Enact Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Enact writes and assumes residential mortgage guaranty insurance and also provides contract underwriting services. It operates as one reportable segment and is a subsidiary of Genworth Financial.
Financial performance
Amounts below are in millions of dollars, except per-share data and ratios.
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Premium revenue | $235.1 | $243.1 | $706.7 | $738.1 |
| Net investment income | $39.5 | $36.0 | $110.4 | $105.9 |
| Total revenue | $275.1 | $280.3 | $818.2 | $845.0 |
| Losses incurred | $(40.3) | $34.1 | $(112.3) | $119.5 |
| Income before tax | $244.6 | $174.6 | $715.4 | $500.3 |
| Net income | $191.0 | $137.2 | $560.4 | $393.2 |
| Diluted EPS | $1.17 | $0.84 | $3.43 | $2.41 |
| Loss ratio | (17)% | 14% | (16)% | 16% |
| Expense ratio | 25% | 24% | 25% | 25% |
- Profit and reserve development: Q3 net income rose 39% year over year; nine-month net income rose 43%. Results benefited substantially from favorable prior-year reserve development: $105 million released in Q3 and $251 million for the nine-month period, primarily reflecting better-than-expected cures on COVID-era delinquencies. This was partly offset by $25 million of reserve strengthening for 2022 delinquencies due to economic uncertainty.
- Premiums and investment income: Premiums fell 3% in Q3 and 4% for the nine-month period, mainly due to lapses of older, higher-priced policies and fewer single-premium cancellations, partly offset by growth in insurance in-force. Investment income increased 10% in Q3 and 4% year to date, supported by higher yields and average invested assets.
- Cash flow: Nine-month operating cash flow was $402.1 million, versus $411.1 million in 2021. Investing activities used $246.5 million, compared with $412.3 million; financing activities used $45.6 million, including dividends. Cash and cash equivalents increased $109.9 million to $535.8 million.
- Balance sheet and investments: At September 30, cash was $535.8 million and available-for-sale investments had a fair value of $4.88 billion. Long-term borrowings were $742.2 million carrying value, representing $750 million of 6.5% senior notes due 2025. Equity was $4.12 billion. Accumulated other comprehensive loss was $427.1 million, compared with income of $83.6 million at December 31, 2021, largely reflecting unrealized investment losses amid rising interest rates.
- Insurance capital and liquidity: EMICO’s risk-to-capital ratio was 12.3:1, below the 25:1 regulatory maximum. PMIERs available assets were $5.292 billion against $3.043 billion of net required assets, or 174% sufficiency. A $200 million five-year revolving credit facility was undrawn; the company reported compliance with its covenants.
Business trends, changes and outlook
- New insurance written fell 37% in Q3 to $15.1 billion and 32% for the first nine months to $51.3 billion, principally reflecting a smaller mortgage-insurance market and fewer refinancings as mortgage rates rose. Primary insurance in-force increased to $241.8 billion from $222.5 billion a year earlier; persistency rose to 82% from 65%.
- Delinquencies declined to 18,856 at September 30, 2022, from 28,904 a year earlier, as cures outpaced new delinquencies. The reported delinquency rate was 1.99%, versus 3.08% a year earlier. Management noted uncertainty remains around forbearance cases and the timing and severity of claims.
- Management described persistent inflation, higher interest rates, market volatility, weakening mortgage origination activity and slowing home-price appreciation. It said it saw underwriting and pricing conditions within its risk-adjusted return appetite. The filing gives no specific company earnings or revenue guidance.
- Potential GSE restrictions remain important: until specified conditions are met for two consecutive quarters, Enact is subject to enhanced PMIERs asset requirements and other limits. Genworth believed it had met its financial metrics for Q3 and expected to maintain compliance through year-end; removal of restrictions in early 2023 remained subject to GSE confirmation.
- Management cited the October 2022 GSE fee changes as expected to be a net positive for the mortgage-insurance market, while the timing and effects of new credit-score models and other housing-policy initiatives remain uncertain.
- After quarter-end, Enact announced a $183 million special dividend ($1.12 per share), a quarterly dividend of $0.14 per share, and a share-repurchase program of up to $75 million. Repurchases from Genworth are to be pro rata with market repurchases; the program does not obligate the company to buy shares. These actions are subject to board, parent, regulatory, capital and covenant considerations as applicable.
Risks, contingencies and unusual items
- Loss reserves depend on estimates of cure rates, claims and loss severity; the company warned that actual outcomes, especially for COVID-19-related forbearance delinquencies, could differ materially and require significant reserve adjustments.
- Economic deterioration, falling home prices, elevated interest rates, weaker mortgage originations, GSE or regulatory changes, customer concentration, reinsurance availability and PMIERs or statutory-capital requirements could adversely affect results or business capacity.
- Unrealized losses in the investment portfolio were attributed mainly to rising rates and market volatility; management said it did not intend, and did not expect to be required, to sell affected securities before recovering amortized cost.
- Enact reinsures risk but remains liable to policyholders if reinsurers do not meet their obligations. The filing reported no pending material legal proceedings and no material change in previously disclosed risk factors.
- The company’s non-GAAP adjusted operating income was $190.9 million for Q3 and $561.1 million for the first nine months; this measure excludes investment gains or losses and specified other items and is not a substitute for GAAP net income.
Investor verification points
- Assess how much reported earnings growth depends on reserve releases, and whether cure experience and future claims support the reserve assumptions.
- Track new insurance written, persistency, premium trends, delinquencies and the effects of higher mortgage rates and home-price changes.
- Verify progress toward satisfying GSE conditions, PMIERs sufficiency and the availability of capital for distributions to the holding company.
- Review investment portfolio valuation and interest-rate sensitivity, including the large accumulated unrealized loss, as well as the company’s ability to hold securities to recovery.
- Confirm the timing, funding and applicable approvals for announced dividends and share repurchases, and monitor debt due in 2025 and revolving-facility covenants.