Business context and reporting period
Enact Holdings, Inc. is a U.S. private mortgage insurer protecting lenders against a portion of losses on low-down-payment residential mortgages. This Form 10-K covers the fiscal year ended December 31, 2021; comparisons below are primarily with 2020.
Enact completed its IPO in September 2021, but the shares were sold by Genworth Holdings, which retained the proceeds. Genworth continued to own more than 80% of Enact at year-end.
Financial and operating performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $1.118 billion | $1.106 billion | Up 1% |
| Net income | $546.7 million | $370.4 million | Up 48% |
| Adjusted operating income (non-GAAP) | $550.5 million | $373.0 million | Up 48% |
| Losses incurred | $125.5 million | $379.8 million | Down 67% |
| Loss ratio | 13% | 39% | Improved |
| Expense ratio | 25% | 24% | Worsened 1 percentage point |
| Operating cash flow | $572.1 million | $704.4 million | Down 19% |
Premiums were nearly flat at $974.9 million. Net investment income increased 6% to $141.2 million, while acquisition and operating expenses rose 8% to $231.5 million. Interest expense increased to $51.0 million, primarily reflecting the 6.5% senior notes issued in 2020. The effective tax rate was 21.4%.
Primary new insurance written (NIW) was $97.0 billion, down 3%; primary insurance-in-force (IIF) reached $226.5 billion, up 9%. Primary persistency improved to 62% from 59%, but remained below historical levels. Year-end delinquent loans fell to 24,820 from 44,904; the delinquency rate declined to 2.65% from 4.86%, still above 2019’s 1.93%.
At year-end, total assets were $5.87 billion, equity $4.11 billion, and cash and cash equivalents $425.8 million. The investment portfolio comprised $5.27 billion of fixed-maturity securities, 97% investment grade. Long-term borrowings had $750 million principal, carried at $740.4 million net of issuance costs, and mature in 2025. Consolidated cash flow was negative $27.0 million after investing outflows of $398.8 million and financing outflows of $200.3 million, including dividends.
Material changes versus the prior period
- Profit rebounded as losses declined sharply: new primary delinquencies were 32,624 in 2021 versus 85,074 in 2020. Management cited economic improvement and favorable reserve development on pre-pandemic claim years; 2021 included a $22 million reserve release, versus $65 million of reserve strengthening in 2020.
- Revenue growth was modest despite IIF growth, with older, higher-priced policies continuing to lapse and ceded premiums increasing as Enact expanded credit risk transfer (CRT).
- Operating cash flow declined, principally due to higher tax and interest payments, partly offset by higher premium receipts and lower claims paid.
- Enact paid a $200 million special cash dividend in December 2021. It had no formal regular-dividend policy but expected to initiate a regular common dividend around mid-2022, subject to its capital and liquidity assessment.
Outlook, commentary, risks and unusual items
- Management described underwriting and pricing conditions as within its risk-adjusted return appetite and expected new business to contribute positively to future profitability. No specific financial earnings or revenue guidance was provided.
- COVID-19 forbearance remained a significant uncertainty: approximately 2.3% of active primary policies were reported in forbearance at year-end, and management said ultimate cures and claims could take several quarters to emerge. Loss reserves were $641 million, up $86 million from 2020; the filing emphasizes that claim-rate and severity estimates are judgmental and sensitive to economic outcomes.
- The auditor identified loss reserves as a critical audit matter. Management estimated that a 6-percentage-point change in average claim rate could change gross reserves by about $95 million; a 4-percentage-point change in severity could change them by about $24 million.
- Capital remained above published PMIERs requirements: available assets of $5.08 billion versus $3.07 billion required, a 165% sufficiency ratio and $2.00 billion excess. CRT provided approximately $1.4 billion of PMIERs capital credit; about 92% of the insured portfolio was described as covered by CRT. These measures benefit from temporary COVID-related capital-factor relief.
- GSE restrictions require GMICO to maintain PMIERs assets at 120% of minimum requirements in 2022 and 125% thereafter until specified conditions are met. They also restrict subsidiary distributions and additional debt issuance without GSE approval, and require holding-company liquidity to be retained for debt service or insurance-subsidiary capital needs. Approximately $252 million of senior-note proceeds remained subject to the holding-company cash restriction.
- Key exposures include a decline in home prices or economic conditions, reserve-estimation uncertainty, persistency and refinancing, competitive pricing, changing GSE rules or reduced use of private mortgage insurance, availability and cost of CRT, regulatory capital requirements, and reliance on Genworth for certain services. Enact reported no pending material legal proceedings. The audited financial statements received an unqualified opinion; management said disclosure controls were effective, while the filing omitted the internal-control attestation permitted for a newly public company.
Important facts for investors to verify
- Track subsequent cures, claims and reserve development for COVID-related delinquencies, including the assumptions behind claim rates and severity.
- Confirm continued PMIERs compliance after temporary relief, the effect of GSE restrictions, and the availability and economics of future CRT transactions.
- Monitor home-price, employment, interest-rate and mortgage-origination trends, as well as persistency and the mix of purchase versus refinance NIW.
- Review the 2025 debt maturity, restricted holding-company liquidity, regulated-subsidiary dividend capacity, and the conditions and timing for any regular dividend.
- Assess Genworth’s continuing control, shared-services and tax arrangements, and the implications of any change in ownership or separation from the Genworth consolidated tax group.