Enact Holdings, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report; the filing does not provide a standalone fourth-quarter income statement. Enact is a U.S. private mortgage insurer covering a portion of losses on low-down-payment residential mortgages, principally loans purchased by Fannie Mae and Freddie Mac.
Financial and operating performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total revenue | $1.154 billion | $1.095 billion | +5% |
| Net income | $666 million | $704 million | -5% |
| Adjusted operating income (non-GAAP) | $676 million | $708 million | -5% |
| Net investment income | $207 million | $155 million | +34% |
| Net investment gains (losses) | ($14 million) | ($2 million) | More losses |
| Operating cash flow | $632 million | $561 million | +13% |
| Loss ratio | 3% | (10)% | — |
| Expense ratio | 23% | 25% | Improved |
| Earned premium rate | 0.37% | 0.40% | Lower |
New insurance written (NIW) fell 20% to $53.1 billion as higher mortgage rates reduced purchase and refinance originations. Primary insurance in-force grew 6% to $262.9 billion, supported by 85% persistency (80% in 2022). Primary risk in-force was $67.5 billion. Delinquency rate was 2.10%, versus 2.08% a year earlier.
Net premiums increased 2% to $957 million, reflecting higher average insurance in-force, partly offset by runoff of older, higher-priced policies and increased ceded premiums. Net investment income rose with higher yields and invested assets. Net income was lower mainly because the prior-year period included a larger favorable reserve release; 2023 also recorded net realized investment losses.
Capital, liquidity and debt
- Year-end cash and cash equivalents were $616 million, up from $514 million. The company also held $5.3 billion of investments, 98% investment grade.
- PMIERs available assets were $5.006 billion against $3.119 billion required; the sufficiency ratio was 161%, or $1.887 billion above requirements, compared with 165% and $2.050 billion in 2022. Approximately 90% of the insured portfolio was covered by credit risk transfer (CRT).
- Combined statutory risk-to-capital ratio was 11.6:1, below the 25:1 state limit. The statutory contingency reserve was approximately $3.960 billion.
- Long-term borrowings were $750 million principal amount of 6.5% senior notes due August 2025 (carrying value $745 million). The $200 million revolving facility, due 2027, was undrawn; the company reported covenant compliance.
- Operating cash flow was $632 million; investing cash outflow was $229 million and financing cash outflow was $301 million. Financing included $213 million in dividends and $88 million in share repurchases.
Material changes and unusual items
- Losses incurred were $27 million, versus a benefit of $94 million in 2022. Enact released $241 million of reserves in 2023, primarily for better-than-expected cures on prior-year delinquencies; 2022 included $314 million of reserve releases and $46 million of reserve strengthening.
- Current-accident-year losses were $275 million, compared with $219 million in 2022. New delinquencies rose to 41,617 from 35,996, while total year-end delinquencies were 20,432.
- Enact contributed $500 million to Bermuda-based Enact Re during 2023 and executed additional excess-of-loss and quota-share reinsurance transactions. It reported $1.7 billion of estimated PMIERs capital credit from its CRT program.
- Unrealized investment losses improved: accumulated other comprehensive loss was $230 million at year-end, versus $383 million in 2022. The filing attributes much of the unrealized decline in security values to higher interest rates and says it does not intend or expect to need to sell the securities before recovery.
- Quarterly dividend increased to $0.16 per share in 2023; a $0.71-per-share special dividend was paid in December. The company also authorized an additional $100 million share-repurchase program.
Outlook, management commentary and principal risks
Management said elevated mortgage rates and low housing supply constrained originations and affordability in 2023, while higher rates supported persistency and growth in insurance in-force. It expected elevated rates to continue into early 2024, but stated that the effects on premiums and future NIW were difficult to predict. Management described pricing and underwriting conditions as within its risk-adjusted return appetite and expects new business to contribute to future profitability. The filing provides no numerical earnings or revenue guidance.
- Results are sensitive to unemployment, home prices, interest rates, mortgage originations, persistency, competition and the performance of insured loans. A recession or home-price decline could increase defaults and claim severity.
- Loss reserves depend on uncertain claim-rate and severity assumptions. Management estimated that a 5-percentage-point change in the average claim rate could change gross reserves by about $75 million; a 4% change in average severity could change them by about $19 million. Loss reserves were $518 million at year-end.
- Continued eligibility depends on meeting PMIERs and state capital requirements; GSE rule changes or reduced availability or affordability of CRT could constrain new business or capital flexibility.
- Enact has $750 million of senior notes maturing in 2025. The filing identifies refinancing and capital access as risks.
- Regulated subsidiary dividends are subject to capital requirements and regulatory processes. Enact estimated $336 million of capacity for dividends from unassigned surplus, subject to notice and applicable review.
- Genworth owns at least 80% of Enact and provides certain services, including investment management and administrative support. This creates governance, related-party and service-continuity considerations and limits common-equity issuance flexibility.
- The filing reports no pending material legal proceedings. Management and KPMG reported effective internal controls; KPMG issued unqualified opinions on the financial statements and internal control. Loss reserves were the audit’s critical audit matter.
Important facts for investors to verify
- Whether delinquencies and claims continue to perform in line with assumptions underlying the $241 million 2023 reserve release, particularly as new delinquencies increase.
- How NIW, persistency, premium yield and insurance in-force respond to mortgage rates, home affordability and housing-market conditions.
- PMIERs headroom, statutory capital and the extent, cost and counterparty quality of CRT coverage; note that the PMIERs calculation benefited from a temporary 0.30 multiplier for certain non-performing loans.
- Plans and available resources to refinance or repay the $750 million notes due in August 2025, and the effect on liquidity and capital returns.
- Whether subsidiary distributions can support dividends and repurchases while maintaining regulatory, PMIERs and debt-covenant requirements.
- Performance of the investment portfolio and whether any need to sell securities with unrealized losses could crystallize losses.