rate decreased 9 basis points sequentially to 2%, consistent with our expectations and in line with pre-pandemic levels. Turning to expenses. Operating expenses for the first quarter of 2024 were $53 million, down $6 million or 10% sequentially and down $1 million or 2% year-over-year, reflecting our ongoing commitment to expense discipline.

The expense ratio for the quarter was 22%, down 3 percentage points sequentially and down 1 percentage point year-over-year. As a reminder, our expenses are weighted towards the second half of the year and thus, we will still expect expenses to be in the range of $220 million to $225 million over the course of 2024. Moving to capital. We continue to operate with a strong capital base and liquidity position reinforced by our robust PMIERs sufficiency and continued success in the execution of our diversified CRT program. Our PMIERs sufficiency was 163% or $1.9 billion above PMIERs requirements at the end of the first quarter. Additionally, at the end of the first quarter, 90% of our risk in-force was subject to credit risk transfers, and our third-party CRT program provides $1.7 billion of PMIERs capital credit.

As previously announced, we closed new quota share and new excess of loss reinsurance transactions during the quarter. Additionally, we increased our affiliate quota share from 7.5% to 12.5% of a portion of our in-force business, along with 12.5% of 2024’s new insurance written. These affiliated transactions will leverage in Enact Re’s existing capital and support new business opportunities, primarily consisting of GSE credit risk transfer. Turning to capital allocation. We continue to execute against our capital prioritization framework, which balances maintaining a strong balance sheet, investing in our business and returning capital to shareholders. During the quarter, we paid out $26 million through our quarterly dividend, and we repurchased 1.8 million shares at a weighted average share price of $27.51 for a total of $49 million of repurchases through our share repurchase program.

In April, we repurchased an additional 0.4 million shares at a weighted average share price of $30.07 for a total of $12 million repurchased. And as of April 30, 2024, there was approximately $24 million remaining on our current share repurchase authorization. Today, we announced a 16% increase to our quarterly dividend from $0.16 to $0.185 per share, and the Board approved a new share repurchase authorization of $250 million. Both actions reflect the continued strength of our financial position and confidence in our business. As with our prior share buyback programs, Genworth will participate proportionately. As a reminder, we still expect total 2024 capital return levels to be similar to the $300 million we delivered in 2023. As in the past, the final amount in the form of capital return to shareholders will ultimately depend on business performance, market conditions and regulatory approvals.

Overall, we’re pleased with our strong start to 2024 and remain focused on prudently managing risk, maintaining a strong balance sheet and driving solid returns for our shareholders. With that, I’ll turn the call back to Rohit.

Rohit Gupta: Thanks, Dean. Looking ahead, I continue to be encouraged by the long-term dynamics of our market, and I’m confident in our ability to realize the opportunities ahead of us and our team’s ability to execute against our strategy and deliver value. Our commitment to responsibly help more people become homeowners, motivates everything we do and has never been stronger. Operator, we are now ready for Q&A.

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Q&A Session

Operator: [Operator Instructions] And our first question is going to come from the line of Doug Harter with UBS. Your line is open. Please go ahead.

Doug Harter: Thanks. First, I was just hoping you could kind of give us an update as to kind of how you see the total market for NIW progressing kind of as the year unfolds, kind of what impact from the Re increase in rates that you’re seeing on either kind of the underlying quality of applications or the amount of applications?

Rohit Gupta: Good morning, Doug, thank you for the question. So I would say, given the volatility we have seen in rates up to this point in the year, it is difficult to forecast originations with a narrow range. I provided our view last quarter, where we basically said that we expect MI market to be generally in line with 2023 market size. Just to add some color to that, I would say, going into spring selling season, we are seeing overall consumer demand including first-time homebuyer demand continuing to be strong. And the consumers who are coming to the market at this point are used to 6% to 7% mortgage rates. And now the challenge basically that we are facing in the market is lack of inventory in the market and some of the volatility we have seen in the last month or so in rate.

So our view continues to be that MI is a very helpful product for consumers, especially first-time homebuyers to get into homes. So as we see that origination volume come through MI products will continue to get very good penetration in the market. But all that being said, at this point of time, our expectation is the MI market size to be generally in line with 2023. Just to give you a historical data point, that level of market size is comparable to 2018 market size within like $5 billion, $6 billion of that. And also, our persistency continues to provide a natural hedge in our business, as higher rates are a tailwind for the retention of our existing portfolio. And Doug, your question on, sorry, I missed your question on manufacturing and credit quality.

So we continue to see, as I said in my prepared remarks, we continue to see manufacturing quality and credit quality remains strong. And from a volume perspective, we continue to have both nondelegated and delegated volumes. So either through direct underwriting or through our audit while we continue to monitor that. And as I said in our prepared remarks, we continue to feel good about that.

Doug Harter: I guess just on that, what are you seeing around affordability on new purchases, kind of how are consumers coping with the higher rates from an affordability perspective?

Rohit Gupta: Yes Doug, very good question. So as I said before in my remarks, I think at this point of time, consumers who are coming to market are prepared for that 6% to 7%, 30-year fixed mortgage rate. So we are seeing those consumers go through the application process and actually get qualified. And then given the fact that we have very granular risk-based pricing, we can price those loans aligned with our view of risk and returns, both in base case and stress case. So from a consumer qualification perspective, while we have seen certain metrics move up similar to what we saw in previous purchase market. So if you think about loan to value, loan to values are back to the 2018 level. If you think about debt-to-income and FICO, they are very indicative of a purchase market.

So we are seeing those markets where we have seen those traditionally. But from a consumer qualification perspective, we continue to feel good about the consumers we are putting on our books and continue to feel good about the attractive returns we can generate from those policies.

Operator: And our next question is going to come from the line of Mihir Bhatia with Bank of America. Your line is open. Please go ahead.

Unidentified Analyst: This is Caroline on for Mihir. Thanks for taking my question. Can you discuss interest rate buydowns. Is that product very prevalent in the market? And can you provide any comments on how you’re underwriting that one, if any different than other mortgages?

Rohit Gupta: Yes. Good morning, Caroline, thank you for the question. So as we think about interest rate buydowns, we continue to see interest rate buydowns in the market as a strong product for consumers right now. We talked about this on our earnings call a few quarters ago. So the trend has been very similar. We don’t publish that as an explicit metric in our financials, but we continue to monitor internally. And I would say there are two flavors of interest rate buydowns. One flavor is temporary interest rate buydowns where the interest rate on the mortgage is brought down for 1 to 2 years by the lender, and there are some limitations on how much money the lender can use to do that. We see that as still a prudent product because the consumer is qualified at the full rate, not at the teaser rate of the mortgage.

So it’s a well-qualified consumer. And then the second flavor is builder commitments, where builder originators specifically buydown the note rate for the life of the mortgage, and we see that also coming through on a consistent basis. And in that case, the consumer does not have any kind of interest rate change in their mortgage. And as a result, the consumer is well qualified for the mortgage. So I would say our usage of those products are coming from different channels, different originators, but we continue to see the usage being consistent to what we have seen in the past.

Unidentified Analyst: Awesome. That’s super helpful. And then also, can you talk about embedded equity in the delinquent inventory and any stats you can share on that?