Enact - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered solid profitability with GAAP net income of $163M ($1.05 diluted EPS) and adjusted operating income of $169M ($1.09 adjusted diluted EPS); ROE was 13.0% (adjusted 13.5%) as reserve releases continued to support results.
• Core KPIs were resilient: primary insurance-in-force (IIF) hit a record $269B; persistency stayed elevated at 82%; net premiums earned were $246M; loss ratio ticked up to 10% on a smaller reserve release versus Q3; expense ratio was 24%.
• Capital strength and returns remain key: PMIERs sufficiency stood at 167% ($2.1B above requirements); 2024 capital returned totaled $354M; Board declared a $0.185 dividend; management targets 2025 capital returns in line with ~$350M in 2024 while keeping flexibility.
• Strategic CRT execution and ratings momentum: Enact executed forward quota share and XOL deals for 2025–2026, and Fitch upgraded EMICO to A and senior debt to BBB in Jan-2025, reinforcing balance sheet resilience and capital flexibility.
• Consensus comparisons: S&P Global EPS/revenue consensus for Q4 2024 was unavailable at time of this report (SPGI API limit). We cannot characterize a beat/miss vs. Street; we will update once available (S&P Global data unavailable).

What Went Well and What Went Wrong

What Went Well

• Record IIF and resilient premiums despite macro headwinds: Primary IIF reached $269B (+2% YoY) with net premiums earned of $246M (+2% YoY), supported by attractive adjacencies and portfolio growth.
• Strong capital and active capital returns: PMIERs sufficiency of 167% ($2.1B above requirements); $354M capital returned in 2024; Q4 dividend of $0.185 declared; ongoing buybacks (2.1M shares for $74M in Q4).
• Credit performance and reserve releases remained supportive: Reserve release of $56M on strong cures (52% cure rate), helping keep loss ratio at 10% amid seasonal delinquency uptick and hurricane effects.

Management quotes:

• “Our very strong performance in 2024 underscores the effectiveness of our strategy and the continued successful execution of our priorities.” — Rohit Gupta, CEO.
• “We remain committed to prudent risk management and capital optimization while also supporting our ability to serve our customers.” — Hardin (Dean) Mitchell, CFO (re CRT program).

What Went Wrong

• Sequential margin compression: Loss ratio rose to 10% from 5% in Q3, driven by a smaller reserve release and higher new delinquencies ex-hurricanes (+1%).
• Slight premium pressure QoQ: Net premiums earned decreased 1% sequentially, primarily from higher ceded premiums (quota share dynamics).
• Expenses up QoQ: Operating expenses increased to $58M and expense ratio to 24% (incentive comp), partly offset by full-year cost initiatives; sequential step-up from 22% in Q3.

Transcript

Operator (participant)

Hello, and welcome to Enact's Fourth 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 Investor Relations. You may begin.

Daniel Kohl (VP of Investor Relations)

Thank you, and good morning. Welcome to our fourth quarter earnings call. Joining me today are Rohit Gupta, President and Chief Executive Officer, and Dean Mitchell, Chief Financial Officer and Treasurer. Rohit will provide an overview of our business performance and progress against our strategy. Dean will then discuss the details of our quarterly results before turning the call back to Rohit for closing remarks. We will then take your questions. The earnings materials we issued after market close 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.

Rohit Gupta (President and CEO)

Thank you, Daniel. Good morning, everyone. Before we begin, I want to express our deepest sympathies to those affected by the devastation caused by the wildfires in the L.A. area, and to acknowledge and thank all the firefighters and first responders for their bravery and tireless efforts in protecting the community. Our hearts go out to the entire community during this incredibly difficult time, and we are committed to supporting recovery efforts. It is challenging to comprehend the events we are currently witnessing. Following the devastation caused by Hurricane Helene, we now face yet another catastrophe where our employees and borrowers reside. Both communities will continue to receive our support as they work towards rebuilding. Turning back to our financial results, I want to take a moment to reflect on the incredible year we had in 2024.

This year was marked by very strong performance as we executed on our strategic priorities amidst a complex economic backdrop. We continued to deliver value for our customers, drive operational efficiencies in our business, maintain a strong balance sheet, and deliver strong capital returns to our shareholders. For the full year, adjusted operating income was a new record high of $718 million, or $4.56 per diluted share, up 9% year-over-year, and was driven by our strong credit performance. Additionally, adjusted return on equity was 15%, and adjusted book value was $34.16 per share, up 12% year-over-year. Even in an environment with high rates and low housing affordability, we wrote $51 billion of new insurance written and ended the year with record insurance in force of $269 billion, supporting approximately 140,000 families in achieving homeownership and putting them on a path of building wealth.

These results, combined with our strong balance sheet and our expense management discipline, enabled us to pursue our capital allocation priorities. During the year, we issued $750 million in senior notes, our first investment-grade debt issuance as a public company, and the largest in the industry in over a decade, allowing us to further strengthen our financial position while also saving $2 million in annual interest expense. Additionally, in a year when the market continued to face inflationary pressures, we reduced our expenses by 2%, excluding restructuring costs. While continuing to invest for future growth, we returned capital of $354 million to shareholders, which was above the high end of our capital return guidance. During the year, our ratings were upgraded by S&P from BBB+ to A-. Additionally, in January 2025, Fitch upgraded our ratings from A- to A.

These upgrades are another testament to our resilient business model, consistent delivery against our strategic priorities, and the strength of our balance sheet. I'm very proud of what our team accomplished this past year and thank our dedicated and talented employees who made it possible. Moving on to fourth quarter results, we reported adjusted operating income of $169 million, up 7% year-over-year. Adjusted earnings per share was $1.09, and adjusted return on equity was 13.5% during the quarter. The operating environment and the U.S. housing market specifically continue to be constructive overall. The long-term demographic drivers of housing demand remain robust, with low inventory continuing to support elevated home prices. The labor markets are demonstrating resilience, with consistent wage growth surpassing the rate of inflation. Overall, our long-term view of the U.S. economy and housing remains positive.

In the near term, we continue to evaluate the current landscape and will adapt as necessary. Our credit and underwriting quality continues to be strong, resulting in high quality NIW and a portfolio with considerable embedded equity. At the end of the fourth quarter, approximately 70% of our insurance in force had mortgage rates below 6%, and the credit quality of our insured portfolio remained strong. Additionally, the risk-weighted average FICO score of the portfolio was 745. The risk-weighted average loan-to-value ratio was 93%, and layered risk was 1.3% of risk in force. Pricing remained constructive in the quarter, and we maintained our commitment to prudent underwriting standards. Our pricing engine allows us to deliver competitive pricing on a risk-adjusted basis, and we continue to underwrite and select risk prudently while generating attractive returns. As anticipated, new delinquencies increased by 6%, reflecting the effects of recent hurricanes.

Excluding the hurricane impacts, new delinquencies rose by 1%, which is in line with historical seasonal trends. A resilient consumer, strong embedded equity, and our loss mitigation efforts continued to drive robust cure rates at 52% for the quarter. This strong cure performance drove a reserve release of $56 million during the quarter, and our resulting loss ratio was 10%. We continue to see strong credit performance and remain well-reserved for a range of scenarios. As I mentioned earlier, we maintained a disciplined approach to expense management while investing in technologies and processes that improve the customer experience and our business operations. During the quarter, our expenses were $58 million, a 2% decrease from the same period in 2023, despite an inflationary environment. Moving to our robust capital position, our PMIERs sufficiency was 167%, or $2.1 billion above requirements.

During the quarter, we continued to execute against our CRT strategy, entering into two quota share reinsurance agreements. Additionally, in January, we executed two forward excess of loss reinsurance transactions covering our 2025 and 2026 book years. We did these transactions at an attractive cost of capital and favorable terms. We remain committed to prudent risk management and capital optimization while also supporting our ability to serve our customers. Our capital position and cash flow have enabled us to effectively pursue our capital allocation priorities, which are 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. In the past, we have spoken about our desire to extend our platform into compelling adjacencies that leverage our capabilities across mortgage, housing, and credit.

To that end, we are pleased with Enact Re's continued performance. Enact Re has maintained strong underwriting standards while generating attractive risk-adjusted returns. Enact Re continues to participate in GSE single and multi-family deals that we find attractive, and we are excited to build upon this momentum. Enact Re remains a long-term growth opportunity that is both capital and expense efficient. Finally, in the fourth quarter, we again delivered on our commitment to return capital to our shareholders by returning over $102 million through share buybacks and our quarterly dividend. Since our IPO, we have returned over $1.1 billion to shareholders. We also remain committed to our capital allocation priorities, including returning capital to shareholders, and expect to continue our share buyback and dividend programs while remaining flexible in our approach based on market conditions and subject to the approval of our Board of Directors.

Shifting to the current policy environment, with every new administration, there is always discussion regarding new efforts on GSE reform. As I've stated in the past, we have support for our franchise and products on both sides of the aisle, and our industry puts private capital ahead of taxpayer dollars. We look forward to working with the new administration to support people responsibly achieving the dream of homeownership. In closing, we are grateful to our dedicated teams for their relentless focus on executing against our strategic priorities. Our strong 2024 results underscored the effectiveness of our approach and our commitment to creating long-term value for our customers and shareholders. With that, I will now turn the call over to Dean.

Dean Mitchell (CFO and Treasurer)

Thanks, Rohit. Good morning, everyone. We delivered another set of very strong results in the fourth quarter of 2024.

GAAP net income was $163 million, or $1.05 per diluted share, compared to $0.98 per diluted share in the same period last year and $1.15 per diluted share in the third quarter of 2024. Return on equity was 13%. Adjusted operating income was $169 million, or $1.09 per diluted share, compared to $0.98 per diluted share in the same period last year and $1.16 per diluted share in the third quarter of 2024. Adjusted operating return on equity was 13.5%. For the full year, GAAP net income was $688 million, or $4.37 per diluted share, as compared to $666 million, or $4.11 per diluted share in 2023. Adjusted operating income for 2024 totaled $718 million, or $4.56 per diluted share, compared to $676 million, or $4.18 per diluted share in 2023.

Turning to revenue drivers, primary insurance in force increased to $269 billion in the fourth quarter, up $1 billion sequentially, and up $6 billion, or 2% year-over-year. New insurance written was $13 billion, down 2% sequentially, primarily driven by seasonality, partially offset by an estimated increase in refinance originations, and up 27% year-over-year due primarily to higher originations and a resulting larger MI market size. Persistency was 82% in the fourth quarter, down one point sequentially and down four points year-over-year. The decrease year-over-year was primarily driven by a decline in mortgage rates in September 2024. Our portfolio remains resilient to mortgage rate volatility, with 8% of the mortgages in our portfolio having rates at least 50 basis points above December's average mortgage rate. Looking ahead, we anticipate that elevated persistency will continue to help offset the impact of higher mortgage rates.

Total net premiums earned were $246 million, down $3 million, or 1% sequentially, and up $6 million, or 2% year-over-year. The decrease sequentially was primarily driven by higher ceded premiums. The increase year-over-year was primarily driven by premium growth from attractive adjacencies and primary insurance in force growth, partially offset by higher ceded premiums. Starting in 2023, we began to leverage quota share reinsurance structures, which are very efficient from a cost of capital perspective but include ceded commissions, ceded losses, and profit commissions in addition to ceded premiums. This quarter, new delinquencies from our covered 2023 and 2024 book years increased ceded losses and reduced profit commissions, and in turn, increased our ceded premiums. Despite this, the net cost of our quota share reinsurance remained flat for the quarter.

As we recently announced two new quota share transactions, we expect quota share transactions to make up a larger part of our CRT program going forward. Turning to primary premiums, our base premium rate of 40 basis points is aligned with our guidance that base rate would be relatively flat in 2024. As a reminder, our base premium rate is impacted by several factors and tends to modestly fluctuate from quarter to quarter. We expect our base rate in 2025 to stabilize around current levels. Our net earned premium rate was 35.5 basis points, down 0.8 basis points sequentially, driven by higher ceded premiums. Investment income in the fourth quarter was $63 million, up $2 million, or 3% sequentially, and up $7 million, or 12% year-over-year. Elevated 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 continued to exceed 5%, contributing to an overall portfolio book yield of 4%. Our focus remains on high-quality assets and maintaining a resilient A-rated portfolio. As we have previously stated, we typically hold investments to maturity. However, we may selectively pursue income enhancement opportunities. During the quarter, we identified assets that, upon selling, allow us to recoup losses through higher net investment income. However, we still view our investment portfolio's unrealized loss position as materially non-economic. New delinquencies increased sequentially to $13,700 from $13,000, with an estimated 1,000 new delinquencies from 2024 hurricanes. Our new delinquency rate remained consistent with pre-pandemic levels, and for the quarter was 1.5% compared to 1.4% sequentially and 1.2% in the fourth quarter of 2023.

We maintain our claim rate on new delinquencies at 9% for the fourth quarter but recorded hurricane-related delinquencies at a 2% claim rate, which is in line with our historical experience from prior storms. Historically, hurricane-related new delinquencies cured at a very high rate as our MI policy excludes property damage and requires homes to be habitable before we pay a claim. Total delinquencies in the fourth quarter increased sequentially to 23,600 from 21,000 as new delinquencies outpaced cures. The primary delinquency rate for the quarter was 2.4% compared to 2.2% sequentially and 2.1% in the fourth quarter of 2023. Excluding the impact of hurricane-related delinquencies, our new delinquency rate would have been 1.4%, and our primary delinquency rate would have been 2.3% in the current quarter, reflecting continued strong credit performance.

Losses in the fourth quarter of 2024 were $24 million, and the loss ratio was 10% compared to $12 million and 5% respectively in the third quarter of 2024 and $24 million and 10% respectively in the fourth quarter of 2023. The current quarter reserve release of $56 million from favorable cure performance and loss mitigation activities compares to a reserve release of $65 million and $53 million in the third quarter of 2024 and fourth quarter of 2023 respectively. Our losses and loss ratio increased sequentially, primarily driven by a lower reserve release in the current quarter, and new delinquencies are up 1% excluding hurricane-related delinquencies. We remain focused on expense discipline throughout 2024. Full year 2024 expenses adjusted for approximately $5 million of reorganization costs were $218 million, or 2% lower than 2023 due to prudent expense management.

The reorganization costs represent approximately 1 percentage point of our reported 23% expense ratio for the full year 2024. Expenses in the fourth quarter of 2024 were $58 million, and the expense ratio was 24% compared to $56 million and 22% respectively in the third quarter of 2024 and $59 million and 25% respectively in the fourth quarter of 2023. For 2025, we anticipate a range of $220 million-$225 million as we continue to prudently manage our expense base while also investing in our growth initiatives and modernization driving future efficiencies in addition to the normal inflationary dynamics. We continue to operate from a strong capital and liquidity position reinforced by our robust PMIERs sufficiency and the successful execution of our diversified CRT program. As of December 31, 2024, our third-party CRT program provides $1.9 billion of PMIERs capital credit.

Our PMIERs sufficiency was 167%, or $2.1 billion, above PMIERs requirements at the end of the fourth quarter. During the quarter, we entered into two quota share reinsurance agreements, which cede approximately 27% of our 2025 and 2026 new insurance written to a broad panel of highly rated reinsurers. Additionally, subsequent to quarter end, we entered into two new excess of loss reinsurance agreements that provide an additional $225 million and $260 million of coverage on our 2025 and 2026 books respectively. While the 2025 forward transactions follow our normal execution cadence, we assess the reinsurance market as attractive from a cost and capacity perspective, and we opportunistically secured coverage on an additional forward year for 2026. We remain committed to the programmatic CRT program and agile in its execution as we continue to source cost-effective capital and volatility protection for our robust balance sheet.

Let me now turn to capital allocation. Today, we announced the first quarter 2025 dividend of $0.18 per common share payable March 14. Additionally, we returned over $354 million to shareholders in 2024 in the form of dividends and share repurchases. During the quarter, we paid out $28 million, or $0.18 per share through our quarterly dividend, and bought back 2.1 million shares at a weighted average share price of $34.75 for a total of $74 million. For the full year 2024, we repurchased 7.6 million shares at a weighted average share price of $31.95 for a total of $243 million. In January, we repurchased an additional 0.6 million shares at a weighted average share price of $32.60 for a total of $19.3 million. As of January 31, 2025, there was approximately $74 million remaining on our 250 million share repurchase authorization.

During 2025, we will continue to balance investing in growth opportunities across the business with our commitment to return capital to our shareholders and expect capital return to shareholders to be aligned with the $350 million returned in 2024. Our preference remains to return capital to shareholders via our quarterly dividend and share repurchases. This can be seen by our announced quarterly dividend and January's share buyback activity. As in the past, the final amount and form of capital return to shareholders will ultimately depend on business performance, market conditions, and regulatory approvals. Overall, we are incredibly pleased with our performance throughout 2024 and the momentum we have in 2025 thus far. We will remain focused on prudently managing risk, maintaining a strong balance sheet, and delivering solid returns for our shareholders. With that, let me turn the call back to Rohit.

Rohit Gupta (President and CEO)

Thanks, Dean.

Looking ahead to 2025, we remain optimistic about the opportunities ahead. Our disciplined approach, strong financial position, and strategic execution provide a solid foundation to navigate the evolving landscape. We are committed to helping people responsibly achieve the dream of homeownership, and our dedication to this principle underpins all aspects of our business and drives our efforts to deliver exceptional value for all of our stakeholders. Operator, we are now ready for Q&A.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

The first question comes from Bose George with KBW. Please go ahead.

Bose George (Managing Director)

Hey, everyone. Good morning. Actually, I wanted to ask first about, dig into the capital return a little more. Your guidance of the $350 million for this year suggests that your debt to capital, it will keep strengthening. It's already at a very, I'd say, attractive level. And if you're in a higher-for-longer market where growth rates remain very modest, I mean, could we see a greater level of capital return, or would you let your capital just continue to strengthen and see what happens?

Dean Mitchell (CFO and Treasurer)

Yeah, Bose. Hey, it's Dean. Thanks for the question. Yeah, our capital return guidance is similar to 2024 at $350 million.

I think from a process perspective, we're going to follow kind of our past practice, which is to guide to the level of planned capital return at the beginning of the year and then continue to assess the factors that influence that amount really as the year progresses. I think we made reference to those in our prepared remarks, but generally focused on business performance, performance rather, the macroeconomic environment, both the prevailing and prospective, and then the regulatory landscape. So if those factors turn more positive, we'll certainly reconsider capital return guidance as we did in 2024 when we raised our guidance kind of mid-year. But really, as we stand here in February, we feel confident in the $350 million, and then, as I said, continue to assess from here.

Bose George (Managing Director)

Okay. Great. Makes sense. Thanks. And then just switching over to the reinsurance business.

At the moment, that's, I guess, all GSE CRT. With the changes in D.C., has there been discussions about potentially that ramping up some more to de-risk the GSEs further, just leaving aside any GSE reform or privatization issues?

Rohit Gupta (President and CEO)

Yeah. Good morning, Bose. Thank you for your question. So absolutely, there is potential for GSE CRT volume to pick up under different scenarios. Our experience in the last 18 months has been positive since we established the entity, not only in terms of participating in the transaction, but also starting off with one rating and then getting S&P A- rating in 2024.

As we move forward, if the market gets bigger, either because GSEs actually start ceding more risk, or there is some kind of de-risking initiative from the regulator or broadly from the administration, that would be a net positive and will allow us to deploy capital in an area where we find risk-adjusted returns attractive.

Bose George (Managing Director)

Great. Thank you.

Rohit Gupta (President and CEO)

Thank you.

Operator (participant)

The next question comes from Doug Harter with UBS. Please go ahead.

Doug Harter (Equity Research Analyst)

Thanks. You guys have talked about kind of the impact of seasoning of some of the larger books on credit quality. Can you just talk about, as we look forward to 2025, the impacts that seasoning should have on delinquencies and possibly claim rates?

Dean Mitchell (CFO and Treasurer)

Yeah. Sure, Doug. Thanks for the question. In terms of aging of the portfolio, the average age of our book increased about 3.8 years seasoned. That's up from about 3.6 years last quarter.

That continues to progress closer to the plateau of a normal delinquency development curve that we talked about last quarter, somewhere in that range, three to four years. I think what that means is that we should see the increase in new delinquency development begin to slow, especially as we think about that relative to last year's increase. Obviously, any assessment of delinquency development is subject to the macroeconomic environment, more recently natural disasters and other credit-related drivers. But I think if we hold those constant, we should see the aging impact start to slow on our portfolio.

Doug Harter (Equity Research Analyst)

I appreciate that, Dean. And I guess as you look at the performance of kind of the 2023 vintage, how would you kind of characterize the performance of kind of that vintage versus kind of the prior years?

Dean Mitchell (CFO and Treasurer)

And Doug, when you say vintage, are you talking accident years?

Doug Harter (Equity Research Analyst)

Origination years?

Dean Mitchell (CFO and Treasurer)

On origination year, very early, but I'd say good performance. We look for any signs of emerging deterioration, and we haven't seen the emergence of any of that across any of our risk attributes. So I'd say very early in the development, but the signs are pointing well. Yeah.

Rohit Gupta (President and CEO)

And Doug, I would just add to that. I agree with what Dean said. As we have said in the past, book years of 2022, 2023, 2024 have more purchase originations just given the rate environment and, as a result, have different credit characteristics. So think about higher loan-to-value, slightly lower FICO, which is just normal for purchase originations. So with that, those books are going to trend differently than 2020 and 2021 vintages, in addition to also embedded home price appreciation in the previous books.

But to Dean's point, tracking in line with expectations.

Doug Harter (Equity Research Analyst)

Great. Appreciate the answers. Thanks.

Dean Mitchell (CFO and Treasurer)

Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Rohit Gupta for any closing remarks.

Rohit Gupta (President and CEO)

Thank you, Megan. Thank you, everyone, for joining. We appreciate your interest in Enact, and I look forward to seeing many of you in Florida at UBS's Financial Services Conference on February 10 and at Bank of America's Financials Conference on February 11. Thank you.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.