Enact Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet figures are as of March 31, 2022. Enact writes and assumes residential mortgage guaranty insurance and provides contract underwriting services. Results are unaudited and reflect one operating segment.
Financial and operating performance
| Metric | Q1 2022 | Prior comparable period / change |
|---|---|---|
| Total revenue | $269.6 million | $288.6 million; down 7% |
| Net premiums earned | $234.3 million | $252.5 million; down 7% |
| Net investment income | $35.1 million | $35.3 million; approximately flat |
| Losses incurred | $(10.4) million | $55.4 million |
| Net income | $164.6 million; $1.01 per diluted share | $125.1 million; $0.77 per diluted share; net income up 32% |
| Adjusted operating income (non-GAAP) | $165.1 million | $125.9 million; up about 31% |
| Loss ratio / expense ratio | (4)% / 24% | 22% / 24% |
| Operating cash flow | $160.8 million | $127.0 million |
| Cash and cash equivalents | $440.2 million | $425.8 million at December 31, 2021 |
| Long-term borrowings | $741.0 million carrying value; $750 million principal | 6.5% senior notes due August 2025 |
| Total assets / equity | $5.79 billion / $4.05 billion | $5.87 billion / $4.11 billion at December 31, 2021 |
The expense ratio was unchanged. The negative loss ratio reflects favorable reserve development, not an absence of current-period claims: losses on current accident-year events were $41.3 million, offset by a $51.7 million release on prior accident years. Net investment losses were $0.3 million.
Material changes and management commentary
- Premiums declined as older, higher-priced policies continued to lapse, single-premium cancellations decreased, and ceded premiums increased with greater use of credit-risk transfer; growth in insurance in-force partly offset the decline.
- New insurance written fell 25% to $18.8 billion, primarily because rising mortgage rates reduced refinance originations. Primary insurance in-force rose to $231.9 billion from $210.2 billion a year earlier, supported by 76% persistency versus 56%.
- Primary delinquencies fell to 22,571 from 41,332 a year earlier; the delinquency rate declined to 2.40% from 4.48%. Cures exceeded new defaults during the quarter.
- The $50 million reserve release was primarily attributable to better-than-expected cures among COVID-19-related 2020 delinquencies. Management cautions that reserve estimates, particularly for borrowers in forbearance, remain uncertain.
- Comprehensive income was a loss of $59.6 million despite positive net income, mainly because of $224.3 million of after-tax unrealized investment losses. Fixed-maturity securities’ fair value declined to $5.09 billion from $5.27 billion at year-end as interest rates rose. Management attributed the unrealized losses largely to rates and market volatility, not credit deterioration, and said it did not expect to sell the affected securities before recovery of amortized cost.
- Operating cash flow exceeded the prior-year quarter; investing activities used $146.5 million, primarily reflecting net purchases of fixed-maturity securities. Financing cash flows were nil.
Capital, liquidity, outlook and risks
- PMIERs available assets were estimated at $5.22 billion against $2.96 billion of net required assets, a 176% sufficiency ratio and $2.26 billion excess. The increase from 165% at year-end was attributed partly to two 2022 reinsurance transactions, which provided about $370 million of additional PMIERs capital credit.
- EMICO’s risk-to-capital ratio was 12.2:1, below North Carolina’s 25:1 maximum. Enact also remains subject to GSE capital and liquidity restrictions, including a 120% PMIERs minimum-asset requirement during 2022 while specified GSE conditions remain unmet. About $228 million of senior-note proceeds remained subject to restrictions for debt service or regulatory capital support.
- Management described inflation, geopolitical uncertainty, supply constraints, COVID-19 effects, rising interest rates, and reduced housing affordability as economic headwinds. It said the January 2022 GSE fee changes were not expected to significantly affect the mortgage-insurance market or growth projections.
- Key risks include uncertainty in loss-reserve estimates and forbearance cures, potentially higher claim severity from extended foreclosure timelines, housing-price declines, lower mortgage originations, GSE or regulatory changes, competition, reinsurer performance, and investment-market volatility. Most active primary policies reported in forbearance were 2.0% of the total at quarter-end; approximately 41% of those were delinquent.
- No formal earnings guidance was provided. In April 2022, the board announced an intended quarterly dividend of $0.14 per share, with the initial payment scheduled for May 26, subject to approvals. EMICO also made an approximately $242 million distribution to Enact in April. Future dividends remain subject to board, parent and applicable regulatory processes.
- The filing reported no pending material legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of March 31, 2022.
Important facts for investors to verify
- Whether COVID-era delinquencies continue to cure at rates supporting reserve assumptions, and whether the $50 million prior-year reserve release proves sustainable.
- How higher rates, home prices, affordability and lower refinance activity affect new insurance written, persistency, premiums and future claims.
- Continued compliance with PMIERs and GSE restrictions, including the restricted-note proceeds, and the availability of statutory capital for distributions.
- Whether unrealized investment losses remain non-credit-related and can be recovered without asset sales; monitor changes in rates, credit quality and portfolio liquidity.
- Whether the announced dividend is paid as planned and what approvals or capital constraints govern subsequent distributions.