Enact (ACT) - 2023 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements with inherent risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements regarding expected financial and operational results, which involve risks and uncertainties that could cause actual results to differ materially[6] - Key risk factors include inability to maintain PMIERs, deteriorating economic conditions, uncertainty around COVID-19, loss reserve estimate inaccuracies, competition, changes to GSE charters, interest rate fluctuations, limited capital/reinsurance, adverse rating agency actions, and various operational and regulatory risks[7][8] Part I. Financial Information Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income, equity changes, cash flows, and detailed notes Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, as of June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | |:---|:---|:---| | Assets ||| | Total investments | $4,925,888 | $4,887,807 | | Cash and cash equivalents | $691,416 | $513,775 | | Total assets | $5,923,860 | $5,709,149 | | Liabilities ||| | Loss reserves | $490,203 | $519,008 | | Unearned premiums | $174,561 | $202,717 | | Total liabilities | $1,547,964 | $1,608,241 | | Equity ||| | Total equity | $4,375,896 | $4,100,908 | | Total liabilities and equity | $5,923,860 | $5,709,149 | - Total assets increased by $214.7 million from December 31, 2022, to June 30, 2023, primarily driven by an increase in cash and cash equivalents[12] - Total liabilities decreased by $60.3 million, mainly due to a reduction in loss reserves and unearned premiums[12] - Total equity increased by $274.9 million, reflecting improved financial health[12] Condensed Consolidated Statements of Income Details the company's revenues, losses, expenses, and net income for the three and six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Income (Amounts in thousands, except per share amounts) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Revenues ||||| | Premiums | $238,520 | $237,386 | $473,628 | $471,665 | | Net investment income | $50,915 | $35,776 | $96,256 | $70,922 | | Net investment gains (losses) | $(13,001) | $(381) | $(13,123) | $(720) | | Total revenues | $277,522 | $273,541 | $558,461 | $543,129 | | Losses and expenses ||||| | Losses incurred | $(4,070) | $(61,563) | $(15,054) | $(72,009) | | Acquisition and operating expenses, net of deferrals | $51,887 | $58,201 | $103,592 | $112,463 | | Total losses and expenses | $63,375 | $12,654 | $119,801 | $72,336 | | Income before income taxes | $214,147 | $260,887 | $438,660 | $470,793 | | Provision for income taxes | $46,127 | $56,152 | $94,652 | $101,428 | | Net income | $168,020 | $204,735 | $344,008 | $369,365 | | Net income per common share ||||| | Basic | $1.04 | $1.26 | $2.13 | $2.27 | | Diluted | $1.04 | $1.25 | $2.11 | $2.26 | - Net income decreased by 18% for the three months ended June 30, 2023, and by 7% for the six months ended June 30, 2023, compared to the respective prior year periods[14] - Net investment income significantly increased by 42% for the three months and 36% for the six months ended June 30, 2023, driven by higher yields and average invested assets[14][178][186] - Losses incurred showed a favorable change, decreasing from $(61,563) thousand to $(4,070) thousand for the three months, and from $(72,009) thousand to $(15,054) thousand for the six months, primarily due to significant reserve releases on prior year delinquencies[14][179][187] Condensed Consolidated Statements of Comprehensive Income Reports net income and other comprehensive income components, showing total comprehensive income for the three and six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Comprehensive Income (Amounts in thousands) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Net income | $168,020 | $204,735 | $344,008 | $369,365 | | Other comprehensive income (loss), net of taxes: ||||| | Net unrealized gains (losses) on securities without an allowance for credit losses | $(25,000) | $(152,401) | $37,510 | $(376,701) | | Foreign currency translation | $(1) | $64 | $(9) | $93 | | Other comprehensive income (loss) | $(25,001) | $(152,337) | $37,501 | $(376,608) | | Total comprehensive income (loss) | $143,019 | $52,398 | $381,509 | $(7,243) | - Total comprehensive income significantly increased to $143.0 million for the three months and $381.5 million for the six months ended June 30, 2023, compared to $52.4 million and $(7.2) million in the prior year periods, primarily due to a positive change in net unrealized gains on securities[17] Condensed Consolidated Statements of Changes in Equity Outlines changes in common stock, paid-in capital, accumulated other comprehensive income, and retained earnings for the periods ended June 30, 2023 Condensed Consolidated Statements of Changes in Equity (Amounts in thousands) - Three Months Ended June 30, 2023 | Metric | Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total equity | |:---|:---|:---|:---|:---|:---|\n| Balance as of March 31, 2023 | $1,619 | $2,362,281 | $(320,242) | $2,252,963 | $4,296,621 | | Net income | — | — | — | $168,020 | $168,020 | | Other comprehensive income (loss), net of taxes | — | — | $(25,001) | — | $(25,001) | | Repurchase of common stock | $(17) | $(41,218) | — | — | $(41,235) | | Stock-based compensation expense and exercises and other | — | $3,464 | — | $(271) | $3,193 | | Dividends | — | — | — | $(25,702) | $(25,702) | | Balance as of June 30, 2023 | $1,602 | $2,324,527 | $(345,243) | $2,395,010 | $4,375,896 | Condensed Consolidated Statements of Changes in Equity (Amounts in thousands) - Six Months Ended June 30, 2023 | Metric | Common stock | Additional paid-in capital | Accumulated other comprehensive income (loss) | Retained earnings | Total equity | |:---|:---|:---|:---|:---|:---|\n| Balance as of December 31, 2022 | $1,628 | $2,382,068 | $(382,744) | $2,099,956 | $4,100,908 | | Net income | — | — | — | $344,008 | $344,008 | | Other comprehensive income (loss), net of taxes | — | — | $37,501 | — | $37,501 | | Repurchase of common stock | $(27) | $(63,408) | — | — | $(63,435) | | Stock-based compensation expense and exercises and other | $1 | $5,867 | — | $(496) | $5,372 | | Dividends | — | — | — | $(48,458) | $(48,458) | | Balance as of June 30, 2023 | $1,602 | $2,324,527 | $(345,243) | $2,395,010 | $4,375,896 | - Total equity increased from $4,100,908 thousand at December 31, 2022, to $4,375,896 thousand at June 30, 2023, primarily driven by net income and positive other comprehensive income, partially offset by share repurchases and dividends[23] - The company repurchased $63.4 million of common stock and paid $48.5 million in dividends during the six months ended June 30, 2023[23] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|\n| Net cash provided by operating activities | $287,185 | $301,745 | | Net cash provided by (used in) investing activities | $2,349 | $(120,828) | | Net cash used in financing activities | $(111,893) | $(22,798) | | Net increase in cash and cash equivalents | $177,641 | $158,119 | | Cash and cash equivalents at end of period | $691,416 | $583,947 | - Net cash provided by operating activities decreased slightly to $287.2 million for the six months ended June 30, 2023, from $301.7 million in the prior year, mainly due to timing of tax payments and reduction in unearned premiums[27][267] - Investing activities shifted from a net cash outflow of $120.8 million in 2022 to a net cash inflow of $2.3 million in 2023, as maturities and sales of securities outpaced purchases[27][268] - Net cash used in financing activities significantly increased to $111.9 million, driven by $63.4 million in share repurchases and $48.5 million in dividends paid[27][268] Notes to Condensed Consolidated Financial Statements Provides detailed explanations of the accounting policies, significant transactions, and financial position supporting the condensed consolidated financial statements (1) Nature of business, organization structure and basis of presentation Describes Enact Holdings, Inc.'s business as a residential mortgage guaranty insurer, its IPO, and operations through EMICO and Enact Re Ltd - Enact Holdings, Inc. (EHI) is a subsidiary of Genworth Financial, Inc. and completed a minority IPO of 18.4% of its common stock in September 2021[29] - The company primarily writes and assumes residential mortgage guaranty insurance, enabling borrowers to buy homes with low down payments and facilitating secondary mortgage market sales to GSEs[30] - Operations are conducted through Enact Mortgage Insurance Corporation (EMICO) in all 50 states and D.C., and mortgage-related insurance/reinsurance through Bermuda-based Enact Re Ltd., to which $250 million was contributed in Q2 2023[31] (2) Accounting changes Confirms no new accounting pronouncements adopted in 2023 and no significant unadopted pronouncements impacting financial statements - The company has not adopted new accounting pronouncements in 2023, and there are no significant new pronouncements impacting its financial statements that are not yet adopted[35] (3) Investments Details the company's investment portfolio, including net investment income, gains/losses, and fair value of fixed maturity securities Net Investment Income (Amounts in thousands) | Source | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Fixed maturity securities available-for-sale | $44,542 | $36,810 | $85,917 | $73,344 | | Cash, cash equivalents and short-term investments | $7,955 | $422 | $13,575 | $432 | | Net investment income | $50,915 | $35,776 | $96,256 | $70,922 | Net Investment Gains (Losses) (Amounts in thousands) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Net realized gains (losses) on fixed maturity securities | $(12,988) | $(381) | $(13,110) | $(893) | | Net investment gains (losses) | $(13,001) | $(381) | $(13,123) | $(720) | - Net investment income increased significantly due to higher yields from rising interest rates and higher average invested assets[37][178][186] - Net investment losses were primarily driven by the sale of fixed income securities as part of an investment strategy to optimize portfolio yield[39][178][186] Fixed Maturity Securities Available-For-Sale (Amounts in thousands) | Investment Type | Amortized cost (June 30, 2023) | Fair value (June 30, 2023) | Amortized cost (December 31, 2022) | Fair value (December 31, 2022) | |:---|:---|:---|:---|:---|\n| U.S. government, agencies and GSEs | $112,190 | $110,538 | $46,319 | $44,769 | | State and political subdivisions | $510,288 | $426,528 | $515,935 | $419,856 | | U.S. corporate | $2,728,245 | $2,509,479 | $2,886,269 | $2,646,863 | | Other asset-backed | $1,285,333 | $1,207,764 | $1,185,048 | $1,100,036 | | Total fixed maturity securities available-for-sale | $5,354,262 | $4,915,039 | $5,371,673 | $4,884,760 | - As of June 30, 2023, the total fair value of fixed maturity securities available-for-sale was $4.915 billion, with U.S. corporate securities representing the largest portion at $2.509 billion[47] - The company holds significant unrealized losses on fixed maturity securities, primarily due to changes in interest rates and market volatility, but expects to recover amortized cost and does not intend to sell prior to recovery[43][52][53] (4) Fair value Explains the methodologies for fair value measurements of assets and liabilities, primarily using third-party pricing services and internal models - Fair value measurements for fixed maturity securities and short-term investments are primarily estimated using third-party pricing services, internal models, and broker quotes, employing market or income approaches[62] - Approximately 89% of the portfolio was priced using third-party pricing services as of June 30, 2023, typically classified as Level 2[68] Assets Measured at Fair Value on a Recurring Basis (Amounts in thousands) | Asset Class | Total (June 30, 2023) | Level 1 (June 30, 2023) | Level 2 (June 30, 2023) | Level 3 (June 30, 2023) | |:---|:---|:---|:---|:---|\n| Fixed maturity securities | $4,915,039 | — | $4,609,062 | $305,977 | | Short-term investments | $10,849 | — | $10,849 | — | | Total | $4,925,888 | — | $4,619,911 | $305,977 | - Level 3 fixed maturity securities, valued using significant unobservable inputs, totaled $305.9 million as of June 30, 2023, an increase from $319.2 million at December 31, 2022[80][81] Liabilities Not Required to be Carried at Fair Value (Amounts in thousands) | Liability | Carrying amount (June 30, 2023) | Fair value (June 30, 2023) | Carrying amount (December 31, 2022) | Fair value (December 31, 2022) | |:---|:---|:---|:---|:---|\n| Long-term borrowings | $744,100 | $737,790 | $742,830 | $739,020 | (5) Loss reserves Provides details on the company's loss reserves, including changes in liability and favorable adjustments from prior accident years Activity for the Liability for Loss Reserves (Amounts in thousands) | Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|\n| Loss reserves, beginning balance | $519,008 | $641,325 | | Net loss reserves, beginning balance | $518,330 | $640,644 | | Total incurred | $(15,191) | $(71,996) | | Total paid | $(14,048) | $(10,427) | | Net loss reserves, ending balance | $489,091 | $558,221 | | Loss reserves, ending balance | $490,203 | $558,894 | - Loss reserves decreased from $519.0 million at the beginning of 2023 to $490.2 million at June 30, 2023, primarily due to favorable adjustments on prior accident year reserves[96] - The company recorded favorable adjustments of $133 million on prior accident year reserves for the six months ended June 30, 2023, driven by better-than-expected cure performance of delinquencies from 2021 and earlier, including COVID-19 related ones[100] - Losses and LAE incurred for the current accident year increased to $120.2 million for the six months ended June 30, 2023, from $75.6 million in the prior year, attributable to new delinquencies[99][189] (6) Reinsurance Describes the company's reinsurance activities, including policy risk reduction, exposure diversification, and specific reinsurance agreements - The company reinsures a portion of its policy risks to reduce ultimate losses, diversify exposures, and comply with regulatory requirements, while also assuming certain policy risks[101] Effects of Reinsurance on Premiums Written and Earned (Amounts in thousands) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Net premiums written | $224,401 | $225,756 | $445,472 | $450,127 | | Net premiums earned | $238,520 | $237,386 | $473,628 | $471,665 | - In March 2023, the company executed an excess-of-loss reinsurance transaction providing up to $180 million coverage for the 2023 book year[108] - On June 30, 2023, EMICO entered into a quota share reinsurance agreement, ceding 13.125% of eligible NIW from January 1, 2023, to December 31, 2023, with a 20% ceding commission and up to 55% profit commission[109][111] (7) Borrowings Details the company's long-term debt, including senior notes and an undrawn revolving credit facility, and compliance with covenants Long-term Borrowings (Amounts in thousands) | Metric | June 30, 2023 | December 31, 2022 | |:---|:---|:---|\n| 6.5% Senior Notes, due 2025 | $750,000 | $750,000 | | Deferred borrowing charges | $(5,900) | $(7,170) | | Total | $744,100 | $742,830 | - The company has $750 million aggregate principal amount of 6.5% senior notes due in 2025[112] - A five-year, unsecured revolving credit facility of $200 million (with an uncommitted ability to increase by $100 million) was entered into on June 30, 2022, and remained undrawn as of June 30, 2023[114][115] - The company is in compliance with all covenants of the revolving credit facility, which include financial covenants related to net worth, capital, liquidity, debt-to-capitalization, and PMIERs compliance[115] (8) Income taxes Explains the computation of income tax provision using a separate return method and consistency with the U.S. corporate federal income tax rate - The provision for income taxes is computed using a separate return with benefits-for-loss method, and the effective tax rate was consistent with the U.S. corporate federal income tax rate[116][182][191] (9) Related party transactions Outlines agreements and costs incurred for services exchanged with Genworth, a related party - The company has various agreements with Genworth for administrative, operating, and investment management services[117][119] Costs Incurred for Services from Genworth (Amounts in millions) | Service Type | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Administrative and operating expenses | $4.5 | $7.5 | $9.2 | $15.3 | | Investment expenses | $1.7 | $1.4 | $3.3 | $2.8 | - The company charged Genworth $0.1 million and $0.2 million for IT and administrative services for the three months ended June 30, 2023 and 2022, respectively[120] (10) Net income per common share Presents basic and diluted net income per common share, along with weighted average shares outstanding, for the reported periods Net Income Per Common Share (Amounts in thousands, except per share amounts) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Net income available to EHI common stockholders | $168,020 | $204,735 | $344,008 | $369,365 | | Basic EPS | $1.04 | $1.26 | $2.13 | $2.27 | | Diluted EPS | $1.04 | $1.25 | $2.11 | $2.26 | | Basic weighted average common shares outstanding | 161,318 | 162,842 | 161,880 | 162,842 | | Diluted weighted average common shares outstanding | 162,171 | 163,225 | 162,675 | 163,140 | - Basic EPS decreased to $1.04 for Q2 2023 from $1.26 for Q2 2022, and to $2.13 for the six months from $2.27 in the prior year, reflecting the decrease in net income[125] (11) Changes in accumulated other comprehensive income Details the roll forward of accumulated other comprehensive income, highlighting changes from unrealized gains/losses on investments and foreign currency translation Roll Forward of Accumulated Other Comprehensive Income (Amounts in thousands) - Six Months Ended June 30, 2023 | Metric | Net unrealized gains (losses) investment | Foreign currency translation | Total | |:---|:---|:---|:---|\n| Balance as of January 1, 2023, net of tax | $(382,896) | $152 | $(382,744) | | Other comprehensive income (loss) before reclassifications | $27,153 | $(9) | $27,144 | | Amounts reclassified from other comprehensive income (loss) | $10,357 | — | $10,357 | | Total other comprehensive income (loss) | $37,510 | $(9) | $37,501 | | Balance as of June 30, 2023, net of tax | $(345,386) | $143 | $(345,243) | - Accumulated other comprehensive income (loss) improved from $(382.7) million at January 1, 2023, to $(345.2) million at June 30, 2023, primarily due to positive unrealized gains on investments[131] (12) Stockholders' equity Discusses changes in stockholders' equity, including share repurchase programs and dividend payments - The Board approved a $75 million share repurchase program on November 1, 2022. During Q2 2023, the company purchased 1,705,169 shares for $41.2 million at an average price of $24.13[134] - For the six months ended June 30, 2023, 2,621,945 shares were purchased for $63.4 million at an average price of $24.15, with $10.1 million remaining under the program[135] - A quarterly cash dividend of $0.16 per share was paid in Q2 2023, an increase from $0.14 per share in Q1 2023 and Q2 2022[136] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results of operations, covering key factors, trends, metrics, and capital management strategies Key Factors Affecting Our Results Notes no material changes to key factors affecting results compared to the Annual Report, except for impacts discussed in 'Trends and Conditions' - No material changes to key factors affecting results compared to the Annual Report, other than impacts discussed in 'Trends and Conditions'[140] Trends and Conditions Discusses macroeconomic conditions, mortgage market trends, delinquency rates, insurance in-force, loss ratio, capital adequacy, credit ratings, and shareholder return initiatives - The U.S. economy faced uncertainty in Q2 2023 due to inflation, geopolitical environment, banking failures, and recession fears, with the Federal Reserve continuing interest rate hikes[141] - Mortgage origination activity remained slow due to elevated mortgage rates and low housing supply, impacting housing affordability despite rising home prices[142] - Total delinquencies decreased in Q2 2023 as cures outpaced new delinquencies, with the new delinquency rate at 1.0%. Approximately 1.3% of active primary policies were in forbearance, with 31% reported as delinquent[145] - New insurance written (NIW) decreased by 14% in Q2 2023 compared to Q2 2022, primarily due to lower originations driven by elevated mortgage rates[155] - Primary persistency rate increased to 84% in Q2 2023 from 80% in Q2 2022, offsetting the decline in NIW and leading to a $9.6 billion increase in primary insurance in-force (IIF) since December 31, 2022[155] - The loss ratio for Q2 2023 was (2)%, compared to (26)% in Q2 2022, both impacted by favorable reserve adjustments from better-than-expected cure performance on prior year delinquencies[157][159] - EMICO's risk-to-capital ratio was approximately 11.9:1 as of June 30, 2023, well below the NCDOI's maximum of 25:1[163] - The company is no longer subject to GSE Restrictions and Conditions as of December 31, 2022, and PMIERs sufficiency was 162% ($1,958 million above requirements) as of June 30, 2023[164][166] - Credit ratings for EMICO were upgraded by S&P, Moody's, and Fitch in early 2023, and A.M. Best initiated A- ratings for EMICO and Enact Re in August 2023[168] - The quarterly dividend was increased to $0.16 per share in May 2023. A new share repurchase program of an additional $100 million was authorized in August 2023[170][171] Results of Operations and Key Metrics Results of Operations Provides a consolidated overview of revenues, losses, expenses, and net income, along with loss and expense ratios, for the reported periods Consolidated Results - Three Months Ended June 30 (Amounts in thousands) | Metric | 2023 | 2022 | Increase (decrease) | Percentage change | |:---|:---|:---|:---|:---|\n| Total revenues | $277,522 | $273,541 | $3,981 | 1% | | Total losses and expenses | $63,375 | $12,654 | $50,721 | 401% | | Net income | $168,020 | $204,735 | $(36,715) | (18)% | | Loss ratio | (2)% | (26)% | | | | Expense ratio | 23% | 26% | | | Consolidated Results - Six Months Ended June 30 (Amounts in thousands) | Metric | 2023 | 2022 | Increase (decrease) | Percentage change | |:---|:---|:---|:---|:---|\n| Total revenues | $558,461 | $543,129 | $15,332 | 3% | | Total losses and expenses | $119,801 | $72,336 | $47,465 | 66% | | Net income | $344,008 | $369,365 | $(25,357) | (7)% | | Loss ratio | (3)% | (15)% | | | | Expense ratio (net earned premiums) | 23% | 25% | | | - Net income decreased by 18% for the three months and 7% for the six months ended June 30, 2023, primarily due to a larger reserve release in the prior year, partially offset by higher revenues and lower operating expenses in 2023[177][185][196][197] - Acquisition and operating expenses, net of deferrals, decreased due to cost reduction initiatives, including a renegotiated shared services agreement with Genworth and a voluntary separation program[182][190] Use of Non-GAAP Financial Measures Explains the use of "adjusted operating income" as a non-GAAP measure for evaluating core operating trends and peer comparisons - The company uses 'adjusted operating income' as a non-GAAP financial measure to evaluate core operating trends and enable peer comparisons, excluding net investment gains (losses) and restructuring costs[192][193] Reconciliation of Net Income to Adjusted Operating Income (Amounts in thousands) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Net income | $168,020 | $204,735 | $344,008 | $369,365 | | Net investment (gains) losses | $13,001 | $381 | $13,123 | $720 | | Costs associated with reorganization | $41 | $104 | $(542) | $326 | | Taxes on adjustments | $(2,739) | $(102) | $(2,642) | $(220) | | Adjusted operating income | $178,323 | $205,118 | $353,947 | $370,191 | - Adjusted operating income decreased for both the three-month and six-month periods ended June 30, 2023, compared to 2022, primarily due to larger reserve releases in 2022[196][197] Key Metrics New insurance written ("NIW") Reports new insurance written, broken down by underlying mortgage type, and discusses trends in loan concentrations New Insurance Written (NIW) (Amounts in millions) | Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Primary NIW | $15,083 | $17,448 | $28,237 | $36,271 | | Total NIW | $15,083 | $17,448 | $28,237 | $36,271 | - NIW decreased by 14% for the three months and 22% for the six months ended June 30, 2023, primarily due to lower originations driven by elevated mortgage rates[199][200] Primary NIW by Underlying Type of Mortgage (Amounts in millions) | Type | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|:---|:---|\n| Purchases | $14,720 (98%) | $16,802 (96%) | $27,481 (97%) | $34,128 (94%) | | Refinances | $363 (2%) | $646 (4%) | $756 (3%) | $2,143 (6%) | - Monthly payment policies continue to dominate NIW, representing 98% in Q2 2023, while single policies declined due to higher mortgage rates[205] - There's an increase in concentrations of loans with higher DTI ratios, aligning with market trends due to rising mortgage rates and home price appreciation impacting affordability[213] Insurance in-force ("IIF") and Risk in-force ("RIF") Presents insurance in-force and risk in-force, including primary persistency rates and breakdown by policy year IIF and RIF (Amounts in millions) | Metric | June 30, 2023 | December 31, 2022 | June 30, 2022 | |:---|:---|:---|:---|\n| Primary IIF | $257,816 | $248,262 | $237,563 | | Total IIF | $258,285 | $248,767 | $238,127 | | Primary RIF | $65,714 | $62,791 | $59,911 | | Total RIF | $65,787 | $62,870 | $60,000 | - Primary IIF increased to $257.8 billion as of June 30, 2023, from $248.3 billion at December 31, 2022, driven by NIW and higher persistency rates[215][216] - Primary RIF increased to $65.7 billion as of June 30, 2023, from $62.8 billion at December 31, 2022, primarily due to higher IIF[215][216] - The primary persistency rate was 84% for Q2 2023, up from 80% in Q2 2022, reflecting lower lapse and cancellations due to higher interest rates[215] Primary IIF by Policy Year (Amounts in millions) | Policy Year | June 30, 2023 | December 31, 2022 | June 30, 2022 | |:---|:---|:---|:---|\n| 2021 | $76,381 (30%) | $81,724 (33%) | $86,175 (37%) | | 2022 | $61,390 (24%) | $63,577 (25%) | $35,426 (15%) | | 2023 | $27,629 (11%) | — | — | Primary RIF by Policy Year (Amounts in millions) | Policy Year | June 30, 2023 | December 31, 2022 | June 30, 2022 | |:---|:---|:---|:---|\n| 2021 | $19,245 (29%) | $20,418 (32%) | $21,384 (36%) | | 2022 | $15,392 (23%) | $15,907 (25%) | $8,884 (15%) | | 2023 | $7,132 (11%) | — | — | Delinquent loans and claims Details the roll forward of primary loans in default, including new defaults, cures, and claims paid, along with direct case reserves and RIF by aged missed payment status Roll Forward of Primary Loans in Default (Loan count) | Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|\n| Number of delinquencies, beginning of period | 19,943 | 24,820 | | New defaults | 18,804 | 16,571 | | Cures | (20,380) | (21,666) | | Claims paid | (282) | (197) | | Number of delinquencies, end of period | 18,065 | 19,513 | - The number of primary delinquencies decreased to 18,065 at June 30, 2023, from 19,943 at the beginning of the period, as cures outpaced new defaults[238] Primary Delinquencies, Direct Case Reserves and RIF by Aged Missed Payment Status (June 30, 2023) | Payments in default | Delinquencies (count) | Direct primary case reserves (millions) | Risk in-force (millions) | Reserves as % of risk in-force | |:---|:---|:---|:---|:---|\n| 3 payments or less | 8,162 | $70 | $488 | 14% | | 4 - 11 payments | 6,229 | $186 | $409 | 46% | | 12 payments or more | 3,674 | $196 | $205 | 95% | | Total | 18,065 | $452 | $1,102 | 41% | - Reserves as a percentage of RIF remained flat at 41% compared to December 31, 2022, but decreased from 48% at June 30, 2022[240][241][242] - Loss reserves in policy years 2016 and newer represented approximately 96% of primary RIF and 72% of total direct primary case reserves as of June 30, 2023[255] Investment Portfolio Describes the company's investment portfolio as a primary source of claims paying resources, focusing on its composition, strategy, and credit quality - The investment portfolio is a primary source of claims paying resources, primarily consisting of diverse, highly-rated fixed income securities[256] - Investment strategy focuses on meeting policyholder obligations, preserving capital, generating income, maximizing statutory capital, and increasing shareholder value[256] Fixed Maturity Securities Available-for-Sale (Amounts in thousands) | Investment Type | Fair value (June 30, 2023) | % of total | Fair value (December 31, 2022) | % of total | |:---|:---|:---|:---|:---|\n| U.S. corporate | $2,509,479 | 51% | $2,646,863 | 54% | | Other asset-backed | $1,207,764 | 25% | $1,100,036 | 23% | | Total | $4,915,039 | 100% | $4,884,760 | 100% | - As of June 30, 2023, 98% of the investment portfolio was rated investment grade, with an effective duration of 3.7 years and a pre-tax yield of 3.4%[261][262] Liquidity and Capital Resources Discusses the company's cash flows, capital adequacy, dividend capacity, and financial strength ratings Consolidated Cash Flows (Amounts in thousands) | Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | |:---|:---|:---|\n| Net cash provided by operating activities | $287,185 | $301,745 | | Net cash provided by (used in) investing activities | $2,349 | $(120,828) | | Net cash used in financing activities | $(111,893) | $(22,798) | | Net increase in cash and cash equivalents | $177,641 | $158,119 | - Cash and cash equivalents increased to $691 million as of June 30, 2023, from $514 million at December 31, 2022, supported by positive cash flows from operating and investing activities[267][284] - EMICO has the capacity to pay dividends from unassigned surplus of $349 million as of June 30, 2023, subject to NCDOI notice and approval[272] - EMICO's statutory risk-to-capital ratio was 11.9:1 as of June 30, 2023, well below the 25:1 maximum, indicating strong capital adequacy[284] EMICO Financial Strength Ratings | Name of Agency | Rating | Outlook | Action | Date of Rating | |:---|:---|:---|:---|:---|\n| Moody's Investor Service, Inc. | A3 | Stable | Upgrade | March 1, 2023 | | Fitch Ratings, Inc. | A | Stable | Upgrade | April 25, 2023 | | S&P Global Ratings | BBB+ | Stable | Upgrade | February 16, 2023 | | A.M. Best | A- | Stable | Initial | August 1, 2023 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks within its investment portfolio, primarily focusing on interest rate risk, credit quality, and concentration risk - The investment portfolio is exposed to market risks, including changes in interest rates, term structure of interest rates, credit quality, concentration risk, and prepayment risk[294][295] - Market risk is managed through defined investment policy guidelines, with oversight from the Board of Directors and senior management[294] - As of June 30, 2023, the effective duration of available-for-sale investments was 3.7 years, indicating a 3.7% change in fair value for a 100 basis point parallel shift in the yield curve[296] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of June 30, 2023, and reports no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023[298] - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2023[299] Part II. Other Information Item 1. Legal Proceedings The company is not currently subject to any pending material legal proceedings - The company is not subject to any pending material legal proceedings[301] Item 1A. Risk Factors This section reiterates that there have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K - No material changes from the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022[302] Item 2. Recent Sales of Unregistered Securities and Use of Proceeds This section details the company's share repurchase activities during the second quarter of 2023, including the number of shares purchased, average price, and remaining authorization Issuer Purchases of Equity Securities - Three Months Ended June 30, 2023 (Amounts in thousands except per share amounts) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs | |:---|:---|:---|:---|:---|\n| April 1 - April 30, 2023 | 353,416 | $23.73 | 353,416 | $42,908 | | May 1 - May 31, 2023 | 944,489 | $23.85 | 944,489 | $20,382 | | June 1 - June 30, 2023 | 407,264 | $25.15 | 407,264 | $10,140 | | Total | 1,705,169 | $24.13 | 1,705,169 | $10,140 | - During Q2 2023, the company repurchased 1,705,169 shares at an average price of $24.13 per share, with $10.1 million remaining under the $75 million authorization[304] - Subsequent to quarter end, an additional 241,946 shares were purchased through July 31, 2023, at an average price of $25.96[305] Item 5. Other Information This section announces a new $100 million share repurchase program and confirms no new Rule 10b5-1 trading arrangements by directors or officers - A new share repurchase program for an additional $100 million of EHI common stock was authorized on August 1, 2023, with no specified expiration date[306] - The new program includes an agreement with Genworth Holdings, Inc. to repurchase its EHI shares on a pro rata basis, not expected to change Genworth's ownership interest[306] - No director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023[308] Item 6. Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-Q, including the Share Repurchase Agreement, certifications from principal executive and financial officers, and Inline XBRL documents - Key exhibits include the Share Repurchase Agreement dated August 1, 2023, certifications of the Principal Executive Officer and Principal Financial Officer, and various Inline XBRL documents[311]