Enact Holdings, Inc. (NASDAQ:ACT) Q2 2023 Earnings Call Transcript August 7, 2023
Operator: Good day and thank you for standing by. Welcome to the Q2 2023 Enact’s Earnings Conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel Kohl, vice President of Investor Relations. Please go ahead.
Daniel Kohl: 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, our 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 the company’s website at www.ir.enactmi.com.
Finance, Investments
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 results to be materially different, and we undertake no obligation to update or revise such statements as a result of new information. For a discussion of these risks and uncertainties, please review the cautionary language regarding forward-looking statements in today’s press release, as well as in our filings with the SEC, which will be available on our website. Please keep in mind the earnings materials and management’s prepared remarks today include certain non-GAAP measures.
Reconciliations of these measures to the most relevant GAAP metrics can be found in the press release, our earnings presentation and our upcoming SEC filing on our website. With that, I’ll turn the call over to Rohit.
Rohit Gupta: Thanks, Daniel. Good morning, everyone. Our team delivered another very strong quarter in a dynamic environment. We reported adjusted operating income of $178 million or $1.10 per diluted share and delivered a 16% adjusted operating return on equity. Insurance-in-force grew 9% year-over-year to a record $258 billion, driven by new insurance written of $15 billion and elevated persistency of 84%. during the quarter, we delivered solid new business production, disciplined growth in our insured portfolio, favorable credit performance, continued acceleration in investment income and expense efficiency. We remain confident in our strategy, as well as the strength and stability of the private mortgage insurance business model.
While the macroeconomic environment remains uncertain with elevated inflation and heightened borrowing costs, the labor market has been resilient and household balance sheets are healthy. We continue to see evidence that manufacturing quality in the mortgage industry remains strong and that despite ongoing challenges to affordability, credit risk remains within our risk appetite. In addition, looking beyond housing, research indicates that serious delinquency rates for prime borrowers are at or below pre-pandemic levels across consumer sectors. Overall, we remain constructive on the long-term outlook for housing, as well as the demand for mortgage insurance. Low housing inventory and first-time homebuyer demand are likely to continue to support home prices, and MI will remain an important affordability tool to help buyers qualify for a mortgage.
As higher interest rates have affected mortgage originations, elevated persistency has continued to act as a counterbalance, supporting insurance enforced growth. Pricing on new insurance written remained constructive during the quarter and we observed increased pricing on new insurance written in the market. We increased our price on NIW in response to continued macro uncertainty while continuing to onboard the right risk for the right price. the credit quality of our insured portfolio remains strong. The weighted average FICO score was 744, the weighted average loan-to-value ratio was 93% and our layered risk was 1.3% of risk enforce, our delinquency rate was 1.9%, even with the first quarter of this year and consistent with pre-pandemic levels.
the loss ratio in the quarter was negative 2%. Continued strength in the labor market and household balance sheets, as well as our loss mitigation efforts helped drive cures above our expectations and as a result, we released $63 million of reserves. We continue to take a prudent approach to loss reserves and believe we are well reserved for a range of scenarios. We continue to operate from a position of financial strength and remain well capitalized, relative to our regulatory requirements. PMIERs sufficiency at the end of the quarter remained robust at 162% or $2 billion of sufficiency, and 90% of our risk in-force was covered by credit risk transfers. Earlier in July, we announced our first quota share reinsurance agreement with a broad panel of highly-rated reinsurers.
This agreement builds on the success of our CRT program and reflects our ongoing commitment to pursue high-quality new business while driving capital efficiency and minimizing credit risk volatility. We also continue to allocate capital in keeping with our balanced approach and three pillars, supporting our policyholders, investing to enhance and diversify our platform and returning capital to our shareholders. I’ll focus on two of those pillars here. I’ll start with capital returns. Given the strength of our balance sheet, the stability of our cash flows and our continued confidence in the business, we have increased our capital return guidance for 2023 to $300 million from $250 million. As we announced previously, we increased our quarterly dividend, 14% from $0.14 per share to $0.16 per share, and the first dividend at that level was paid during the quarter.
Additionally, we repurchased $41 million in stock during the second quarter and through July, we have substantially completed the original $75 million share repurchase program. With that said, I am pleased to announce that the Board has authorized a new $100 million share repurchase program. Dean will provide additional detail on our capital return plans shortly. I will now turn to investment in the business. We seek opportunities that will create long-term value by growing, extending and differentiating our platform, supported by our deep expertise in mortgage insurance. I’m pleased to note that during the quarter, we successfully launched Enact Re, a reinsurer that expands our franchise through access to new business opportunities that are expected to create shareholder value over time.
Enact Re is a long-term growth opportunity that provides us with capital efficient access to the GSE credit risk transfer market. Having received approval from Bermuda Monetary Authority, the GSE’s and an A- rating from A.M. Best, Enact Re has participated in two Fannie Mae CRT transactions and one Freddie Mac transaction since launch. The attractive risk-adjusted returns and strong underwriting we have seen from these transactions reinforce our decision to enter this market. In addition, we executed a quota share arrangement with EMICO to provide scale for Enact Re’s A- rating. Importantly, we have intentionally structured Enact Re to preserve Enact’s dividend capacity. And as you can see from our decisions to increase our guidance for total capital returns this year to $300 million and the authorization of a new share repurchase program, our commitment to returning capital to shareholders remains strong and well balanced with our growth initiatives.
Led by an experienced Leadership Team and board, the launch of Enact Re leverages our industry expertise, analytic capabilities and operating infrastructure and is aligned with our commitment to drive compelling returns and create value for our shareholders. I will now turn it over to Dean, who will cover our performance in detail and will have more to say on Eanct Re in a moment.
Dean Mitchell: Thanks, Rohit. Good morning, everyone. We again delivered very strong results in the second quarter of 2023. GAAP net income for the quarter was $168 million, or $1.04 per diluted share, as compared to $1.25 per diluted share in the same period last year, and $1.08 per diluted share in the first quarter of 2023. Return on equity was 15.5%. Adjusted operating income was $178 million, or a $1.10 per diluted share, as compared to $205 million, or $1.26 per diluted share in the same period last year, and $176 million, or $1.08 per diluted share in the first quarter of 2023. Adjusted operating return on equity was 16.4%. Turning to revenue drivers. primary insurance-in-force increased in the second quarter to a new record of $258 billion, up $5 billion, or 2% sequentially, and up $20 billion, or 9% year-over-year.
New insurance written of $15 billion was up $2 billion, or 15% sequentially, driven in part by higher originations and down $2 billion, or 14% year-over-year, driven by lower mortgage originations resulting from continued elevated interest rates. With elevated interest rates, persistency remained high at 84% in the second quarter, down 1 percentage point sequentially and up 4 percentage points year-over-year. Given that most of our insured portfolio has mortgage rates at or below 6%, and the expectation that interest rates will remain elevated in the short term, we anticipate continued strength and persistency, which is a positive for the future profitability of our insurance-in-force portfolio. Our base premium rate was 40.3 basis points, down 0.2 basis points sequentially, 2.2 basis points year-over-year and 0.7 basis points year-to-date.
The rate of change in our base premium rate continues to narrow and is in line with our expectations. As a reminder, base premium rate is impacted by a variety of factors and can deviate from quarter-to-quarter. Our net earned premium rate also reflected lower single premium cancellations year-over-year. For the quarter, single premium cancellations were flat sequentially and contributed only $2 million of net earned premium, limiting its potential for meaningful future dilution. Investment income in the second quarter was $51 million, up $6 million, or 12% sequentially, and $15 million, or 42% year-over-year. The rise in interest rates and the current rate environment are favorable for our investment portfolio, as our new money yield for the quarter was over 5%.
as of quarter end, unrealized losses in our investment portfolio increased by $32 million to $439 million. As I’ve mentioned, although we generally do not expect to realize these losses, we will act upon opportunities that are expected to generate the highest value at a given time. During the quarter, we identified assets that upon selling, generated a loss, but presented an opportunity for higher net investment income going forward. We’ll continue to evaluate similar opportunities to maximize the value of our portfolio, but this does not change our view that our investment portfolio’s unrealized loss position is materially non-economic. Revenue for the quarter were $278 million, down $3 million, or 1% sequentially, and up $4 million, or 1% year-over-year.
Excluding the opportunistic investment trade just mentioned, which resulted in a $13 million loss in exchange for higher future investment income, revenues in the quarter were up $10 million, or a 3% sequentially and $17 million or a 6% year-over-year. Net premiums earned were $239 million, up $3 million or 1% sequentially and relatively flat year-over-year. The increase in net premiums earned sequentially was driven by strong IIF growth, partially offset by the lapse of older higher price policies, as compared to our NIW. Turning to credit. losses in the quarter were a benefit of $4 million, as compared to a benefit of $11 million last quarter and a benefit of $62 million in the second quarter of 2022. Our loss ratio for the quarter was negative 2%, compared to negative 5% last quarter and negative 26% in the second quarter of 2022.
Our losses and loss ratio were primarily driven by favorable cure performance, which was above our expectations, resulting in a $63 million reserve release in the quarter. Included in the reserve release were delinquencies from the first half of 2022, which were reserved at a 10% claim rate. New delinquencies decreased sequentially to 9,200 from 9,600. Our new delinquency rate for the quarter was 1%, consistent with pre-pandemic levels and reflective of ongoing positive credit trends. We continue to book new delinquencies at an approximate 10% claim rate, reflecting our prudent and measured approach to reserving in this dynamic environment. total delinquencies in the second quarter decreased by approximately 500 to 18,100 as cures outpaced new delinquencies.
The associated delinquency rate stayed flat at 1.9%, which is stabilizing near pre-pandemic levels. Turning to expenses. Operating expenses in the quarter were $55 million, relatively flat sequentially and down $7 million, or 11% year-over-year. The expense ratio for the quarter was 23%, flat to the first quarter of 2023 and below the 26% we reported a year ago. Our performance reflected the ongoing benefit of our cost reduction actions. We continue to expect costs for the full year to decline 6% year-over-year to $225 million. Moving to capital and liquidity. we continue to operate from a position of financial strength and flexibility. As Rohit referenced, this quarter, we executed our first quota share reinsurance transaction as part of our credit risk transfer program.
The transaction secured coverage from a panel of highly-rated reinsurers covering approximately 13% of our current and expected new insurance written throughout 2023. We believe the inclusion of quota share reinsurance coverage into our CRT program provides incremental capacity on attractive terms at a time of volatility in the CRT market and serves as another proof point for the value of diversified capital sources. As of June 30, 2023, our CRT program provides $1.5 billion reduction to our PMIER’s minimum required assets. Before moving on to a discussion of PMIERs and capital allocation, I wanted to take a minute on Enact Re. As Rohit discussed, we are very pleased to have launched Enact Re during the quarter. Enact Re is a Bermuda-based, wholly-owned subsidiary of EMICO and is classified as a non-exclusive affiliated reinsurer for PMIERs purposes.
EMICO has initially contributed $250 million to Enact REIT, which serves as a reallocation of capital to Enact Re that will be used to support the initial 7.5% quota share of business from EMICO and our participation in transactions with the GSEs. The strength of our credit ratings is a key factor in our ability to successfully enter and participate in the GSE’s CRT market. The quota share agreement with EMICO has provided the scale and efficiency to support our strong ratings and opportunities to pursue third-party risk on attractive terms. Over the long-term, we believe Enact Re will contribute to increasing our income and shareholder order value while preserving our dividend capacity. Additionally, we expect it to have a minimal impact on our expense structure, as evidenced by the fact that we have reaffirmed our expense guidance of $225 million for the year.
We have structured Enact Re to be efficient from a ratings capital and expense perspective, and will take an intentional approach to growing the business that balances scaling it to optimize a return on capital with our disciplined approach to capital allocation and commitment to our core franchise. we intend to prudently build scale in this business and we’ll continue to keep the market apprised of progress through time. Let me now shift gears to talk about PMIERs and capital allocation. Our PMIER’s efficiency remains strong at 162%, or $2 billion above PMIER’s requirements, compared to 164% or $2.1 billion in the first quarter of 2023. At quarter-end, we had $1.5 billion of PMIER’s capital credit and $2.7 billion of seeded risk, provided by our third-party CRT program, which currently covers 90% of our risk in-force.
Turning now to capital allocation. we remain committed to our prioritization framework, which balances prudently investing to strengthen and differentiate our platform, maintaining a strong balance sheet, and supporting our policyholders and returning capital to shareholders. I’ve already talked about Enact Re and our strong PMIER’s position, which touch on the first two pillars. So, let me take a moment to speak to capital return. Yesterday, we announced that our board has approved a new $100 million share repurchase program. As with our prior program, Genworth will participate proportionately to their 81.6% ownership, ensuring their proportional ownership of Enact remains unchanged. We returned a total of $67 million to shareholders during the second quarter, consisting of our $26 million, or $0.16 per share quarterly dividend, which was increased 14% and share repurchases totaling $41 million.
As of July 30, 2023, we have repurchased $71 million in stock and have $4 million remaining on our current $75 million share repurchase authorization. We are well-positioned to return capital to shareholders in 2023. And as Rohit mentioned, with a strong first half behind us, we are increasing our capital return guidance for the year to $300 million, up $50 million from 2022 levels through a combination of our quarterly dividend, share repurchases and a potential special dividend in the fourth quarter. In April, EMICO, our primary mortgage insurance operating company completed a distribution of $158 million that will be used to support our ability to return capital to shareholders and bolster financial flexibility. We had a strong quarter in an outstanding first half of 2023.
We remain focused on prudently managing our risk, driving cost efficiencies and maintaining a strong balance sheet while executing against our capital allocation strategy. With that, I’ll turn it back to Rohit.
Rohit Gupta: Thanks, Dean. We are very pleased with our results for the second quarter, delivering continued high-quality growth in our insured portfolio and strong return. Looking forward, we will continue to deploy capital in a manner that balances investment in the business, balance sheet strength and distributions to our shareholders. Overall, we are well positioned to continue to serve our customers and their borrowers, grow our franchise, and deliver strong performance and value creation for our shareholders. Finally, I’d like to thank our talented team for their commitment and for driving us forward. Operator, we are now ready for Q&A.
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Q&A Session
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Operator: [Operator Instructions] And our first question comes from the line of Mihir Bhatia with Bank of America. Your line is now open.
Mihir Bhatia: Hey. good morning and thank you for taking my question. I wanted to start with competitive intensity in the industry right now. when I look at the market share numbers quarter-over-quarter. And I understand you don’t manage the business by market share, but I guess the question on the competitive intensity is when you look at your market share numbers or the growth, you’re seeing versus the growth some of the competitors are seeing. this quarter, I think you’ve had of the companies that I’ve reported, the lowest increase in quarter over quarter origination, suggesting you may be lost a little bit of market share. Now, like I said, I understand you don’t manage the business from a market share perspective, but what does that tell you about the competitive intensity or the pricing that others are doing?
Is it driven by pricing? Is it that others are pricing more aggressively? Maybe, just talk about that in general, what you’re seeing in the pricing environment, how people are responding, the changes in pricing? Is pricing getting better, or getting worse? What’s happening? Thank you.
Rohit Gupta: Good morning, Mihir and thanks for the question. As you stated, we have said in the past, market share is not a strategy for us. It’s an outcome of our successful execution of our go-to-market strategy, where we talk about charging the right price for the right risk. So, I would start off just by saying we like the $15 billion of NIW that we wrote in the quarter and its profile from both pricing and credit mix perspective. Also, I think important to kind of emphasize, especially in this environment, that we continue to see strong underwriting quality and credit policy, which is very much within our risk appetite. Now, market share right now is tough to calculate, because there are only three MI companies reporting and three to go.
But from our perspective, we think of quarterly market share being volatile. And we have seen that over the last, I would say, three or so years, especially after all the MI companies move to opaque rate engines. It’s just the volatility on quarterly market share has been higher. And that could be driven by just the timing of pricing moves by different companies. It could also be driven by specific lenders that MI companies do business with, and who is growing and who is shrinking in the origination market. I think our focus continues to be that we have a good market position, and actually are writing product and new business at very good returns. As I also said, coming back to your question on pricing, I said in my prepared remarks that we saw pricing being constructive in the marketplace.
And during the quarter, we saw pricing across the industry move up and we actually moved our pricing up on new insurance written given the economic uncertainty that’s in front of us. So, I think that hopefully provides you color on how we think about intersection of pricing and our market position. Last thing I would say, obviously, market share numbers are not known, but our directional sense is that if you look at our trailing 12 months of market share last quarter, the quarter before while there has been quarterly volatility. That number is actually relatively stable and within a range that is very much aligned with how we think of our market participation, that diversity of our customer base and doing business with close to 1,800 active lenders.
Mihir Bhatia: Got it. Thanks for that. In terms of the origination market in general, I guess particularly, on the purchase side, where are you seeing particular growth or areas of strength, I mean, you called out a little bit of the economic uncertainty. So maybe, talk about just where you expect things to trend for the back half of the year? Thank you.
Rohit Gupta: Thank you, Mihir for the question. I would say, this is a tough environment to predict mortgage originations. I think just given the volatility we have seen in 10 years, treasury yield and the spreads to mortgage rates makes it difficult to predict mortgage rates on an ongoing basis. And that in turn means that when you think about consumer behavior, consumers are very interested in buying homes. But between broader inflation ever-to-date home price appreciation and then now, higher mortgage rates in 2023, I think consumer are just taking that step more carefully. I think what we are optimistic about is when you think of first-time homebuyers, we believe that there are more Americans coming to the age of being first-time homebuyers around the age of 33 to 36 in higher numbers than we have seen in a decade.
And then we also know that in terms of their propensity or their desire to buy a home that is still in place. So, whether those folks come to market this month, this quarter or next year, I think that aspect is tough to predict. Our estimate is that origination market size will still be — purchase origination market size will still be meaningful material this year. So, about $1.3-ish trillion is our general range for purchase originations market. Just to give you color on second quarter, we think second quarter did see that spring selling season. Obviously, we don’t have final numbers, but our expectation is purchase market was up maybe 40%-ish over first quarter. Historical seasonality would be about 50% on that number. So, the seasonality is a little bit subdued with borrowers maybe holding back.
What gives us more optimism is my point on first-time homebuyers will come to market and with the market dynamics, we are talking about MI being a very strong affordability tool for those borrowers. So, we still expect MI market size this year to be in the $300 billion plus range, maybe slightly over $300 billion. And while it’s lower than prior years, it’s mostly purchase driven, which means it’s not churning the book and still gives us reasonable size scale from a new insurance written perspective.
Mihir Bhatia: And my last question just on persistency. It seems to have leveled off around this 85% area, I think 84% this quarter. It’s the right number to think of through the rest of this year or really till we start seeing rates come down. Thank you.
Dean Mitchell: Yes, Mihir. it’s Dean. Thanks for the question. Just for some context again, this is for the broader market. Our highest persistency is really in the high 80% and that happened for one quarter. So, we really think about 84% persistency in the quarter as remaining elevated on a historical basis. I do think you saw the one-point decline sequentially in part by what Rohit just talked about the seasonality during the spring selling season, kind of like we’ve talked about where persistency is going to level out. It’s hard to predict. We do have a combination of a large new book with very low interest rates coupled with a pretty dynamic rate environment that Rohit just referenced. It’s obviously never going to be 100%.
