Q3 2026 Enact Earnings Conference Call - ENACT HOLDINGS INC

Financial Performance:

• Adjusted operating income reached $164 million ($1.19 per diluted share) for the quarter, up significantly from $112 million ($0.82 per share) in the same period last year.
• Adjusted return on equity (ROE) was 12%.
• New insurance written (NIW) totaled $14 billion, down 7% sequentially but flat year-over-year; total insurance in force grew 1% year-over-year to $275 billion.
• Net premiums earned were $242 million, down slightly sequentially and year-over-year due to higher seeded premiums from reduced profit commissions on quota-share reinsurance.
• Investment income increased 9% year-over-year to $74 million, with a new money yield exceeding 5.5% and an average portfolio book yield of 4.7%.
• Credit loss ratio was 20% for the quarter, driven by higher new delinquencies ($14.4 million) and seasonal trends, compared to 14% in Q2 and 15% in Q3 of the prior year.
• Total delinquency rate rose 20 basis points sequentially to 2.8%, though cure rates remained elevated at 50% and reserve releases of $37 million supported the quarter.
• Operating expenses were $50 million with an expense ratio of 21%, benefiting from disciplined management and reduced headcount (lowest in over a decade).

Guidance and Future Outlook:

• Capital return guidance for 2026 has been increased to approximately $600 million, reflecting strong performance and confidence in capital generation.
• Full-year 2026 expense guidance is lowered to the bottom end of the $205–$210 million range (excluding reorganization costs).
• Management anticipates continued resilience in the insurance-in-force portfolio, with persistency remaining elevated (81%) as 89% of loans carry rates below 7%.
• Forward guidance on credit performance suggests delinquency rates may gradually increase into 2027 as newer vintages age, though expected to remain in line with pricing assumptions under a stable macro environment.
• Management supports the administration's executive order on lowering housing costs and anticipates working constructively with GSEs and FHFA on prospective pilot programs.

Business Segments and Product Lines:

• Primary MI portfolio demonstrates strong credit performance with a risk-weighted average credit score of 747 and an average LTV of 93% at quarter-end.
• Entered a new quota-share reinsurance agreement covering approximately 35% of expected 2028 new insurance written, advancing the programmatic Capital Risk Transfer (CRT) strategy.
• The "Enact" business unit continues to deliver attractive risk-adjusted returns, viewed as a long-term growth and diversification opportunity.
• Dynamic pricing engine "Rate360" is actively utilized to assess granular risks across varying geographic housing market conditions.
• Participation in the rollout of VantageScore 4.0 continues, though volume remains concentrated among specific originators.

Market and Competitive Landscape:

• Mortgage rates remained high (exiting above 7%), pressuring housing activity and refinance demand, while housing supply normalized and home prices appreciated nationwide.
• Reinsurance market demand for mortgage credit default risk remains strong, allowing Enact to secure terms in the low-to-mid single digits.
• Credit performance of recent books (2020-2021) is rolling off the portfolio, yet persistency remains historically high (18th consecutive quarter above 80%).
• AM Best upgraded Enact's financial strength rating to A from A- with a stable outlook; S&P upgraded the issuer credit rating to BBB from BBB-.

Risks and Challenges:

• Rising mortgage rates and affordability constraints continue to act as headwinds for new originations and mortgage demand.
• Unrealized losses in the investment portfolio increased by $248 million to $345 million due to interest rate hikes, though management views this as non-economic given the long-term holding strategy.
• Seasonal trends in Q4 are expected to drive a slight increase in delinquencies; newer vintages with higher LTVs and DTIs face normal loss development curves.
• Regulatory uncertainty surrounds the new executive order on housing costs, with specific parameters on automated valuations and cancellation protocols still undefined.

Management Commentary and Tone:

• Management expressed high confidence in the business model's resilience, emphasizing prudent underwriting, strong borrower credit characteristics, and embedded home equity.
• Tone was positive and disciplined, highlighting successful expense management despite inflation and the ability to return excess capital to shareholders.
• CEO Rohit Gupta thanked retiring board member Tom McInerney and expressed confidence in long-term shareholder value creation.
• CFO Dean Mitchell emphasized a "waterfall" approach to capital returns, prioritizing dividends for durability and utilizing buybacks opportunistically based on book value comparisons.

Analyst Questions and Answers:

• Persistency: Analysts questioned if FHFA focus on cancellations would impact the 2020-2021 vintages. Management confirmed those large books are rolling off but persistency remains elevated above 80%.
• Capital Returns: Management clarified that buybacks are opportunistic based on price vs. book value (including AOCI) and that share repurchases remain compelling at current valuations.
• Reinsurance: Questions on 2028 forward quota-share deals were answered with confirmation that reinsurance demand is strong and terms remain favorable due to Enact's proven underwriting track record.
• Credit Metrics: Analysts inquired about cure cycle times and loss ratio expectations for 2027. Management noted cumulative cures typically reach 85-90% by the fifth quarter and advised that loss ratios should be viewed as a function of macro conditions and roll rate assumptions.
• Regulatory Pilot: Regarding the new housing cost executive order, management stated it is too early to determine cost allocation for appraisals or servicer incentives, but they will advocate for mark-to-market LTV and seasoning requirements in the pilot design.

Other Key Points:

• Paid $33 million in dividends and repurchased $118 million in shares during the quarter, totaling $151 million in capital returns.
• Portfolio PMIRE sufficiency ratio stands at 158%, providing $1.8 billion of excess capital above regulatory requirements.
• Third-party CRT program provides $2 billion in PMIRE capital credit.
• Management noted that borrower-initiated cancellations average roughly $1.5 billion per quarter (approx. 2% of annualized lapses), indicating current cancellation mechanisms function effectively for educated borrowers.