Enact Holdings, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Enact provides residential mortgage guaranty insurance, principally for low-down-payment loans, and related underwriting services. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are to the same 2022 periods unless stated otherwise.
Financial performance and condition
- Q2 revenue: $277.5 million, up 1%. Premiums were $238.5 million, approximately flat, while net investment income rose 42% to $50.9 million as yields and average invested assets increased. Net investment losses were $13.0 million, mainly from sales of fixed-income securities.
- Q2 earnings: Net income was $168.0 million, down 18%; diluted EPS was $1.04 versus $1.25. Adjusted operating income, a non-GAAP measure, was $178.3 million versus $205.1 million. The effective tax rate was 21.5%.
- Q2 loss and expense measures: The loss ratio was negative 2% versus negative 26%, reflecting favorable prior-year reserve development in both periods. The expense ratio improved to 23% from 26%.
- First-half results: Revenue was $558.5 million, up 3%; net income was $344.0 million, down 7%, and diluted EPS was $2.11 versus $2.26. Adjusted operating income was $353.9 million versus $370.2 million. Net investment income increased 36% to $96.3 million.
- Cash flow and liquidity: First-half operating cash flow was $287.2 million versus $301.7 million. Cash and cash equivalents were $691.4 million at June 30, compared with $513.8 million at year-end 2022; investments were $4.93 billion at fair value. The $200 million revolving facility was undrawn.
- Debt and capital: Long-term borrowings were $744.1 million, representing $750 million of 6.5% senior notes due August 2025, net of deferred issuance costs. Enact reported $4.38 billion of equity. EMICO’s risk-to-capital ratio was 11.9:1, below the 25:1 regulatory maximum; PMIERs available assets exceeded required assets by $1.96 billion, a 162% sufficiency ratio.
- Insurance and shareholder metrics: Q2 new insurance written was $15.1 billion, down 14%; primary insurance in-force was $257.8 billion, up from $237.6 billion at June 2022. Persistency was 84% versus 80%. The delinquency rate was 1.86% versus 2.06% at June 2022. Enact paid $48.5 million in dividends and repurchased $63.4 million of shares in the first half.
Material changes and management commentary
- Q2 incurred losses were negative $4.1 million, including a $64 million release of prior-year reserves; current-accident-year incurred losses were $59.9 million. For the first half, prior-year favorable development was $135.4 million, partly offset by $120.2 million of current-year incurred losses. Management attributed releases mainly to stronger-than-expected cures, including on COVID-era delinquencies. In Q2 2022, the prior-year reserve release was $96 million.
- Mortgage origination activity remained slow amid elevated mortgage rates and limited housing supply. Higher persistency and lower cancellations helped offset reduced new insurance written, supporting growth in insurance in-force. Management described pricing and underwriting conditions as within its risk-adjusted return appetite.
- At June 30, about 1.3% of active primary policies were reported in forbearance; about 31% of those were delinquent. Management noted uncertainty over cure rates, claim timing and severity, including from extended foreclosure timelines. It also cited affordability pressures and increased concentrations of new loans with higher debt-to-income ratios.
- Enact contributed $250 million to its Bermuda subsidiary, Enact Re, during Q2. It also executed 2023 excess-of-loss and quota-share reinsurance arrangements. Reinsurance supports risk and capital management, but does not remove Enact’s obligations to policyholders if reinsurers fail to pay.
- Management cited persistent investment-market, interest-rate and economic uncertainty. The investment portfolio’s available-for-sale securities had $443 million of gross unrealized losses at June 30; management attributed these largely to interest rates and volatility, and said it did not expect or intend to sell the affected securities before recovering amortized cost.
- There is no specific earnings or revenue guidance in the filing. Management said future dividends and repurchases will depend on business performance, capital needs, regulatory requirements and market conditions. The quarterly dividend increased to $0.16 per share. After quarter-end, Enact authorized an additional $100 million share-repurchase program and reported A.M. Best ratings of A- for EMICO and Enact Re, with stable outlooks.
Risks, contingencies and other notable items
- Loss reserves depend on estimates of delinquency cures, claims, severity and timing; the filing warns that future adverse experience could result in material reserve increases. COVID-related forbearance and foreclosure delays remain relevant uncertainties.
- Results and capital flexibility are exposed to housing and employment conditions, home prices, interest rates, mortgage origination volumes, competition, GSE and regulatory policy, PMIERs compliance, investment-market risk, reinsurance availability and counterparty performance.
- Insurance-subsidiary distributions are subject to regulatory limits and approvals. Enact reported $349 million of estimated capacity for dividends from unassigned surplus, while noting policyholder-surplus and PMIERs considerations may constrain future distributions. Parent Genworth provides certain services and manages the insurance subsidiaries’ investment portfolios.
- The filing reports no pending material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30, 2023.
Important facts for investors to verify
- Whether reserve releases continue, and how current-year delinquencies develop into cures, claims and paid losses.
- Whether lower new insurance written is offset by persistency and insurance-in-force growth, particularly if mortgage rates or housing affordability change.
- The sensitivity of earnings, liquidity and equity to investment yields, credit conditions and unrealized securities losses.
- PMIERs sufficiency, risk-to-capital levels, reinsurance recoverability and the regulatory capacity of subsidiaries to upstream capital.
- Debt repayment or refinancing plans ahead of the 2025 notes’ maturity, and the sustainability and funding of dividends and share repurchases.