Enact Holdings, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. Enact provides residential mortgage guaranty insurance, primarily for low-down-payment loans, and related underwriting services. This unaudited filing covers the quarter and nine months ended September 30, 2023. Enact is a subsidiary of Genworth Financial.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $299.0 million | $275.1 million | $857.5 million | $818.2 million |
| Net income | $164.2 million | $191.0 million | $508.2 million | $560.4 million |
| Diluted EPS | $1.02 | $1.17 | $3.13 | $3.43 |
| Adjusted operating income (non-GAAP) | $164.2 million | $190.9 million | $518.2 million | $561.1 million |
| Net investment income | $55.0 million | $39.5 million | $151.2 million | $110.4 million |
| Loss ratio | 7% | (17)% | Approximately 0% | (16)% |
| Expense ratio | 23% | 25% | 23% | 25% |
Premium revenue rose 4% in Q3 and 1% year to date, supported by growth in insurance in-force; net earned premium rate declined to 0.37% from 0.39% in Q3 and from 0.40% year to date. Higher investment yields and invested assets lifted investment income. Year-to-date net investment losses were $13.1 million, mainly from sales of fixed-income securities as part of a portfolio yield strategy.
Net income declined 14% in Q3 and 9% year to date. The main comparison factor was smaller favorable reserve development than in 2022: Enact released $55 million of reserves in Q3 2023 versus $105 million in Q3 2022, and $188 million during the first nine months of 2023 versus $251 million in the prior-year period. Current-accident-year losses increased, partly offset by favorable prior-year development.
For the nine months, operating cash flow was $442.0 million, investing cash outflow $134.0 million, and financing cash outflow $143.8 million. Cash and cash equivalents were $678.0 million at September 30, up from $513.8 million at December 31, 2022. The company held $5.0 billion of investments at fair value. Accumulated other comprehensive loss was $400.3 million, largely reflecting unrealized investment losses.
At September 30, total assets were $6.00 billion, total liabilities $1.54 billion, and equity $4.46 billion. Long-term borrowings were $744.8 million, representing $750 million of 6.5% senior notes due August 2025, net of deferred issuance costs. The $200 million revolving credit facility was undrawn; Enact reported compliance with its covenants.
Material changes, outlook and risks
- Primary insurance in-force reached $262.0 billion, up from $248.3 billion at year-end 2022; primary risk in-force was $67.1 billion. Q3 new insurance written was $14.4 billion, down 4% year over year, while persistency increased to 84% from 82%.
- Mortgage rates reached more than 20-year highs during the quarter, and originations remained weak. Management said higher persistency has partly offset lower new business. It described underwriting and pricing conditions as within its risk-adjusted return appetite; the filing provides no quantified earnings guidance.
- Delinquencies were 19,241, with a 1.97% delinquency rate, versus 18,856 and 1.99% a year earlier. Management cited increased new delinquencies and uncertainty around cure rates, claims, and foreclosure timing. About 1.2% of active primary policies were reported in forbearance at quarter-end; about 30% of those were delinquent.
- Capital measures remained above stated requirements: PMIERs available assets were $5.27 billion versus $3.25 billion required, a 162% sufficiency ratio and $2.02 billion excess. EMICO’s risk-to-capital ratio was 11.6:1, below the 25:1 regulatory maximum.
- Enact contributed $250 million to its Bermuda subsidiary, Enact Re, in Q2 and entered into additional excess-of-loss and quota-share reinsurance arrangements in 2023. Reinsurance reduces exposure but does not release Enact from its obligations if reinsurers cannot pay.
- Capital returns included $74.1 million of dividends and $69.7 million of share repurchases during the first nine months. After quarter-end, Enact announced a $0.16-per-share quarterly dividend and a special dividend of $113 million, or $0.71 per share, for Q4 2023. Subsidiary distributions are subject to regulatory restrictions, and future dividends remain subject to approvals.
- Key risks include economic deterioration or falling home prices, interest-rate and investment-market volatility, reserve-estimate uncertainty, GSE and regulatory changes, competition, reinsurance availability, and the ability to maintain PMIERs and regulatory capital. Management reported no material change in previously disclosed risk factors, no pending material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether favorable reserve development continues, given the reliance on cure performance and uncertainty in forbearance and foreclosure outcomes.
- How persistently high mortgage rates, subdued originations, and rising higher-DTI business affect new insurance written, premium rates, and future claims.
- Whether investment income gains are sustained and how interest rates and credit conditions affect the portfolio’s substantial unrealized losses.
- Whether PMIERs headroom, regulatory capital, and permitted subsidiary distributions support planned dividends, repurchases, and other capital uses.
- The terms, performance, and counterparty exposure of reinsurance arrangements, and the company’s ability to refinance or repay the 2025 notes at maturity.