Enact Holdings, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. Enact writes residential mortgage guaranty insurance, primarily for lower-down-payment mortgages, and provides contract underwriting services. This unaudited report covers the quarter and nine months ended September 30, 2021, compared with the same 2020 periods. Enact completed its IPO in September; shares were sold by its parent, Genworth Holdings, and Enact received no offering proceeds.
Financial and operating highlights
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $280.3 million | $284.3 million | $845.0 million | $820.9 million |
| Net income | $137.2 million | $138.0 million | $393.2 million | $279.2 million |
| Diluted EPS | $0.84 | $0.85 | $2.41 | $1.71 |
| Loss ratio | 14% | 18% | 16% | 40% |
| Expense ratio | 24% | 23% | 25% | 23% |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $411.1 million | $560.5 million |
- Revenue and earnings: Q3 premiums were $243.1 million, down 3%; net investment income was $36.0 million, up 8%. Nine-month revenue rose 3% and net income rose 41%, chiefly reflecting lower incurred losses versus the COVID-affected 2020 comparison.
- Cash flow: Nine-month investing cash use was $412.3 million, mainly reflecting net purchases of investments. Cash decreased $1.2 million to $451.6 million. No dividends were paid in the nine-month period.
- Balance sheet and debt: At September 30, assets were $5.99 billion, liabilities $1.79 billion, and equity $4.20 billion. Long-term borrowings had a $739.8 million carrying value, representing $750 million principal of 6.5% senior notes due 2025. The notes’ estimated fair value was $810.5 million.
- Investment portfolio: Investments totaled $5.39 billion, mostly fixed-maturity securities. The company reported 97% of the portfolio investment grade, a 3.7-year duration, and a 2.7% pre-tax yield. Nine-month OCI included a $74.7 million after-tax unrealized investment loss.
- Insurance metrics: Primary insurance in-force was $222.5 billion and risk in-force $55.9 billion. The delinquency rate was 3.08%, down from 5.44% a year earlier; reported delinquent loans numbered 28,904 versus 49,692. Q3 new insurance written was $24.0 billion, down 10% year over year; nine-month new insurance written rose 3.7% to $75.6 billion.
Material changes versus the prior comparable period
- Q3 net income was nearly flat year over year, as lower losses were largely offset by lower premiums and higher interest expense. The nine-month earnings increase reflected substantially lower losses, including the prior-year COVID-related reserve strengthening.
- Nine-month losses incurred fell to $119.5 million from $290.8 million. The 2020 period included significantly more new delinquencies and reserve strengthening. In 2021, Enact added $14.5 million of reserves for prior accident years, primarily reflecting slower cures in pre-COVID delinquencies.
- Q3 acquisition and operating expenses were broadly flat; nine-month expenses increased 13%, including parent-allocated costs, strategic-transaction preparation costs, and restructuring charges. Enact reported $10 million of strategic-transaction preparation costs and a $2 million one-time restructuring charge for the nine months.
- Q3 interest expense increased to $12.8 million from $5.5 million because the 2025 notes were outstanding for only part of the 2020 comparison period.
- Genworth sold shares in Enact’s IPO and concurrent private sale, retaining the proceeds. Genworth subsequently used part of its proceeds to repay approximately $296 million of its secured AXA note; AXA then released its 19.9% security interest in Enact shares.
Outlook, risks, and contingencies
- COVID-19 and reserves: Management said the economic and housing recovery continued, but the resolution and ultimate claim rate of forbearance delinquencies remain uncertain. About 3.2% of active primary policies were reported in forbearance at quarter-end, and approximately 55% of those were reported delinquent. Reserve estimates may change materially as cures and claims emerge.
- Capital and dividends: PMIERs available assets were estimated at $5.13 billion against $2.84 billion of net required assets, or 181% sufficiency under published requirements. Separate GSE restrictions impose capital buffers and limit dividends and transfers; Enact reported a 115% required-asset floor through 2021, increasing thereafter. GMICO’s risk-to-capital ratio was 11.9:1, below the 25:1 regulatory maximum.
- GMICO received regulatory approval for a $200 million dividend to be distributed by year-end. Management intended to recommend a 2021 dividend of that amount for board approval, subject to business performance, regulatory and other approvals, and market conditions; this was not a declared or guaranteed payment.
- Management described new business as being written at attractive, low-to-mid-teen risk-adjusted returns and expected business with some customers to increase, while noting the outcome was uncertain. No formal financial guidance was provided.
- Key external risks include housing-market and home-price changes, interest rates and refinancing, GSE and government policy, competition, and the effect of COVID-19. Reinsurance reduces some loss exposure but does not release Enact from obligations to policyholders if reinsurers fail to pay.
- Enact reported no pending material legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; the filing states no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How forbearance cases cure or progress to claims, and whether actual claim frequency and severity align with reserve assumptions.
- Whether the proposed $200 million dividend is approved and paid, given PMIERs, GSE, regulatory, and capital-preservation restrictions.
- The continuing impact of persistency, refinancing, policy cancellations, and ceded reinsurance on earned premiums and future profitability.
- Whether PMIERs capital credit, GSE restrictions, and rating requirements change; the filing notes these restrictions depend partly on specified conditions involving Genworth and GMICO.
- The IPO was a sale by the parent, not a capital raise for Enact; verify the implications of the parent’s remaining ownership and future share sales.
- The cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months. Investors should verify the circumstances and implications, particularly in light of the company’s recent IPO.