Enact Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet figures are as of March 31, 2024, unless otherwise stated. Enact writes and assumes residential mortgage guaranty insurance, primarily for low-down-payment loans, and provides contract underwriting services. It operates as a single reportable segment. Financial results are unaudited.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $291.6 million | $280.9 million | +4% |
| Premium revenue | $240.7 million | $235.1 million | +2% |
| Net investment income | $57.1 million | $45.3 million | +26% |
| Net investment gains (losses) | ($6.7) million | ($0.1) million | More realized losses |
| Losses incurred | $19.5 million | ($11.0) million | $30.5 million increase |
| Income before taxes | $205.9 million | $224.5 million | -8% |
| Net income | $161.0 million | $176.0 million | -9% |
| Diluted EPS | $1.01 | $1.08 | -6% |
| Adjusted operating income (non-GAAP) | $166.2 million | $175.6 million | -5% |
The loss ratio was 8%, versus (5)% in Q1 2023; the expense ratio improved to 22% from 23%. The net earned premium rate was 0.37%, compared with 0.38%. The effective tax rate was 21.8%, versus 21.6%.
- Cash flows: Operating cash flow was $187.3 million, up from $119.3 million. Investing cash flow was a use of $113.5 million, versus a source of $33.5 million, as purchases of securities exceeded sales and maturities. Financing cash outflow was $75.2 million, including $49.7 million of share repurchases and $25.5 million of dividends. Cash and cash equivalents ended at $614.3 million.
- Balance sheet and debt: Total assets were $6.30 billion; total liabilities $1.59 billion; and equity $4.71 billion. Long-term borrowings were $746.1 million, representing $750 million of 6.5% senior notes due August 2025, net of deferred borrowing costs. The $200 million revolving facility was undrawn, and the company reported compliance with its covenants.
- Investments and liquidity: Investments totaled $5.36 billion, including $5.35 billion of available-for-sale fixed maturities. Cash plus short-term investments was approximately $624 million. About 98% of the investment portfolio was investment grade. The portfolio had a 3.7-year effective duration and a 3.7% pretax yield. Net unrealized investment losses in accumulated other comprehensive income were $237.6 million at quarter-end.
- Mortgage insurance indicators: Primary insurance in-force was $263.6 billion, up from $252.5 billion a year earlier; primary risk in-force was $68.0 billion, versus $64.1 billion. New insurance written fell 20% to $10.5 billion. Persistency was 85% in both periods. The delinquency rate was 2.01%, compared with 1.93% a year earlier.
Material changes and management commentary
- Premium growth reflected higher insurance in-force, partly offset by higher ceded premiums. Net investment income rose due to higher yields and average invested assets.
- Q1 2024 included $74.4 million of current-accident-year losses and $54.8 million of favorable prior-year reserve development. Q1 2023 included $60.3 million of current-year losses and $71.3 million of favorable prior-year development, primarily related to COVID-era delinquencies. The smaller reserve release contributed to lower earnings year over year.
- The company recorded $6.7 million of net realized investment losses, which management linked to its yield-optimization strategy and reinvestment of sale proceeds. Management excludes investment gains and losses from adjusted operating income.
- New insurance written declined amid a smaller estimated mortgage-insurance market and lower estimated market share. Management said elevated persistency continued to support growth in insurance in-force and that market and underwriting conditions remained within its risk-adjusted return appetite.
- Management cited inflation, elevated mortgage rates, low housing supply, economic uncertainty, and possible recession as relevant conditions. It said national home prices remained broadly consistent into Q1 2024 and servicer-reported forbearances had generally declined. At quarter-end, 1.1% of active primary policies were reported in forbearance; about 26% of those were delinquent.
Capital, outlook, and risks
- EMICO’s risk-to-capital ratio was 11.2:1, below the North Carolina regulatory maximum of 25:1. PMIERs available assets were $4.853 billion against $2.970 billion required, a 163% sufficiency ratio and $1.883 billion above requirements.
- In March 2024, EMICO distributed approximately $270 million to Enact Holdings, primarily to support capital returns and financial flexibility. The filing reports $65 million of insurance-subsidiary dividend capacity from unassigned surplus, subject to regulatory requirements. Management estimates regulators would require approximately $300 million of minimum policyholder surplus.
- After quarter-end, the company announced a further $250 million share-repurchase authorization and raised the quarterly dividend to $0.185 per share. It also reported 412,678 post-quarter-end repurchases through April 30, 2024. These actions are discretionary and subject to capital availability, market conditions, regulation, and debt restrictions.
- Management provided no specific earnings or revenue guidance in the supplied filing text. It identified the 2025 notes maturity as its most significant long-term liquidity need and said it continues to evaluate refinancing, capital-raising, reinsurance, and other options; favorable terms or availability are not assured.
- Key stated risks include adverse economic or housing-market changes, higher interest rates, uncertain delinquency cure and claim timing, reserve-model uncertainty, competition and lower originations, GSE or regulatory changes, PMIERs or capital-compliance issues, reinsurance availability and counterparty risk, investment-portfolio risk, and operational, cybersecurity, litigation, and technology risks. The company said loss-reserve estimates could require material future increases. No pending material legal proceedings were reported.
Important facts for investors to verify
- Whether new delinquencies, cure rates, claim severity, and reserve development continue to track management’s assumptions; Q1 included 11,395 new defaults and $54.8 million of favorable prior-year development.
- Whether declining new insurance written is offset by persistency and in-force growth, and how market share and premium rates evolve.
- The quality and liquidity implications of the investment portfolio, including realized losses, unrealized losses, interest-rate sensitivity, and reinvestment yields.
- Progress toward addressing the $750 million senior notes due in August 2025, and any effects on liquidity or shareholder distributions.
- Whether PMIERs sufficiency, statutory capital, and regulatory approvals continue to support planned dividends and repurchases; verify the terms and execution of the new $250 million authorization.
- Potential changes to economic conditions, mortgage rates, housing affordability, GSE requirements, and reinsurance protection that could affect premiums, claims, and capital.