Enact Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Enact provides residential mortgage guaranty insurance, principally covering low-down-payment loans. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Total revenue | $280.9 | $269.6; up 4% |
| Net earned premiums | $235.1 | $234.3 |
| Net investment income | $45.3 | $35.1; up 29% |
| Net income | $176.0; diluted EPS $1.08 | $164.6; diluted EPS $1.01 |
| Adjusted operating income (non-GAAP) | $175.6 | $165.1 |
| Loss ratio / expense ratio | (5)% / 23% | (4)% / 24% |
| Operating cash flow | $119.3 | $160.8 |
| Cash and cash equivalents | $621.6 | $513.8 at Dec. 31, 2022 |
| Investments | $4,931.8 fair value | $4,887.8 at Dec. 31, 2022 |
| Long-term borrowings | $743.5 carrying value | $742.8 at Dec. 31, 2022 |
| Total assets / equity | $5,842.2 / $4,296.6 | $5,709.1 / $4,100.9 at Dec. 31, 2022 |
Q1 cash flow also included $33.5 million provided by investing activities and $45.0 million used in financing, including $22.8 million of dividends and $22.2 million of share repurchases. The $750 million 6.5% senior notes mature August 15, 2025. A $200 million revolving facility was undrawn, and the company reported compliance with its covenants.
Material changes and operating indicators
- Net income rose 7%, chiefly reflecting higher investment income and lower expenses. Investment income benefited from higher yields and average invested assets.
- Prior-year reserve development was favorable by $71.3 million, primarily from better-than-expected cures on COVID-19-era delinquencies from 2020 and 2021. Current-accident-year incurred losses were $60.3 million. The reported negative loss ratio reflects the reserve release, not an absence of current-period claims.
- New insurance written fell 30% to $13.2 billion, largely due to lower mortgage originations amid elevated mortgage rates. Primary insurance-in-force rose to $252.5 billion from $231.9 billion a year earlier; persistency increased to 85% from 76%.
- Primary delinquencies fell to 18,633 from 22,571 a year earlier; the delinquency rate was 1.93% versus 2.40%. Delinquencies declined during the quarter as cures exceeded new defaults.
- Available-for-sale fixed maturities had $407.4 million of pretax net unrealized losses at quarter-end (approximately $320.4 million after tax); accumulated other comprehensive loss was $320.2 million. Management attributed unrealized losses principally to interest rates and market volatility, said issuers were making timely payments, and stated it neither intended nor expected to be required to sell before recovery of amortized cost.
Outlook, risks and notable items
- The filing gives no numerical earnings or revenue guidance. Management described mortgage originations as slow and refinancing activity as likely to remain low near to medium term, while noting that elevated rates support persistency. It said pricing and underwriting conditions remained within its risk-adjusted return appetite.
- Key uncertainties include economic weakness, interest rates and home prices, mortgage-insurance demand and competition, GSE/FHFA or FHA policy changes, PMIERs eligibility and capital requirements, and the timing and severity of claims. Loss reserves depend on uncertain cure, claim and foreclosure experience; management cautioned that reserve estimates could require material future adjustments.
- At March 31, 1.4% of active primary policies (13,678) were reported in forbearance, and about 34% of those were delinquent. Extended loss-mitigation and foreclosure timelines may affect claim timing and severity.
- PMIERs available assets were $5.357 billion against $3.259 billion of required assets, a 164% sufficiency ratio and $2.098 billion excess. EMICO’s risk-to-capital ratio was 12.7:1, below the North Carolina 25:1 maximum. The 0.30 PMIERs factor for eligible delinquencies reduced required assets by an estimated $120 million.
- GSE restrictions and conditions were confirmed satisfied by December 31, 2022. Enact said their removal improved capital flexibility. EMICO completed an approximately $158 million distribution to Enact in April 2023; subsidiary distributions remain subject to regulatory requirements and other limits.
- Moody’s upgraded EMICO to A3 and S&P upgraded it to BBB+ during the quarter; Fitch upgraded it to A- after quarter-end. The company repurchased 916,776 shares for $22.2 million and paid a $0.14-per-share dividend. A $0.16 dividend was announced for June 2023.
- The March 20, 2023 amended and restated agreement with parent Genworth removed Genworth’s approval right over Enact’s annual operating plan. The filing reports no pending material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether favorable reserve development continues, and how COVID-era and other delinquencies ultimately cure or generate claims.
- Whether falling mortgage originations and higher persistency translate into sustained insurance-in-force and premium growth.
- The sensitivity of investment values and liquidity to interest rates, credit conditions and any need to realize portfolio losses.
- Ongoing PMIERs and statutory capital headroom, plus the regulatory and parent-approval constraints on future subsidiary distributions and shareholder returns.
- The terms and performance of reinsurance, including the new 2023 book-year transaction providing up to $180 million of coverage.