Enact (ACT) - 2024 Q1 - Quarterly Report

Part I. Financial Information Financial Statements The company's total assets increased to $6.30 billion as of March 31, 2024, from $6.19 billion at year-end 2023, driven by growth in investments, while Q1 2024 net income decreased to $161.0 million from $176.0 million due to higher losses, with operating cash flow significantly increasing to $187.3 million Condensed Consolidated Balance Sheet Highlights | Account | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Total Investments | 5,361,101 | 5,286,360 | | Cash and cash equivalents | 614,330 | 615,683 | | Total Assets | 6,303,683 | 6,190,473 | | Loss reserves | 531,443 | 518,191 | | Long-term borrowings | 746,090 | 745,416 | | Total Liabilities | 1,589,919 | 1,558,126 | | Total Equity | 4,713,764 | 4,632,347 | Condensed Consolidated Statements of Income Highlights | Account | Three months ended March 31, 2024 ($ thousands) | Three months ended March 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Premiums | 240,747 | 235,108 | | Total Revenues | 291,576 | 280,939 | | Losses incurred | 19,501 | (10,984) | | Total losses and expenses | 85,655 | 56,426 | | Income before income taxes | 205,921 | 224,513 | | Net Income | 160,988 | 175,988 | | Diluted EPS | $1.01 | $1.08 | Condensed Consolidated Statements of Cash Flows Highlights | Activity | Three months ended March 31, 2024 ($ thousands) | Three months ended March 31, 2023 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | 187,296 | 119,339 | | Net cash provided by (used in) investing activities | (113,468) | 33,463 | | Net cash used in financing activities | (75,181) | (44,956) | | Net (decrease) increase in cash | (1,353) | 107,846 | Notes to Condensed Consolidated Financial Statements The notes detail the company's residential mortgage guaranty insurance business through EMICO, highlighting a $54 million favorable reserve development, active reinsurance programs, and capital returns including $0.16/share dividends and $36.9 million remaining for share repurchases - The company's primary business is writing and assuming residential mortgage guaranty insurance, which protects lenders from losses on low-down-payment loans, conducted through its main subsidiary, Enact Mortgage Insurance Corporation (EMICO)[23][24] - For Q1 2024, the company recorded a favorable reserve development of $54 million on prior accident years, driven by better-than-expected cure performance on delinquencies from early 2023 and prior[88] - The company utilizes both excess-of-loss (XOL) and quota share reinsurance agreements to reduce ultimate losses and manage exposures, with ceded premiums of $26.4 million in Q1 2024[89][90][100] - The company has $750 million in 6.5% senior notes due in 2025 and maintains an undrawn $200 million revolving credit facility for general corporate purposes[101][104][105] - In Q1 2024, the company paid a quarterly cash dividend of $0.16 per share and repurchased 1.8 million shares for approximately $49.7 million, with $36.9 million remaining available under the share repurchase program as of March 31, 2024[117][118] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Enact faced a challenging Q1 2024 with 20% decrease in NIW to $10.5 billion due to elevated mortgage rates, yet maintained 85% persistency and $263.6 billion insurance in-force, while net income fell to $161.0 million due to smaller reserve releases, maintaining strong capital with 163% PMIERs sufficiency and 11.2:1 risk-to-capital ratio Trends and Conditions Q1 2024 saw persistent inflation and elevated mortgage rates slowing origination, yet Enact's portfolio grew with 85% persistency, an 8% loss ratio reflecting a $54 million reserve release, and strong capital with 163% PMIERs sufficiency and 11.2:1 risk-to-capital ratio, supported by capital returns and new reinsurance - The macroeconomic environment featured continued inflationary pressure and elevated mortgage rates, leading to slow mortgage origination activity in Q1 2024[123][124] - New Insurance Written (NIW) decreased 20% YoY to $10.5 billion in Q1 2024, attributed to a smaller mortgage insurance market and lower market share, though a high primary persistency rate of 85% led to an increase in primary insurance in-force (IIF)[130] - The loss ratio for Q1 2024 was 8%, reflecting a $54 million favorable reserve release, compared to a (5)% loss ratio in Q1 2023 which included a larger $70 million reserve release[131] Capital Adequacy Ratios | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | PMIERs Sufficiency Ratio | 163% | 161% | | PMIERs Sufficiency ($) | $1,883 million | $1,887 million | | Risk-to-Capital Ratio | 11.2:1 | 11.6:1 | - The company executed a new quota share reinsurance agreement ceding approximately 21% of new insurance written for 2024 and an excess-of-loss transaction providing up to $255 million of coverage for the 2024 book year[139][140] Results of Operations and Key Metrics Q1 2024 net income was $161.0 million, down 9% YoY, with an 8% loss ratio reflecting smaller reserve releases, while premiums rose 2% to $240.7 million and adjusted operating income reached $166.2 million, despite a 20% decrease in NIW to $10.5 billion, with primary insurance in-force growing to $263.6 billion and a 2.01% delinquency rate Q1 2024 vs Q1 2023 Performance | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net Income | $161.0M | $176.0M | | Premiums | $240.7M | $235.1M | | Losses Incurred | $19.5M | ($11.0M) | | Loss Ratio | 8% | (5)% | | Expense Ratio | 22% | 23% | Reconciliation to Adjusted Operating Income | (Amounts in thousands) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net income | $160,988 | $175,988 | | Adjustments (Net investment gains/losses, etc.) | $5,247 | ($464) | | Adjusted operating income | $166,235 | $175,624 | Key Operating Metrics | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | New insurance written | $10,526M | $13,154M | | Primary insurance in-force | $263,645M | $252,516M | | Persistency rate | 85% | 85% | | Delinquency rate | 2.01% | 1.93% | - The number of delinquent loans at the end of Q1 2024 was 19,492, up from 18,633 at the end of Q1 2023, with new defaults for the quarter totaling 11,395[169] Investment Portfolio The $5.35 billion investment portfolio as of March 31, 2024, primarily consists of highly rated fixed maturity securities, with 98% investment grade and 51% in U.S. corporate bonds, maintaining an effective duration of 3.7 years and a pre-tax yield of 3.7%, focused on capital preservation and income generation - The investment strategy is designed to meet policyholder obligations, preserve capital, and generate income, with a focus on a diversified mix of highly rated fixed income securities[183][184] Investment Portfolio Composition (Fair Value) | Asset Class | March 31, 2024 (%) | December 31, 2023 (%) | | :--- | :--- | :--- | | U.S. corporate | 51% | 52% | | Other asset-backed | 23% | 23% | | Non-U.S. corporate | 13% | 13% | | State and political subdivisions | 8% | 8% | | U.S. government, agencies and GSEs | 5% | 4% | | Total | 100% | 100% | - As of March 31, 2024, 98% of the investment portfolio was rated investment grade, with an effective duration of 3.7 years and a pre-tax yield of 3.7%[187] Liquidity and Capital Resources As of March 31, 2024, the company maintained strong liquidity with $614 million in cash and $187.3 million from operating activities, supported by an undrawn $200 million credit facility and $750 million senior notes, while insurance subsidiaries have $65 million dividend capacity and a healthy 11.2:1 combined risk-to-capital ratio - Net cash from operating activities increased to $187.3 million in Q1 2024 from $119.3 million in Q1 2023, driven by higher investment income and lower expenses[190] - Financing activities in Q1 2024 included $25.5 million in dividends paid and $49.7 million in share repurchases[191] - The company has an undrawn $200 million revolving credit facility maturing in June 2027 and $750 million of senior notes maturing in August 2025[192][193] - The ability of insurance subsidiaries to pay dividends is restricted by North Carolina insurance laws, with $65 million available from unassigned surplus as of March 31, 2024, subject to regulatory notice[196] Combined Risk-to-Capital (RTC) Ratio | Metric | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Combined statutory capital | $4,913M | $5,045M | | Adjusted RIF | $55,254M | $58,277M | | Combined RTC Ratio | 11.2:1 | 11.6:1 | Quantitative and Qualitative Disclosures About Market Risk The company's investment portfolio faces market risks from interest rate changes, credit quality, and volatility, managed through diversification and a buy-and-hold strategy, with an effective duration of 3.7 years as of March 31, 2024, implying a 3.7% fair value change for a 100-basis-point yield curve shift - The company's investment portfolio is exposed to market risks, primarily changes in interest rates, credit quality deterioration, concentration risk, and prepayment risk[216][217] - As of March 31, 2024, the effective duration of the available-for-sale investments was 3.7 years, implying a 100 basis point parallel shift in interest rates would result in a 3.7% change in the portfolio's fair value[218] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during Q1 2024 - Based on an evaluation as of March 31, 2024, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[220] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, internal controls[221] Part II. Other Information Legal Proceedings The company is not subject to any pending material legal proceedings - The company is not subject to any pending material legal proceedings[224] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes from the risk factors previously disclosed in the Annual Report[225] Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2024, the company repurchased 1,779,838 shares at an average of $27.51 per share, with $36.9 million remaining under the existing program, and an additional $250 million share repurchase program authorized post-quarter Issuer Purchases of Equity Securities (Q1 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2024 | 133,307 | $27.75 | | February 2024 | 1,309,160 | $27.13 | | March 2024 | 337,371 | $28.90 | | Total | 1,779,838 | $27.51 | - As of March 31, 2024, $36.9 million remained available under the share repurchase program announced in August 2023[226] - Subsequent to the quarter end, on May 1, 2024, the company announced a new share repurchase authorization for an additional $250 million[226] Other Information On May 1, 2024, the company authorized a new $250 million share repurchase program with no expiration date, including a pro rata agreement with Genworth Holdings, Inc - On May 1, 2024, the company authorized a new share repurchase program for up to an additional $250 million of its common stock[227] - During Q1 2024, no director or Section 16 officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements[229] Exhibits This section lists exhibits filed with the Form 10-Q, including a new Share Repurchase Agreement dated May 1, 2024, and standard officer certifications - A new Share Repurchase Agreement, dated May 1, 2024, between Enact Holdings, Inc. and Genworth Holdings, Inc. was filed as an exhibit[231] - Certifications from the Principal Executive Officer and Principal Financial Officer are included as exhibits[231]