Executive Summary / Key Takeaways

• Enact Holdings (ACT) demonstrates robust financial health and operational efficiency, underpinned by a strong capital position (165% PMIERs sufficiency in Q1 2025) and a resilient mortgage insurance portfolio benefiting from embedded equity and effective risk management.
• The company's strategic focus on profitable growth, efficiency, and capital return is yielding results, highlighted by record full-year 2024 adjusted operating income ($718 million) and a commitment to return approximately $350 million in capital to shareholders in 2025, supported by a new $350 million share repurchase authorization and a dividend increase to $0.21 per share.
• Technological differentiation, particularly the Rate360 pricing engine leveraging proprietary data and machine learning, enhances competitive positioning by enabling granular, risk-adjusted pricing and prudent risk selection in a competitive market.
• Diversification efforts through Enact Re, participating in GSE credit risk transfer transactions, are establishing a long-term, capital-efficient growth vehicle with an attractive return profile, recently validated by an S&P A- rating.
• While macroeconomic uncertainty, including potential impacts from changing economic policies and tariffs, and ongoing housing affordability challenges present risks, Enact's disciplined underwriting, strong reserves, and strategic flexibility position it to navigate evolving market conditions.

The Foundation of Strength: Enact's Position in the Mortgage Insurance Landscape

Enact Holdings, operating primarily through its subsidiary Enact Mortgage Insurance Corporation (EMICO), stands as a key player in the U.S. residential mortgage guaranty insurance sector. Since EMICO's inception in 1981, the company has focused on insuring prime-based, individually underwritten residential mortgage loans, enabling borrowers to achieve homeownership with down payments below 20%. This core function is vital to the U.S. housing finance system, facilitating the sale of these low-down payment loans into the secondary market, predominantly to government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, with whom EMICO maintains approved insurer status.

Enact's journey, including its incorporation in 2012 as a Genworth Financial (GNW) subsidiary and its minority IPO in 2021, has shaped its current strategic posture. The company operates as a single, integrated Mortgage Insurance segment, managed with a clear focus on driving profitable growth, maximizing efficiency, and creating shareholder value. This strategy is executed through disciplined underwriting, proactive risk and capital management, and strategic investments in its platform.

The U.S. private mortgage insurance industry is highly competitive, featuring several established players like NMI Holdings (NMIH), MGIC Investment Corporation (MTG), Radian Group (RDN), and Essent Group (ESNT), alongside indirect competition from government programs and fintech disruptors. Enact holds an estimated 10-12% market share, positioning it as a significant contender, though trailing larger players like MTG (25-30%) and RDN (15-20%). While precise, directly comparable market share figures for all niche competitors are not publicly detailed, the company's consistent performance suggests a stable competitive standing.

Technological Edge: Rate360 and the Pursuit of Efficiency

A critical component of Enact's strategy and competitive positioning is its investment in technology, particularly its proprietary pricing engine, Rate360. This advanced tool leverages a sophisticated blend of proprietary data, external market information, advanced analytical models, and machine learning capabilities.

The tangible benefit of Rate360 lies in its ability to deliver competitive pricing on a risk-adjusted basis. In a dynamic and increasingly complex market, this technology enables Enact to adjust pricing effectively and quickly, ensuring prudent risk selection while generating attractive returns. While specific quantitative metrics on the magnitude of pricing advantage or efficiency gains from Rate360 are not explicitly detailed, management highlights its role in enhancing the ability to serve customers and drive profitable growth.

Beyond pricing, Enact is committed to broader technological investment and process improvement. This includes initiatives aimed at improving the customer experience and driving operational efficiencies. Management has noted that investments over the past decade have consistently increased underwriting productivity, contributing to the business being more efficient from an employee count perspective, even as Insurance In-Force has reached record levels. This ongoing focus on efficiency, supported by technology, is a key factor in managing the expense base.

Expanding the Horizon: Enact Re and Strategic Diversification

Recognizing the opportunity to leverage its core competencies in mortgage, housing, and credit, Enact launched Enact Re Ltd., a Bermuda-based subsidiary, around the second quarter of 2023. Enact Re serves a dual purpose: reinsuring a portion of EMICO's new and existing insurance in-force under quota share agreements and investing in new business opportunities, specifically the assumption of excess-of-loss reinsurance related to GSE credit risk transfer (CRT).

This strategic adjacency is designed to diversify Enact's platform, enhance its return profile, and serve as a long-term, capital, and expense-efficient growth vehicle. Enact Re's performance has been positive, maintaining strong underwriting standards and an attractive return profile, and actively participating in GSE CRT transactions. The strategic importance of Enact Re was underscored by S&P assigning it an A- rating with a stable outlook in the third quarter of 2024, followed by Fitch upgrading EMICO's rating to A in January 2025.

The CRT program, involving both traditional excess-of-loss reinsurance and collateralized reinsurance via special purpose insurers issuing Insurance-Linked Notes (ILNs), is a key risk and capital management tool. It provides PMIERs capital credit and loss protection. Enact has actively managed this program, executing new quota share agreements ceding a portion of future new business and entering into forward excess-of-loss transactions for upcoming book years at attractive terms. This programmatic approach, coupled with agility in execution, allows Enact to source cost-effective capital and volatility protection for its balance sheet.

Financial Performance: Resilience and Profitability

Enact has demonstrated strong financial performance, particularly in recent periods, reflecting its strategic execution and favorable market dynamics. For the full year 2024, the company reported a record high adjusted operating income of $718 million, a 9% increase year-over-year, driven by robust credit performance. Adjusted return on equity for 2024 was a solid 15%.

The first quarter of 2025 continued this trend, with adjusted operating income of $169 million, up 2% year-over-year, and adjusted earnings per share of $1.10, up 6%. Net income for Q1 2025 was $165.8 million, compared to $161.0 million in Q1 2024.

Revenue growth is primarily driven by premiums and net investment income. Premiums increased 2% year-over-year in Q1 2025 to $244.8 million, benefiting from insurance in-force growth and increased assumed premiums from attractive adjacencies like Enact Re, partially offset by higher ceded premiums. The net earned premium rate was 0.35% in Q1 2025, slightly down from 0.36% in Q1 2024, but the base premium rate is expected to stabilize around 2024 levels in 2025.

Net investment income saw a significant 10% increase in Q1 2025 to $63.0 million, primarily due to higher yields resulting from elevated interest rates and a larger average invested asset base. The new money investment yield continues to exceed 5%, lifting the overall portfolio book yield (4.1% in Q1 2025). While the investment portfolio has an unrealized loss position, management views this as materially non-economic and has selectively pursued income enhancement opportunities.

Losses incurred increased to $30.5 million in Q1 2025 from $19.5 million in Q1 2024, resulting in a loss ratio of 12% compared to 8%. Both periods benefited from favorable reserve development ($47 million release in Q1 2025, $54 million in Q1 2024), driven by strong cure performance. The year-over-year increase in losses was primarily due to a lower reserve release in the current quarter and incremental new delinquencies, partially offset by a lower claim rate assumption (reduced from 10% to 9% in Q2 2024 based on sustained favorable cure performance and market expectations). Current period primary delinquencies contributed $75 million of loss expense in Q1 2025.

Operating expenses remained relatively flat year-over-year in Q1 2025 at $50.1 million, contributing to an improved expense ratio of 21% (vs. 22% in Q1 2024) as premium growth outpaced expense increases. This reflects disciplined expense management and ongoing efficiency efforts.

Compared to peers, Enact's financial metrics are competitive. While MTG and RDN may exhibit slightly higher operating margins due to scale or diversification, Enact's net profit margin (56.8% TTM) and ROE (13.4% Q1 2025 adjusted) demonstrate strong profitability and capital efficiency. Its ROIC (14% TTM) is solid, though trails MTG's (18%), indicating areas for potential efficiency gains.

Capital Strength and Shareholder Returns

Enact maintains a robust capital and liquidity position, a cornerstone of its strategy and a key competitive advantage. As of March 31, 2025, the company's PMIERs sufficiency stood at a strong 165%, representing $2.0 billion above required assets, well exceeding regulatory requirements. This is supported by a significant reinsurance credit ($1.9 billion) from its third-party CRT program. The company expects to hold capital sufficiency well in excess of updated PMIERs standards phasing in through September 2026.

Liquidity is ample, with cash and cash equivalents of $635.3 million as of March 31, 2025, supplemented by a portfolio of investment-grade fixed maturity securities. Operating cash flow generation is strong ($226.7 million in Q1 2025), providing the primary source of funds for operations and capital deployment.

Capital allocation is a stated priority, balancing support for policyholders, investment in the business, funding new opportunities, and returning excess capital to shareholders. Enact has consistently delivered on capital returns. In Q1 2025, the company returned over $94 million through dividends ($28.1 million) and share repurchases ($65.3 million). Subsequent to the quarter end, the Board authorized a new $350 million share repurchase program and approved a 14% increase in the quarterly dividend to $0.21 per common share. This builds on the $354 million returned in 2024, which exceeded the high end of prior guidance.

The company expects to deliver capital returns in 2025 similar to the 2024 level, subject to business performance, market conditions, and regulatory approvals. The share repurchase program is opportunistic, depending on various factors including share price and capital availability. While regulatory restrictions apply to dividends from insurance subsidiaries, Enact has demonstrated the ability to upstream capital to the holding company to support shareholder returns.

Outlook and Risks

Enact's outlook for 2025 reflects confidence in its strategy and market position, while acknowledging potential headwinds. The company reaffirmed its 2025 expense guidance range of $220 million to $225 million (excluding reorganization costs), signaling continued focus on efficiency. Capital return is expected to remain robust, aligned with the $350 million returned in 2024.

Management anticipates elevated persistency rates will continue to help offset the impact of higher mortgage rates on new origination volumes. The base premium rate is expected to stabilize. Investment income is projected to benefit from further yield improvement as the portfolio rolls over in the current elevated interest rate environment.

However, the operating environment remains dynamic and complex. Risks include potential deterioration in economic conditions, particularly from changing economic policies and tariffs which became a source of volatility in April 2025 and could materially impact housing markets. A decline in home prices, uncertainty around loss reserve estimates (influenced by forbearance/foreclosure timelines), and fluctuations in interest rates also pose risks. Competition is intense, and changes to GSE charters or practices could impact the business. While Enact's technology provides an edge, the pace of innovation among competitors, particularly fintech players, is a factor to monitor. Natural disasters and public health emergencies also present ongoing risks.

Enact's disciplined underwriting, strong embedded equity in its portfolio, effective loss mitigation efforts (driving high cure rates), and prudent reserve levels are key mitigants against credit risk. The CRT program provides significant loss protection, particularly for newer book years aging through an uncertain environment.

Conclusion

Enact Holdings presents a compelling investment thesis grounded in its financial strength, operational efficiency, and strategic adaptability within the competitive U.S. mortgage insurance market. The company's robust capital position, highlighted by strong PMIERs sufficiency and consistent cash flow generation, provides a solid foundation. Strategic initiatives like the development of the Rate360 pricing engine and the expansion into GSE CRT via Enact Re demonstrate a commitment to leveraging technology and diversifying the platform for long-term value creation.

While macroeconomic uncertainties and competitive pressures persist, Enact's disciplined risk management, prudent underwriting, and proactive capital allocation strategy, including significant planned returns to shareholders through dividends and buybacks, position it favorably. Investors should monitor trends in housing affordability, interest rates, and the broader economic landscape, as well as the company's continued execution on its efficiency and diversification initiatives, as key indicators of its ability to sustain strong performance and navigate future challenges. Enact's focus on the right price for the right risk, supported by its technological capabilities and resilient balance sheet, underpins its potential to deliver continued value.