Business Overview and History
Enact Holdings Inc (NASDAQ:ACT) is a leading provider of private mortgage insurance, protecting lenders and investors against losses resulting from borrowers' inability to repay their residential mortgage loans. With a rich history spanning over a decade, Enact has established itself as a trusted partner in the mortgage industry, delivering innovative solutions and maintaining a steadfast commitment to responsible lending practices.
Enact's origins trace back to 1981 when Genworth Mortgage Insurance Corporation (formerly GE Mortgage Insurance) was established. Over the years, the company grew to become one of the largest private mortgage insurers in the country. In 2012, Genworth Mortgage Insurance Corporation was reorganized and rebranded as Enact Mortgage Insurance Corporation (EMICO), which served as the primary insurance subsidiary of the newly formed Enact Holdings, Inc.
In September 2021, the company completed a minority initial public offering, selling 18.4% of its common stock to the public, with Genworth Financial retaining a majority ownership stake. This strategic move allowed Enact to access additional capital and enhance its financial flexibility as an independent company. Enact's primary focus is on providing private mortgage insurance, which enables borrowers to purchase homes with a down payment of less than 20% of the home's value. This facilitates the sale of low down payment mortgage loans to government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac.
Throughout its history, Enact has successfully navigated various regulatory and policy changes in the mortgage insurance industry, adapting to shifts in underwriting standards, guaranty fees, and alternative products introduced by government-sponsored enterprises and federal housing agencies. The company has remained focused on its core mission of enabling responsible homeownership and supporting the U.S. housing finance system.
Over the years, Enact has expanded its product offerings to include fee-based contract underwriting services for mortgage lenders, as well as mortgage-related insurance and reinsurance through its wholly-owned Bermuda-based subsidiary, Enact Re Ltd. The company's operations are primarily carried out through EMICO, which is approved by the GSEs and operates in all 50 states and the District of Columbia.
Financial Performance and Strength
Enact has consistently demonstrated strong financial performance, showcasing its ability to navigate the dynamic mortgage insurance market. As of September 30, 2024, the company reported a GAAP net income of $181 million, or $1.15 per diluted share, and an adjusted operating income of $182 million, or $1.16 per diluted share. The company's return on equity stood at a solid 14.7%, while its adjusted operating return on equity was 14.8%.
Enact's balance sheet remains exceptionally strong, with a PMIERs (Private Mortgage Insurer Eligibility Requirements) sufficiency ratio of 173% as of September 30, 2024, or $2.2 billion above the regulatory requirements. This robust capital position enables the company to support its policyholders, invest in growth opportunities, and return capital to shareholders through dividends and share repurchases.
Financials
For the fiscal year ended December 31, 2023, Enact reported revenue of $1.15 billion, net income of $665.51 million, operating cash flow of $632.04 million, and free cash flow of $632.04 million. In the most recent quarter ended September 30, 2024, the company reported revenue of $309.59 million, net income of $180.67 million, operating cash flow of $188.14 million, and free cash flow of $188.14 million.
Revenues increased by 2% year-over-year due to growth in insurance in-force and higher assumed premiums, partially offset by higher ceded premiums. Net income increased by 10% year-over-year driven by higher premiums and investment income, as well as a larger reserve release.
During the third quarter of 2024, Enact's primary insurance in-force grew to a record $268 billion, a 2% increase from the previous quarter and a 2% year-over-year improvement. This growth was driven by elevated persistency levels, as 70% of the company's mortgage portfolio had rates below 6%, mitigating the impact of higher mortgage rates in the current environment.
Enact's new insurance written (NIW) during the quarter was $14 billion, flat sequentially but down 6% year-over-year, primarily due to lower estimated market share. The company's credit quality and underwriting standards remained strong, with a risk-weighted average FICO score of 745 and a risk-weighted average loan-to-value ratio of 93% in the portfolio.
The company's loss ratio for the third quarter was 5%, improving from 7% in the prior-year period. This was largely attributable to a $65 million reserve release, reflecting Enact's proactive loss mitigation efforts and the continued strength of its portfolio, with a significant portion of delinquent loans having considerable embedded equity.
Enact's expense management efforts have been effective, with operating expenses for the full year 2024 expected to be flat to down compared to 2023, excluding one-time restructuring costs. The company remains committed to investing in technology and process improvements to drive efficiency and enhance the customer experience.
The US private mortgage insurance industry has experienced steady growth, with a compound annual growth rate (CAGR) of approximately 5% over the past 5 years, indicating a favorable market environment for Enact's operations.
Liquidity
Enact's liquidity position remains strong, supported by its robust balance sheet and consistent cash flow generation. The company's PMIERs sufficiency ratio of 173% demonstrates its ability to meet and exceed regulatory capital requirements, providing a solid foundation for future growth and financial stability.
As of December 31, 2023, Enact reported a debt-to-equity ratio of 0.1475, indicating a conservative capital structure. The company's cash and cash equivalents stood at $673.36 million as of September 30, 2024. Additionally, Enact maintains a $200 million unsecured revolving credit facility, which remains undrawn as of September 30, 2024, providing further financial flexibility.
The company's current ratio and quick ratio both stood at 4.22 as of September 30, 2024, indicating strong short-term liquidity and the ability to meet its near-term obligations comfortably.
Operational Highlights and Market Dynamics
During the third quarter of 2024, Enact's primary insurance in-force grew to a record $268 billion, a 2% increase from the previous quarter and a 2% year-over-year improvement. This growth was driven by elevated persistency levels, as 70% of the company's mortgage portfolio had rates below 6%, mitigating the impact of higher mortgage rates in the current environment.
Enact's new insurance written (NIW) during the quarter was $14 billion, flat sequentially but down 6% year-over-year, primarily due to lower estimated market share. The company's credit quality and underwriting standards remained strong, with a risk-weighted average FICO score of 745 and a risk-weighted average loan-to-value ratio of 93% in the portfolio.
The company's loss ratio for the third quarter was 5%, improving from 7% in the prior-year period. This was largely attributable to a $65 million reserve release, reflecting Enact's proactive loss mitigation efforts and the continued strength of its portfolio, with a significant portion of delinquent loans having considerable embedded equity.
Enact's expense management efforts have been effective, with operating expenses for the full year 2024 expected to be flat to down compared to 2023, excluding one-time restructuring costs. The company remains committed to investing in technology and process improvements to drive efficiency and enhance the customer experience.
Diversification and Strategic Initiatives
Enact has successfully launched its Bermuda-based subsidiary, Enact Re, to participate in the GSE credit risk transfer (CRT) market. This strategic initiative has performed well, maintaining strong underwriting standards and an attractive return profile. In the third quarter, Enact Re received an A- rating and a stable outlook from S&P Global Ratings, a testament to the subsidiary's successful integration and growth.
Additionally, Enact continues to explore other strategic opportunities that leverage its core capabilities and expand its addressable market. The company's disciplined capital allocation framework prioritizes supporting policyholders, investing in organic growth, funding attractive new business opportunities, and returning capital to shareholders.
Enact maintains a strong capital position, with a PMIERs sufficiency ratio of 173% as of September 30, 2024, representing $2.19 billion above PMIERs requirements. The company has also continued to execute on its diversified credit risk transfer program, with approximately 79% of its risk in-force subject to credit risk transfers as of the same date.
Risks and Challenges
While Enact has demonstrated resilience in the face of market volatility, the company is not immune to risks and challenges. Macroeconomic factors, such as changes in interest rates, housing market conditions, and broader economic trends, can impact the company's performance. Regulatory changes, competition from government-sponsored enterprises, and the potential for unexpected losses or claims could also pose risks to Enact's business.
Guidance and Future Outlook
Based on the company's recent performance and management's outlook, Enact expects its full-year 2024 expenses before nonrecurring restructuring costs to be flat to down compared to 2023. The company anticipates being in the upper half of its $300 million to $350 million guidance range for capital return to shareholders in 2024 through share repurchases and dividends.
Enact has maintained its 9% claim rate expectation on new delinquencies for Q3 2024 and expects elevated persistency to continue helping offset the impact of higher mortgage rates. The company's strong performance in Q3 2024, with adjusted operating income of $182 million (up 11% year-over-year), adjusted EPS of $1.16, and adjusted return on equity of 15%, indicates a positive trajectory for the company.
The adjusted book value per share reached $33.27 in Q3 2024, up 3% sequentially and 10% year-over-year, further demonstrating Enact's ability to create value for shareholders.
Conclusion
Enact Holdings Inc (NASDAQ:ACT) has established itself as a leading player in the private mortgage insurance industry, navigating a dynamic market with a steadfast commitment to responsible lending practices and a strong focus on financial discipline. The company's robust capital position, diversified business model, and strategic initiatives position it well to capitalize on future growth opportunities while maintaining its focus on delivering value to shareholders. With a solid financial foundation, strong market presence, and a clear strategic vision, Enact is well-positioned to continue its growth trajectory and maintain its leadership in the mortgage insurance industry.