Q4 2024 Enact Holdings Inc Earnings Call
Hello and welcome to ENAC'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.
Congratulations. You may begin.
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Speaker Change: 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.
Speaker Change: 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.
Speaker Change: These are available on the Investor Relations section of our website.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Please keep in mind the earnings materials and management's prepared remarks today include certain non-GAAP measures.
Speaker Change: Reconciliations of these measures to the most relevant gap 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.
Speaker Change: Before we begin, I want to express our deepest sympathies to those affected by the devastation caused by the wildfires in the Los Angeles area, and to acknowledge and thank all the firefighters and first responders for their bravery and tireless efforts in protecting the community.
Speaker Change: Our hearts go out to the entire community during this incredibly difficult time and we are committed to supporting recovery efforts.
Speaker Change: It is challenging to comprehend the events we are currently witnessing.
Speaker Change: Following the devastation caused by Hurricane Helene, we now face yet another catastrophe wherever employees and borrowers reside.
Speaker Change: Both communities will continue to receive our support as they work towards rebuilding.
Speaker Change: Turning back to our financial results, I want to take a moment to reflect on the incredible year we had in 2024.
Speaker Change: This year was marked by very strong performance as we executed on our strategic priorities amidst a complex economic backdrop.
Speaker Change: We continue 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.
Speaker Change: 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.
Speaker Change: Additionally, adjusted return on equity was 15% and adjusted book value was $34.16 per share, up 12% year over year.
Speaker Change: supporting approximately 140,000 families in achieving homeownership and putting them on a path of building wealth.
Speaker Change: These results, combined with our strong balance sheet and our expense management discipline, enabled us to pursue our capital allocation priorities.
Speaker Change: during the year. We issued 750 million dollars in senior notes.
Speaker Change: 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.
Speaker Change: Additionally, in a year when the market continued to face inflationary pressures, we reduced our expenses by 2 percent, excluding restructuring costs.
Speaker Change: 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.
Speaker Change: During the year, our ratings were upgraded by S&P from BBB plus to A-.
Speaker Change: Additionally, in January 2025, Twitch upgraded our ratings from A- to A.
Speaker Change: These upgrades are another testament to our resilient business model, consistent delivery against our strategic priorities, and the strength of our balance sheet.
Speaker Change: I'm very proud of what our team accomplished this past year and thank our dedicated and talented employees who made it possible.
Speaker Change: Moving on to fourth quarter results, we reported adjusted operating income of $169 million, up 7% year-over-year.
Speaker Change: Adjusted earnings per share was $1.09 and adjusted return on equity was 13.5% during the quarter.
Speaker Change: The operating environment and the U.S. housing market specifically continue to be constructive overall.
Speaker Change: The long-term demographic drivers of housing demand remain robust, with low inventory continuing to support elevated home prices.
Speaker Change: The labor markets are demonstrating resilience with consistent wage growth surpassing the rate of inflation.
Speaker Change: Overall, our long-term view of the U.S. economy and housing remains positive.
Speaker Change: In the near term, we continue to evaluate the current landscape and will adapt as necessary.
Speaker Change: Our credit and manufacturing 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 remains strong.
Speaker Change: 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.
Speaker Change: Pricing remained constructive in the quarter and we maintained our commitment to prudent underwriting standards.
Speaker Change: 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.
Speaker Change: As anticipated, new delinquencies increased by 6%, reflecting the effects of recent hurricanes.
Speaker Change: Excluding the hurricane impact, new delinquencies rose by one percent, which is in line with historical seasonal trends.
Speaker Change: A resilient consumer, strong embedded equity, and our loss mitigation efforts continue to drive robust cure rates at 52% for the quarter.
Speaker Change: This strong cure performance drove a reserve release of $56 million during the quarter and our resulting loss ratio was 10%.
Speaker Change: We continue to see strong credit performance and remain well-reserved for a range of scenarios.
Speaker Change: 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.
Speaker Change: During the quarter, our expenses were $58 million, a 2% decrease from the same period in 2023, despite an inflationary environment.
Speaker Change: Moving to our robust capital position, our PMIR sufficiency was 167% or 2.1 billion above requirements.
Speaker Change: During the quarter, we continue to execute against our CRT strategy, entering into two quota share reinsurance agreements.
Speaker Change: Additionally, in January, we executed two forward excess of loss reinsurance transactions covering our 2025 and 2026 book years.
Speaker Change: We remain committed to prudent risk management and capital optimization while also supporting our ability to serve our customers.
Speaker Change: Our capital position and cash flow have enabled us to effectively pursue our capital allocation priorities.
Speaker Change: which are to support existing policyholders by maintaining a strong balance sheet.
invest in our business to drive organic growth and efficiencies.
Speaker Change: Fund attractive new business opportunities to diversify our platform and return excess capital to shareholders.
Speaker Change: 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 Anakri's continued performance.
Speaker Change: An Act V has maintained strong underwriting standards while generating attractive risk-adjusted returns.
Speaker Change: and Akhri continues to participate in GSE single and multifamily deals that we find attractive and we are excited to build upon this momentum.
Speaker Change: and Akram remains a long-term growth opportunity that is both capital and expense efficient.
Speaker Change: 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.
Speaker Change: Since our IPO, we have returned over $1.1 billion to shareholders.
Speaker Change: 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.
Speaker Change: Shifting to the current policy environment, with every new administration, there is always discussion regarding new efforts on GSC reform.
Speaker Change: 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.
Speaker Change: We look forward to working with the new administration to support people responsibly achieving the dream of home ownership.
Speaker Change: In closing, we are grateful to our dedicated teams for their relentless focus on executing against our strategic priorities.
Speaker Change: Our strong 2024 results underscore the effectiveness of our approach and our commitment to creating long-term value for our customers and shareholders.
Dean Mitchell: With that, I will now turn the call over to Dean.
Thanks, Rohit. Good morning, everyone.
Dean Mitchell: We delivered another set of very strong results in the fourth quarter of 2024.
Dean Mitchell: Gap 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%.
Dean Mitchell: 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%.
Dean Mitchell: For the full year, Gap Net Income was $688 million, or $4.37 per diluted share, as compared to $666 million, or $4.11 per diluted share in 2023.
Dean Mitchell: Turning the revenue drivers, primary insurance and force increased to $269 billion in the fourth quarter, up $1 billion sequentially, and up $6 billion or 2% year-over-year.
Dean Mitchell: New insurance written was $13 billion, down 2% sequentially, primarily driven by seasonality, partially offset by an estimated increase in refinance originations.
Dean Mitchell: and up 27% year-over-year due primarily to higher originations and a resulting larger MI market size.
Dean Mitchell: Persistency was 82% in the fourth quarter, down one point sequentially and down four points year-over-year.
Dean Mitchell: The decrease year-over-year was primarily driven by a decline in mortgage rates in September 2024.
Dean Mitchell: 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.
Dean Mitchell: Looking ahead, we anticipate that elevated persistency will continue to help offset the impact of higher mortgage rates.
Dean Mitchell: 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-seeded premiums.
Dean Mitchell: The increase year-over-year was primarily driven by premium growth from attractive adjacencies and primary insurance-enforced growth.
partially offset by higher seeded premiums.
Dean Mitchell: Starting in 2023, we began to leverage quota share reinsurance structures, which are very efficient from a cost of capital perspective, but include seeded commissions, seeded losses, and profit commissions, in addition to seeded premiums.
Dean Mitchell: This quarter new delinquencies from our covered 2023 and 2024 book years increased seeded losses and reduced profit commissions and in turn increased our seeded premiums.
Dean Mitchell: Despite this, the net cost of our quota share reinsurance remained flat for the quarter.
Dean Mitchell: 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.
Dean Mitchell: As a reminder, our base premium rate is impacted by several factors and tends to modestly fluctuate from quarter to quarter.
Dean Mitchell: Our net earned premium rate was 35.5 basis points, down 0.8 basis points sequentially, driven by higher seeded premiums.
Dean Mitchell: Investment income in the fourth quarter was $63 million, up $2 million or 3% sequentially, and up $7 million or 12% year-over-year.
Dean Mitchell: Elevated interest rates have increased our investment portfolio yields, and as our portfolio rolls over, we anticipate further yield improvement.
Dean Mitchell: During the quarter, our new money investment yield continued to exceed 5%, contributing to an overall portfolio book yield of 4%.
Dean Mitchell: Our focus remains on high-quality assets and maintaining a resilient A-rated portfolio.
Dean Mitchell: As we have previously stated, we typically hold investments to maturity.
However, we may selectively pursue income enhancement opportunities.
Dean Mitchell: New delinquencies increased sequentially to 13,700 from 13,000, with an estimated 1,000 new delinquencies from 2024 hurricanes.
Dean Mitchell: 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.
Dean Mitchell: 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.
Dean Mitchell: Historically, hurricane-related new delinquencies cured a very high rate as our MI policy excludes property damage and requires homes to be habitable before we pay a claim.
Dean Mitchell: Total delinquencies in the fourth quarter increased sequentially to 23,600 from 21,000 as news outpaced cures.
Dean Mitchell: The primary delinquency rate for the quarter was 2.4% compared to 2.2% sequentially and 2.1% in the fourth quarter of 2023.
Dean Mitchell: Excluding the impact of hurricane-related delinquencies, our new DELWC rate would have been 1.4 percent and our primary delinquency rate would have been 2.3 percent in the current quarter, reflecting continued strong credit performance.
Dean Mitchell: Losses in the fourth quarter of 2024 were 24 million, and the loss ratio was 10%.
Dean Mitchell: compared to 12 million and 5 percent respectively in the third quarter of 2024 and 24 million and 10 percent respectively in the fourth quarter of 2023.
Dean Mitchell: 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.
Dean Mitchell: Are 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?
Dean Mitchell: 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.
Dean Mitchell: The reorganization costs represent approximately one percentage point of our reported 23% expense ratio for the full year 2024.
Dean Mitchell: 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.
Dean Mitchell: For 2025, we anticipate a range of $220 million to $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.
Dean Mitchell: We continue to operate from a strong capital and liquidity position reinforced by our robust PMIR sufficiency and the successful execution of our diversified CRT program.
Dean Mitchell: As of December 31, 2024, our third-party CRT program provides $1.9 billion of PMEYR's capital credit.
Dean Mitchell: Our PMIRS sufficiency was 167% or 2.1 billion above PMIRS requirements at the end of the fourth quarter.
Dean Mitchell: 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.
Dean Mitchell: Additionally, subsequent to quarter end, we entered into two new excess of loss reinsurance agreements that provide an additional 225 and 260 million of coverage on our 2025 and 2026 books respectively.
Dean Mitchell: 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.
Dean Mitchell: 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.
Dean Mitchell: Today, we announce the first quarter 2025 dividend of $0.185 per common share, payable March 14.
Dean Mitchell: Additionally, we returned over $354 million to shareholders in 2024 in the form of dividends and share repurchases.
Dean Mitchell: During the quarter, we paid out $28 million or $0.185 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.
Dean Mitchell: 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.
Dean Mitchell: In January, we repurchased an additional .6 million shares at a weighted average share price of $32.60 for a total of $19.3 million.
Dean Mitchell: As of January 31st, 2025, there was approximately $74 million remaining on our $250 million share repurchase authorization.
Dean Mitchell: During 2025, we will continue to balance investing and 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.
Dean Mitchell: Our preference remains to return capital to shareholders via our quarterly dividend and share repurchases.
Dean Mitchell: This can be seen by our announced quarterly dividend and January's share buyback activity.
Dean Mitchell: As in the past, the final amount and form of capital returned to shareholders will ultimately depend on business performance, market conditions, and regulatory approvals.
Dean Mitchell: Overall, we are incredibly pleased with our performance throughout 2024 and the momentum we have in 2025 thus far.
Dean Mitchell: 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: 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.
Rohit Gupta: We are committed to helping people responsibly achieve the dream of home ownership, 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.
We will now begin the question and answer session.
Rohit Gupta: To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Rohit Gupta: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Rohit Gupta: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Bose George with KBW. Please go ahead.
Bose George: Hey, everyone. Good morning. Actually, I wanted to ask first about, you know, dig into the capital return a little more.
Bose George: You know, your guidance of the $350 million for this year suggests that your debt-to-capital will keep strengthening. It's already at a very, I'd say, attractive level.
Bose George: And if you're in a higher-for-longer market where growth rates remain very modest, 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: Yeah, Boz. Hey, it's Dean. Thanks for the question. Yeah, our capital return guidance is similar to 2024 at $350 million.
Dean Mitchell: You know, I think from a process perspective, we're going to follow kind of our past practice, which is the 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.
Dean Mitchell: I think we made reference to those in our prepared remarks, but generally focused on business performance, the macroeconomic environment, both the prevailing and prospective, and then the regulatory landscape.
Dean Mitchell: So, if those factors turn more positive, we'll certainly reconsider capital return guidance.
Dean Mitchell: as we did in 2024 when we raised our guidance kind of mid-year.
Dean Mitchell: But, you know, really, as we stand here in February, we feel confident in the $350 million and then, you know, as I said, continue to assess from here.
Speaker Change: Okay, great. Makes sense. Thanks. And then just switching over to the reinsurance business.
Speaker Change: At the moment, that's, I guess, all GSE CRT. With the changes in DC, 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?
Speaker Change: Good morning, Boaz. Thank you for your question. So, absolutely, there is potential for GSE CRT volume to pick up under different scenarios.
Speaker Change: Our experience in the last 18 months has been positive since we established the entity.
Speaker Change: not only in terms of participating in the transaction, but also starting off with one rating and then getting SNPA minus rating in 2024.
As we move forward, if the market gets bigger...
either because GSC is actually start feeding more risk.
Speaker Change: 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.
Great, thank you.
Doug Harder: Thank you. The next question comes from Doug Harder with UBS. Please go ahead.
Thank you.
Doug Harder: Thanks. You know, you guys have talked about, you know, kind of the impact of seasoning of some of the larger books, you know, on credit quality. Can you just talk about, you know, as we look forward to 2025, you know, the impacts that seasoning should have on delinquencies and possibly claim rates?
Yeah, sure, Doug. Thanks for the question.
Speaker Change: 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.
Speaker Change: last quarter, and that continues to progress closer to the plateau.
Speaker Change: of a normal delinquency development curve that we talked about last quarter, you know, somewhere in that range, three to four years.
Speaker Change: I think what that means is that we should see the increase in new delinquency development slow, begin to slow, especially as we think about that relative to last year's increase.
You know, obviously any assessment of delinquency development is.
Speaker Change: you know, credit-related drivers, but I think if we hold those constant...
Speaker Change: we should see the aging impact start to slow on our portfolio.
Speaker Change: I appreciate that, Dean. And I guess as you look at the performance of kind of the 23 vintage, how would you kind of characterize the performance of kind of that vintage versus kind of the prior years?
Speaker Change: And Doug, when you say vintage, are you talking accident years? Origination year. Origination year. Okay, sorry, yeah. On an origination year, very early, but I'd say good performance. We look for...
Speaker Change: any signs of emerging deterioration and we haven't seen any 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 you know
Speaker Change: Yes, 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.
Speaker Change: 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.
Speaker Change: in addition to also embedded home price appreciation in the previous books. But to Dean's point, tracking in line with expectations.
Great, appreciate the answers.
Thank you.
This concludes our question and answer session.
Speaker Change: I would like to turn the conference back over to Rohit Gupta for any closing remarks.
Speaker Change: 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 10th and at Bank of America's Financial Conference on February 11th. Thank you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
and Rohit Gupta. Thank you. Thank you.