Enact Holdings, Inc. — Q2 2022 Form 10-Q
Business and period: Enact writes and assumes residential mortgage guaranty insurance and provides contract underwriting services. This unaudited filing covers the quarter and six months ended June 30, 2022, with comparisons to 2021. The company reports one operating segment and is a subsidiary of Genworth Financial.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $273.5M | $276.1M | $543.1M | $564.7M |
| Net income | $204.7M | $130.8M | $369.4M | $255.9M |
| Diluted EPS | $1.25 | $0.80 | $2.26 | $1.57 |
| Loss ratio | (26)% | 12% | (15)% | 17% |
| Expense ratio | 26% | 27% | 25% | 26% |
| Adjusted operating income (non-GAAP) | $205.1M | $134.0M | $370.2M | $259.9M |
Profit drivers: Net income rose 57% for the quarter and 44% for the half year. Results benefited substantially from favorable prior-year reserve development: a $96M reserve release in Q2 and $146M for the first half, primarily reflecting better-than-expected cures on COVID-19-era delinquencies. Current-accident-year loss expense remained positive. Premium revenue declined as older, higher-priced policies continued to lapse and single-premium cancellations decreased.
Cash flow and liquidity: First-half operating cash flow was $301.7M, versus $263.1M a year earlier; investing cash outflow was $120.8M, versus $280.6M; dividends paid were $22.8M. Cash and equivalents were $583.9M at June 30, up from $425.8M at year-end. Available-for-sale fixed maturities had a $4.91B fair value. The company reported $741.6M of long-term borrowings, comprising $750M of 6.5% senior notes due August 2025, net of deferred borrowing costs. A new $200M five-year unsecured revolving facility was undrawn at quarter-end.
Capital and investment marks: Equity was $4.08B. Accumulated other comprehensive income moved from a positive $83.6M at year-end to a negative $293.0M, mainly from unrealized losses on fixed maturities as interest rates rose. The filing attributes the declines largely to rates and market volatility, not credit losses, and says it does not expect or intend to sell the affected securities before recovering amortized cost. EMICO’s risk-to-capital ratio was 12.6:1, below the 25:1 regulatory maximum. PMIERs available assets were $5.147B against $3.100B required, or 166% sufficiency; this excludes the effect of GSE restrictions.
Material changes and operating trends
- Q2 new insurance written fell 35% to $17.4B, primarily reflecting lower mortgage refinancing activity amid rising rates. First-half NIW was $36.3B versus $51.6B.
- Primary insurance in-force increased to $237.6B from $226.5B at December 31, 2021; persistency rose to 80% in Q2 from 63% a year earlier, cushioning lower new business.
- Delinquent primary loans fell to 19,513 from 24,820 at year-end and 33,568 a year earlier; the delinquency rate was 2.06%, versus 2.65% and 3.60%, respectively. Cures exceeded new defaults in the first half.
- Moody’s upgraded EMICO’s financial strength rating to Baa1 from Baa2 on July 21, 2022; Fitch affirmed BBB+ and S&P affirmed BBB with a positive outlook.
- The company began a quarterly dividend program; the inaugural Q2 dividend was $0.14 per share, paid May 26, 2022. Future payments require periodic Board and Parent approval and remain subject to capital, regulatory and facility restrictions.
Outlook, commentary and risks
Management described continued economic headwinds, including inflation, rising interest rates, market volatility, weaker housing affordability and declining mortgage originations. It expects refinancing activity to remain low if rates continue to rise. No specific earnings or revenue guidance was provided. Management said current market and underwriting conditions remained within its risk-adjusted return appetite, while noting that GSE affordability initiatives and other policy changes could affect the private mortgage insurance market.
Loss reserves remain uncertain, particularly for COVID-19-related forbearance delinquencies whose ultimate cures or claims may take several quarters to resolve. Extended foreclosure timelines, higher claim expenses, economic deterioration and falling home prices could increase losses. Other material risks include GSE/PMIERs eligibility and capital restrictions, competition, reinsurance availability and counterparty performance, interest-rate and investment risk, and the parent-company relationship. The filing reports no pending material legal proceedings and no material changes in critical accounting estimates.
Investor verification points
- Assess how much earnings growth depends on reserve releases and whether cure trends continue to support favorable prior-year development.
- Track forbearance resolutions, new delinquencies, claims, reserve adequacy and potential loss severity as foreclosure timelines progress.
- Monitor NIW, persistency, premium trends and the effects of mortgage rates and housing policy on the insured portfolio.
- Verify PMIERs sufficiency, GSE restrictions, statutory capital and dividend capacity; distinguish published PMIERs sufficiency from restricted capital availability.
- Review interest-rate sensitivity and unrealized investment losses, including whether liquidity needs could require securities sales before recovery.
- Confirm future dividends against Board and Parent approvals, regulatory requirements and revolving-credit covenants.