Enact's Dividend Boost and Buyback Signal Confidence Amid Mortgage Insurance Challenges

Enact Holdings (NASDAQ: ACT) has bolstered its shareholder returns with a 14% increase to its quarterly dividend to $0.21 per share and a $350 million share repurchase program, marking a confident stance despite headwinds in the private mortgage insurance sector. The moves reflect the company’s strong capital position, but also highlight the need to navigate an uncertain housing market.

A Solid Foundation for Returns

Enact’s Q1 2025 results underscore the financial backbone behind these capital actions:
- Stable profitability: GAAP net income rose to $166 million, while adjusted operating income remained steady at $169 million.
- Capital strength: PMIERs (Primary Mortgage Insurance Eligibility Requirements) sufficiency hit 165%, or $2 billion above regulatory thresholds, with a book value per share of $33.96 (excluding AOCI).
- Low payout ratios: The dividend payout ratio stands at just 16.67% of net income and 16.43% of free cash flow, leaving ample room for future hikes.

The dividend increase follows a 15.86% year-over-year surge in TTM dividends to $0.74 per share, while the new buyback program adds to the $66 million spent in Q1 alone. CEO Rohit Gupta emphasized the company’s focus on "prudent underwriting, expense discipline, and capital returns," a strategy now backed by a Fitch Ratings upgrade to A for its insurer financial strength.

The Trade-Offs in a Slowing Market

While Enact’s balance sheet is robust, its core business faces challenges:
- Declining new insurance written (NIW): NIW fell 7% year-over-year to $10 billion, reflecting reduced market share and seasonal slowdowns.
- Elevated loss ratios: Losses incurred rose to $31 million (12% ratio) due to lower reserve releases, though operating expenses improved to a 21% expense ratio.
- Affordability pressures: Mortgage rates above 6.7% have dampened purchase originations, with 8% of Enact’s portfolio carrying rates 50+ basis points above current averages.

Why the Market Should Take Note

Investors should consider three key factors:
1. Sustainability: With payout ratios under 20%, Enact’s dividend is well-covered, even if NIW remains muted.
2. Strategic moves: The $350 million buyback and $225 million/$260 million reinsurance agreements for 2025-2026 bolster liquidity and risk mitigation.
3. Long-term housing demand: Enact’s management points to first-time buyer demographics and a strong labor market as tailwinds, even as affordability constraints persist.

The Bear Case: Risks Ahead

• Economic volatility: A potential recession could strain mortgage delinquency rates, squeezing margins.
• Regulatory shifts: Changes to GSE (Fannie Mae/Freddie Mac) policies could disrupt demand for private mortgage insurance.
• Yield competition: Enact’s 2.07% dividend yield lags the sector median of 3.12%, suggesting it may struggle to attract income-focused investors without stronger growth.

Conclusion: A Conservative Play in a Volatile Sector

Enact’s dividend hike and buyback program are prudent moves that align with its fortress balance sheet and low payout ratios. The company’s capital management—bolstered by Fitch’s upgrade and $356 million in cash—suggests it can weather near-term NIW declines.

However, investors must weigh these positives against the structural slowdown in mortgage origination and the risk of rising delinquencies. For now, Enact’s moves reflect confidence in its liquidity and underwriting discipline, making it a defensive option in the mortgage insurance space.

Key Takeaways:
- Dividend yield: 2.07% (TTM), with a 15.86% YoY increase.
- Payout ratios: 16.67% (net income), 16.43% (FCF).
- Capital strength: PMIERs at 165%, ROE of 13.4%, and $350M buyback authorization.

In a sector where caution is key, Enact’s actions signal it’s positioned to capitalize on housing’s long-term fundamentals, even as it navigates short-term headwinds.