The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2022 and 2021, and our audited consolidated financial statements and related notes for the years ended December 31, 2021 and 2020 within our Annual Report on Form 10-K for the fiscal year ending December 31, 2021 (the "Annual Report"). In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Cautionary Note Regarding Forward-Looking Statements" above and Part I, Item 1A "Risk Factors" in our Annual Report and Part II, Item 1A "Risk Factors" in this Quarterly Report. Future results could differ significantly from the historical results presented in this section. References to EHI, Enact, Enact Holdings, the "Company," "we" or "our" herein are, unless the context otherwise requires, to EHI on a consolidated basis.
Key Factors Affecting Our Results
There have been no material changes to the factors affecting our results, as compared to those disclosed in the Annual Report, other than the impact of items as discussed below in "-Trends and Conditions".
Trends and Conditions
During the third quarter of 2022, the United States and global economies
experienced continued volatility due to high inflation, geopolitical uncertainty
and supply chain disruption. Inflationary pressures lessened in the third
quarter of 2022, but remain elevated with the Bureau of Labor Statistics
reporting in September that the Consumer Price Index was 8.2% year-over-year. As
a result, the Federal Reserve has continued its aggressive approach towards
addressing inflation through interest rate increases and a reduction of its
balance sheet. The Federal Reserve approved an interest rate increase of 0.75%
in November 2022 following increases of 0.75% in September, July and June 2022,
0.50% in May 2022 and 0.25% in the first quarter of 2022. Financial markets have
reacted with increased volatility and rates have increased across the Treasury
yield curve.
Mortgage origination activity continued to decline during the third quarter of
2022 in response to rising mortgage rates. The refinance market is likely to
remain low as the Federal Reserve has signaled that it may make additional
interest rate increases to address persistent inflationary pressure. Housing
affordability remains challenged as of August 2022 compared to the past few
years due to sharply increasing interest rates and rising home prices, modestly
offset by rising median family income according to the National Association of
Realtors Housing Affordability Index. Year-over-year home price appreciation has
slowed throughout 2022, and in July 2022, home prices declined for the first
time in more than two years, according to the FHFA Monthly Purchase-Only House
Price Index.
The unemployment rate ticked down slightly to 3.5% in September 2022 compared to
3.6% in June 2022, following a steady decline from its peak of 14.8% in April
2020, bringing unemployment in line with the pre-COVID-19 level of 3.5% in
February 2020. In the third quarter of 2022, the number of unemployed Americans
stands at approximately 5.8 million, relatively in line with February 2020
metrics. Among the unemployed, those on temporary layoff remained at
approximately 0.8 million, down significantly from a peak of 18 million in April
2020, and the number of permanent job losses remained at approximately 1.2
million. In addition, the number of long term unemployed over 26 weeks was
approximately 1.1 million in September 2022.
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The Federal Housing Finance Agency ("FHFA") and the GSEs are focused on
increasing the accessibility and affordability of homeownership, in particular
for low- and moderate-income borrowers and underserved minority communities. In
June 2022, the FHFA announced the release of Fannie Mae's and Freddie Mac's
respective Equitable Housing Finance Plans. The proposals included many
initiatives, including language discussing potential changes that could impact
the mortgage insurance industry. These initiatives remain preliminary, and we
will continue to work with the FHFA, the GSEs, and the broader housing finance
industry as these proposals develop and to the extent they are implemented. We
cannot predict whether or when any new practices or programs will be implemented
under the GSEs' Equitable Housing Finance Plans or other affordability
initiatives, and if so in what form, nor can we predict what effect, if any,
such practices or programs may have on our business, results of operations or
financial condition.
For mortgages insured by the federal government (including those purchased by
Fannie Mae and Freddie Mac), forbearance allows borrowers impacted by COVID-19
to temporarily suspend mortgage payments up to 18 months subject to certain
limits. An initial forbearance period is typically up to six months and can be
extended for another six months if requested by the borrower to its mortgage
servicer. For GSE loans in a COVID-19 forbearance plan as of February 28, 2021,
the maximum forbearance can be up to 18 months. Currently, the GSEs do not have
a deadline for requesting an initial forbearance. Even though most foreclosure
moratoriums expired at the end of 2021, federal laws and regulations continue to
require servicers to discuss loss mitigation options with borrowers before
proceeding with foreclosures. These requirements could further extend the
foreclosure timeline, which could negatively impact the severity of loss on
loans that go to claim.
Although it is difficult to predict the future level of reported forbearance and
how many of the policies in a forbearance plan that remain current on their
monthly mortgage payment will go delinquent, servicer-reported forbearances have
generally declined. At the end of the third quarter of 2022 approximately 1.5%,
or 14,231, of our active primary policies were reported in a forbearance plan,
of which approximately 34% were reported as delinquent. As of September 30,
2022, we have not experienced any material impact from the recent hurricane
affecting the southeastern United States. We will continue to monitor the
affected areas and support the measures enacted by the GSEs allowing
forbearance, restricting foreclosure actions and providing other forms of
mortgage relief for those dealing with damage.
Total delinquencies decreased during the third quarter of 2022 as a result of
cures outpacing new delinquencies, which decreased modestly during the quarter.
The third quarter 2022 new delinquency rate of 1.0% was up slightly from the
second quarter of 2022 but remains in line with pre-COVID-19 levels.
The full impact of COVID-19 and its ancillary economic effects on our future
business results are difficult to predict. Given the maximum length of
forbearance plans, the resolution of a delinquency in a plan may not be known
for several quarters. We continue to monitor regulatory and government actions
and the resolution of forbearance delinquencies. While the associated risks have
moderated and delinquencies have declined, it is possible that COVID-19 could
have an adverse impact on our future results of operations and financial
condition.
Private mortgage insurance market penetration and eventual market size are
affected in part by actions that impact housing or housing finance policy taken
by the GSEs and the U.S. government, including but not limited to, the Federal
Housing Administration ("FHA") and the FHFA. In the past, these actions have
included announced changes, or potential changes, to underwriting standards,
including changes to the GSEs' automated underwriting systems, FHA pricing, GSE
guaranty fees, loan limits and alternative products. On February 25, 2022, the
FHFA finalized the rule for the Enterprise Capital Framework, which included
technical corrections to their December 17, 2020 rule. Higher GSE capital
requirements could lead to increased costs to borrowers of GSE loans, which in
turn could shift the market away from the GSEs to the FHA or lender portfolios.
Such a shift could potentially result in a smaller market for private mortgage
insurance.
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On October 24, 2022, the FHFA announced two initiatives: 1) targeted changes to
the GSEs' guarantee fee pricing by eliminating upfront fees for certain
borrowers and affordable mortgage products, while implementing targeted
increases to the upfront fees for most cash-out refinance loans; and 2) the
validation and approval of both the FICO 10T credit score model and the
VantageScore 4.0 credit score model for use by the GSEs as well as changing the
requirement that lenders provide credit reports from all three nationwide
consumer reporting agencies and instead only require credit reports from two of
the three nationwide credit reporting agencies.
The upfront fees are eliminated for certain first-time home buyers with income
at or below area median income and certain other GSE affordable housing
products. The fee reductions are expected to go into effect "as soon as
possible" while the new fees on cash-out refinance loans will begin February 1,
2023. We expect these price changes to be a net positive to the mortgage
insurance market. The validation of the new credit scores requires lenders to
deliver both credit scores for each loan sold to the GSEs. There is currently no
implementation deadline, but this is expected to be a multiple year process that
will require system and process updates along with coordination across
stakeholders of the industry.
In January 2022, the FHFA introduced new upfront fees for some high-balance and
second-home loans sold to Fannie Mae and Freddie Mac. Upfront fees for high
balance loans increased between 0.25% and 0.75%, tiered by loan-to-value ratio.
For second home loans, the upfront fees increased between 1.125% and 3.875%,
also tiered by loan-to-value ratio. The new pricing framework became effective
April 1, 2022. To date, we have not experienced a significant impact to the
mortgage insurance market or our projections based on this initiative.
On January 14, 2021, the FHFA and the Treasury Department agreed to amend the
Preferred Stock Purchase Agreements ("PSPAs") between the Treasury Department
and each of the GSEs to increase the amount of capital each GSE may retain.
Among other things, the amendments to the PSPAs limit the number of certain
mortgages the GSEs may acquire with two or more prescribed risk factors,
including certain mortgages with combined loan-to-value ("LTV") ratios above
90%. However, on September 14, 2021, the FHFA and Treasury Department suspended
certain provisions of the amendments to the PSPAs, including the limit on the
number of mortgages with two or more risk factors that the GSEs may acquire.
Such suspensions terminate on the later of one year after September 14, 2021, or
six months after the Treasury Department notifies the GSEs of termination. The
limit on the number of mortgages with two or more risk factors was based on the
market size at the time, and we do not expect any material impact to the private
mortgage market.
New insurance written of $15.1 billion in the third quarter of 2022 decreased
37% compared to the third quarter of 2021 primarily due to a smaller estimated
private mortgage insurance market including a decline in refinance originations
due to rising mortgage rates.
Our largest customer accounted for a sizable percentage of our total NIW during
the first nine months of 2022 and we expect this customer to exceed 10% of our
total estimated NIW for 2022. Our largest customer accounted for 14% of NIW for
the year ended December 31, 2021. Additionally, no customer had earned premiums
that accounted for more than 10% of our total revenues for the nine months ended
September 2022, or the year ended December 31, 2021.
Our primary persistency increased to 82% during the third quarter of 2022
compared to 65% during the third quarter of 2021 and is in line with historic
levels of approximately 80%. The increase in persistency was primarily driven by
a decline in the percentage of our in-force policies with mortgage rates above
current mortgage rates. The increase in persistency has offset the decline in
new insurance written in the third quarter of 2022, leading to an increase in
insurance in-force ("IIF") of $15 billion since December 31, 2021. Low
persistency impacted business performance trends in 2021 in several ways
including, but not limited to, accelerating the recognition of earned premiums
due to single premium policy cancellations, accelerating the amortization of our
existing reinsurance transactions, and shifting the concentration of our primary
IIF to more recent years of policy origination. As of September 30, 2022, our
primary IIF has approximately 4% concentration in 2014 and prior book years. In
contrast, our 2021 book
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year represents 35% of our primary IIF concentration while our 2022 book year
concentration is 20% as of September 30, 2022.
The U.S. private mortgage insurance industry is highly competitive. Our market
share is influenced by the execution of our go to market strategy, including but
not limited to, pricing competitiveness relative to our peers and our selective
participation in forward commitment transactions. We continue to manage the
quality of new business through pricing and our underwriting guidelines, which
are modified from time to time when circumstances warrant. We see the market and
underwriting conditions, including the pricing environment, as being within our
risk-adjusted return appetite enabling us to write new business at attractive
returns. Ultimately, we expect our new insurance written with its strong credit
profile and attractive pricing to positively contribute to our future
profitability and return on equity.
Net earned premiums declined in the third quarter of 2022 compared to the third
quarter of 2021 primarily as a result of the continued lapse of older, higher
priced policies and a decrease in single premium cancellations. This was
partially offset by insurance in-force growth. The total number of delinquent
loans has declined from the COVID-19 peak in the second quarter of 2020 as
forbearance exits continue and new forbearances declined. During this time and
consistent with prior years, servicers continued the practice of remitting
premiums during the early stages of default and we refund the post-delinquent
premiums to the insured party if the delinquent loan goes to claim. We record a
liability and a reduction to net earned premiums for the post-delinquent
premiums we expect to refund. The post-delinquent premium liability recorded
since the beginning of COVID-19 in the second quarter of 2020 through the third
quarter of 2022 was not significant to the change in earned premiums for those
periods as a result of the high concentration of new delinquencies being subject
to a servicer reported forbearance plan and the lower estimated rate at which
delinquencies go to claim for these loans.
Our loss ratio for the three months ended September 30, 2022, was (17)% as
compared to 14% for the three months ended September 30, 2021. The decrease was
due to reserve adjustments in the current quarter. We released $105 million of
reserves on delinquencies from prior years, primarily related to favorable cure
performance on COVID-19 delinquencies from 2020 and early 2021. During the peak
of COVID-19, we experienced elevated new delinquencies subject to forbearance
plans. Those delinquencies have continued to cure at levels above our reserve
expectations, which led to the release of reserves in the third quarter of 2022.
Reserves related to delinquencies from 2022 were strengthened by $25 million due
to uncertainty in the current economic environment.
Our loss reserves continue to be impacted by COVID-19 and remain subject to
uncertainty. Borrowers who have experienced a financial hardship including, but
not limited to, the loss of income due to the closing of a business or the loss
of a job, continue to take advantage of available forbearance programs and
payment deferral options. Loss reserves recorded on these new delinquencies have
a high degree of estimation due to the level of uncertainty regarding whether
delinquencies in forbearance will ultimately cure or result in claim payments.
The severity of loss on loans that do go to claim may be negatively impacted by
the extended forbearance and foreclosure timelines, the associated elevated
expenses and the higher loan amount of the recent new delinquencies. These
negative influences on loss severity could be mitigated, in part, by embedded
home price appreciation. For loans insured on or after October 1, 2014, our
mortgage insurance policies limit the number of months of unpaid interest and
associated expenses that are included in the mortgage insurance claim amount to
a maximum of 36 months.
New delinquencies in the third quarter of 2022 increased compared to the third
quarter of 2021. Current period primary delinquencies of 9,121 contributed $39
million of loss expense in the third quarter of 2022. We incurred $33 million of
losses from 7,427 current period delinquencies in the third quarter of 2021. In
determining the loss expense estimate, considerations were given to forbearance
and non-forbearance delinquencies, recent cure and claim experience, and the
prevailing economic conditions. Approximately 18% of our primary new
delinquencies in the third quarter of 2022 were subject to a forbearance plan as
compared to 36% in the third quarter of 2021.
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As of September 30, 2022, EMICO's risk-to-capital ratio under the current
regulatory framework as established under North Carolina law and enforced by the
North Carolina Department of Insurance ("NCDOI"), EMICO's domestic insurance
regulator, was approximately 12.3:1, compared with a risk-to-capital ratio of
12.3:1 and 11.9:1 as of December 31, 2021, and September 30, 2021, respectively.
EMICO's risk-to-capital ratio remains below the NCDOI's maximum risk-to-capital
ratio of 25:1. North Carolina's calculation of risk-to-capital excludes the
risk-in-force for delinquent loans given the established loss reserves against
all delinquencies. EMICO's ongoing risk-to-capital ratio will depend on the
magnitude of future losses incurred by EMICO, the effectiveness of ongoing loss
mitigation activities, new business volume and profitability, the amount of
policy lapses and the amount of additional capital that is generated or
distributed by the business or capital support provided.
Under PMIERs, we are subject to operational and financial requirements that
private mortgage insurers must meet in order to remain eligible to insure loans
that are purchased by the GSEs. Since 2020, the GSEs have issued several
amendments to PMIERs, which implemented both permanent and temporary revisions.
For loans that became non-performing due to a COVID-19 hardship, PMIERs was
temporarily amended with respect to each non-performing loan that (i) had an
initial missed monthly payment occurring on or after March 1, 2020, and prior to
April 1, 2021, or (ii) is subject to a forbearance plan granted in response to a
financial hardship related to COVID-19, the terms of which are materially
consistent with terms of forbearance plans offered by the GSEs. The risk-based
required asset amount factor for the non-performing loan is the greater of (a)
the applicable risk-based required asset amount factor for a performing loan
were it not delinquent, and (b) the product of a 0.30 multiplier and the
applicable risk-based required asset amount factor for a non-performing loan. In
the case of (i) above, absent the loan being subject to a forbearance plan
described in (ii) above, the 0.30 multiplier was applicable for no longer than
three calendar months beginning with the month in which the loan became a
non-performing loan due to having missed two monthly payments. Loans subject to
a forbearance plan described in (ii) above include those that are either in a
repayment plan or loan modification trial period following the forbearance plan
unless reported to the approved insurer that the loan is no longer in such
forbearance plan, repayment plan, or loan modification trial period. The PMIERs
amendment dated June 30, 2021 further allows loans that enter a forbearance plan
due to a COVID-19 hardship on or after April 1, 2021 to remain eligible for
extended application of the reduced PMIERs capital factor for as long as the
loan remains in forbearance. In addition, the PMIERs amendment imposed permanent
revisions to the risk-based required asset amount factor for non-performing
loans for properties located in future Federal Emergency Management Agency
Declared Major Disaster Areas eligible for individual assistance.
In September 2020, subsequent to the issuance of our senior notes due in 2025,
the GSEs imposed certain restrictions (the "GSE Restrictions") with respect to
capital on our business. In May 2021, in connection with their conditional
approval of the then potential partial sale of EHI, the GSEs confirmed the GSE
Restrictions will remain in effect until the following collective conditions
("GSE Conditions") are met for two consecutive quarters: (a) EMICO obtains
"BBB+"https://www.marketscreener.com/"Baa1" (or higher) rating from S&P, Moody's or Fitch Ratings, Inc. and
(b) Genworth achieves certain financial metrics. Genworth believes that they
achieved their financial metrics for the quarter ended September 30, 2022, and
expect to maintain compliance through December 31, 2022. If achieved, Enact
would no longer be subject to GSE Restrictions and Conditions in early 2023,
subject to GSE confirmation.
Prior to the satisfaction of the GSE Conditions, the GSE Restrictions require:
•EMICO to maintain 120% of PMIERs minimum required assets through 2022 and 125%
thereafter;
•EHI to retain $300 million of net proceeds from the 2025 Senior Notes offering
that can be drawn down exclusively for debt service of those notes or to
contribute to EMICO to meet its regulatory capital needs including PMIERs; and
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•written approval must be received from the GSEs prior to any additional debt
issuance by either EMICO or EHI.
Until the GSE Conditions imposed in connection with the GSE Restrictions are met, our liquidity must not fall below 13.5% of its outstanding debt. In addition, Fannie Mae agreed to reconsider the GSE Restrictions if Genworth were to own 50% or less of EHI at any point prior to their expiration. We understand that Genworth's current plans do not include a potential sale in which Genworth owns less than 80% of EHI. The current balance of the 2025 Senior Notes proceeds required to be held by our holding company is approximately $203 million. As of September 30, 2022, we had estimated available assets of $5,292 million against $3,043 million net required assets under PMIERs compared to available assets of $5,147 million against $3,100 million net required assets as of June 30, 2022. The sufficiency ratio as of September 30, 2022, was 174%, or $2,249 million, above the published PMIERs requirements, compared to 166%, or $2,047 million, above the published PMIERs requirements as of June 30, 2022. PMIERs sufficiency is based on the published requirements applicable to private mortgage insurers and does not give effect to the GSE Restrictions imposed on our business. The increase in the PMIERs sufficiency for the quarter was driven by a new XOL transaction, business cash flows, and lower delinquencies, partially offset by NIW and amortization of existing reinsurance transactions. Our PMIERs required assets as of September 30, 2022, and June 30, 2022, benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for certain non-performing loans. The application of the 0.30 multiplier to all eligible delinquencies provided $140 million of benefit to our September 30, 2022 PMIERs required assets compared to $178 million of benefit as of June 30, 2022. These amounts are gross of any incremental reinsurance benefit from the elimination of the 0.30 multiplier.
On July 21, 2022, Moody’s Investors Service upgraded the insurance financial
strength rating of EMICO to Baa1 from Baa2. The increase was driven by
improvement in our overall credit profile, including market position,
profitability, capital adequacy and financial flexibility.
On January 27, 2022, we executed an excess of loss reinsurance transaction with
a panel of reinsurers, which provides up to $294 million of reinsurance coverage
on a portion of current and expected new insurance written for the 2022 book
year, effective January 1, 2022.
On March 24, 2022, we executed an excess of loss reinsurance transaction with a
panel of reinsurers, which provides up to $325 million of reinsurance coverage
on a portfolio of existing mortgage insurance policies written from July 1,
2021, through December 31, 2021, effective March 1, 2022.
On September 15, 2022, we executed an excess of loss reinsurance transaction
with a panel of reinsurers, which provides up to $201 million of reinsurance
coverage on a portfolio of existing mortgage insurance policies written from
January 1, 2022, through June 30, 2022, effective September 1, 2022.
On June 30, 2022, we entered into a five-year, unsecured revolving credit
facility (the "Facility") with a syndicate of lenders in the initial aggregate
principal amount of $200 million. The Facility may be used for working capital
needs and general corporate purposes, including the execution of dividends to
our shareholders and capital contributions to our insurance subsidiaries. The
Facility remains undrawn as of September 30, 2022.
On April 26, 2022, our Board of Directors approved the initiation of a dividend
program under which the Company intends to pay a quarterly cash dividend. The
inaugural quarterly dividend for the second quarter of 2022 was $0.14 per share,
and was paid on May 26, 2022. Our second quarterly dividend payment was also
$0.14 per share and was paid on September 9, 2022, and we recently announced our
quarterly dividend of $0.14 per share to be paid in December, 2022. Future
dividend payments are subject to quarterly review and approval by our Board of
Directors and Genworth, and will be targeted to be paid in the third month of
each subsequent quarter. In April 2022, our primary mortgage insurance operating
company, EMICO, completed a distribution to EHI that supports our ability to pay
a quarterly dividend. We completed another such distribution in October 2022,
subsequent to quarter end. We intend
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to use these proceeds and future EMICO distributions to fund the quarterly
dividend as well as to bolster our financial flexibility and potentially return
additional capital to shareholders.
Returning capital to shareholders, balanced with our growth and risk management
priorities, remains a key commitment as we look to drive shareholder value
through time. We believe the initiation of a quarterly dividend reflects
meaningful progress towards that goal. Further, subsequent to quarter end we
announced a special cash dividend of $183 million, or $1.12 per share, to be
paid during the fourth quarter of 2022. We also announced the initiation of a
share repurchase program which authorizes the repurchase of up to $75 million of
the Company's common stock. Under the program, share repurchases may be made at
the Company's discretion from time to time in open market transactions,
privately negotiated transactions, or by other means, including through 10b5-1
trading plans. In support, we have entered into an agreement with Genworth
Holdings, Inc. to repurchase its Enact shares on a pro rata basis as part of the
program. The share repurchase program is not expected to change Genworth's
ownership interest in Enact post completion. We expect the timing and amount of
any share repurchases will be opportunistic and will depend on a variety of
factors, including Enact's share price, capital availability, business and
market conditions, regulatory requirements, and debt covenant restrictions. The
program does not obligate Enact to acquire any amount of common stock, it may be
suspended or terminated at any time at the Company's discretion without prior
notice, and it does not have a specified expiration date.
Future return of capital will be shaped by our capital prioritization framework:
supporting our existing policyholders, growing our mortgage insurance business,
funding attractive new business opportunities and returning capital to
shareholders. Our total return of capital will also be based on our view of the
prevailing and prospective macroeconomic conditions, regulatory landscape and
business performance.
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Results of Operations and Key Metrics
Results of Operations
Three months ended September 30, 2022, compared to three months ended September
30, 2021
The following table sets forth our consolidated results for the periods
indicated:
Increase (decrease)
Three months ended and percentage
September 30, change
(Amounts in thousands) 2022 2021 2022 vs. 2021
Revenues:
Premiums $ 235,060 $ 243,063 $ (8,003) (3) %
Net investment income 39,493 35,995 3,498 10 %
Net investment gains (losses) (42) 580 (622) (107) %
Other income 564 671 (107) (16) %
Total revenues 275,075 280,309 (5,234) (2) %
Losses and expenses:
Losses incurred (40,309) 34,124 (74,433) (218) %
Acquisition and operating expenses, net of
deferrals 54,523 55,151 (628) (1) %
Amortization of deferred acquisition costs
and intangibles 3,338 3,669 (331) (9) %
Interest expense 12,879 12,756 123 1 %
Total losses and expenses 30,431 105,700 (75,269) (71) %
Income before income taxes 244,644 174,609 70,035 40 %
Provision for income taxes 53,658 37,401 16,257 43 %
Net income $ 190,986 $ 137,208 $ 53,778 39 %
Loss ratio (1) (17) % 14 %
Expense ratio (2) 25 % 24 %
_______________
(1)Loss ratio is calculated by dividing losses incurred by net earned premiums.
(2)Expense ratio is calculated by dividing acquisition and operating expenses,
net of deferrals, plus amortization of deferred acquisition costs and
intangibles by net earned premiums.
Revenues
Premiums decreased mainly attributable to the continued lapse of older, higher
priced policies and a decrease in single premium cancellations. This was
partially offset by insurance in-force growth driven by increased persistency.
Net investment income increased from higher yield as a result of rising interest rates and higher average invested assets partially offset by lower income from bond calls.
Net investment losses in the third quarter of 2022 were driven by realized
losses on sales. Net investment gains from the third quarter of 2021 were driven
by realized gains from sales.
Losses and expenses
Losses incurred during the third quarter of 2022 decreased due to prior year
development, offset in part by current year reserve strengthening. We continued
to experience better than expected cure performance on delinquencies primarily
from 2020 and early 2021 related to COVID-19 contributing to a
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reserve release of $105 million on prior years. Reserves related to
delinquencies from 2022 were strengthened by $25 million associated with
uncertainty the current economic environment. Current period primary
delinquencies of 9,121 contributed $39 million of loss expense in the three
months ended September 30, 2022. This compares to $33 million of loss expense
from 7,427 current period primary delinquencies in the third quarter of 2021.
The following table shows incurred losses related to current and prior accident
years for the three months ended September 30,:
(Amounts in thousands) 2022
2021
Losses and LAE incurred related to current accident year $ 62,942 $ 33,343
Losses and LAE incurred related to prior accident years (103,241)
791 Total incurred (1) $ (40,299) $ 34,134 _______________ (1)Excludes run-off business. Acquisition and operating expenses, net of deferrals, remained relatively flat for the three months ended September 30, 2022, as declines in variable costs were offset by higher general and administrative expenses.
The expense ratio increased slightly in the current quarter due to a higher
percentage decline in premiums than expenses.
Interest expense primarily relates to our 2025 Senior Notes. For additional
details see Note 7 to our unaudited condensed consolidated financial statements
for the three months ended September 30, 2022 and 2021.
Provision for income taxes
The effective tax rate was 21.9% and 21.4% for the three months ended September
30, 2022 and 2021, respectively, consistent with the United States corporate
federal income tax rate.
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Nine months ended September 30, 2022, compared to nine months ended September
30, 2021
The following table sets forth our consolidated results for the periods
indicated:
Increase (decrease)
Nine months ended and percentage
September 30, change
(Amounts in thousands) 2022 2021 2022 vs. 2021
Revenues:
Premiums $ 706,725 $ 738,085 $ (31,360) (4) %
Net investment income 110,415 105,943 4,472 4 %
Net investment gains (losses) (762) (2,129) 1,367 (64) %
Other income 1,826 3,114 (1,288) (41) %
Total revenues 818,204 845,013 (26,809) (3) %
Losses and expenses:
Losses incurred (112,318) 119,501 (231,819) (194) %
Acquisition and operating expenses, net of
deferrals 166,986 175,823 (8,837) (5) %
Amortization of deferred acquisition costs and
intangibles 9,658 11,104 (1,446) (13) %
Interest expense 38,441 38,238 203 1 %
Total losses and expenses 102,767 344,666 (241,899) (70) %
Income before income taxes 715,437 500,347 215,090 43 %
Provision for income taxes 155,086 107,196 47,890 45 %
Net income $ 560,351 $ 393,151 $ 167,200 43 %
Loss ratio (1) (16) % 16 %
Expense ratio (net earned premiums) (2) 25 %
25 %
_______________
(1)Loss ratio is calculated by dividing losses incurred by net earned premiums. (2)Expense ratio (net earned premiums) is calculated by dividing acquisition and operating expenses, net of deferrals, plus amortization of DAC and intangibles by net earned premiums. Revenues
Premiums decreased mainly attributable to the continued lapse of older, higher
priced policies and a decrease in single premium cancellations. This was
partially offset by insurance in-force growth driven by increased persistency.
Net investment income increased primarily from higher average invested assets in
the current year and a small increase in investment yields, partially offset by
lower income from bond calls in the current year.
Net investment losses in the current year were primarily driven by realized
losses from the sale of fixed maturity securities. Net investment losses in the
prior year were mainly driven by credit losses related to non-US corporate fixed
maturity securities and realized losses from the sale of fixed maturity
securities.
40
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Losses and expenses
Losses incurred decreased as a result of favorable reserve adjustments. New primary delinquencies of 25,692 contributed $113 million of loss expense in the first nine months of 2022. This compares to $107 million of loss expense from 24,432 new primary delinquencies in the first nine months of 2021. During the first nine months of 2022, we released reserves of $251 million on prior accident years reserves due to better than expected cure experience primarily on delinquencies from 2020 related to the emergence of COVID-19. This was partially offset by $25 million of reserve strengthening related to delinquencies from 2022 given uncertainty the current economic environment. In the prior year, existing reserves were strengthened by $10 million primarily driven by slower early cure emergence patterns on pre-COVID-19 delinquencies.
The following table shows incurred losses related to current and prior accident
years for the nine months ended September 30,:
(Amounts in thousands) 2022
2021
Losses and LAE incurred related to current accident year $ 138,504 $ 104,939
Losses and LAE incurred related to prior accident years (250,799)
14,468 Total incurred (1) $ (112,295) $ 119,407 _______________ (1)Excludes run-off business.
Acquisition and operating expenses, net of deferrals, increased primarily
attributable to lower costs allocated by our Parent, partially offset by higher
general and administrative expenses.
The expense ratio (net earned premiums) remained flat as we experienced a
decline in both expenses and premiums during the period.
Interest expense primarily relates to our 2025 Senior Notes and increased as the notes were outstanding for only a portion of the nine months ended September 30, 2022. For additional details see Note 7 to our unaudited condensed consolidated financial statements for the nine months ended September 30, 2022 and 2021.
Provision for income taxes
The effective tax rate was 21.7% and 21.4% for the nine months ended September 30, 2022 and 2021, respectively, consistent with the United States corporate federal income tax rate.
Use of Non-GAAP Financial Measures
We use a non-U.S. GAAP ("non-GAAP") financial measure entitled "adjusted
operating income." This non-GAAP financial measure aligns with the way our
business performance is evaluated by both management and our Board of Directors.
This measure has been established in order to increase transparency for the
purposes of evaluating our core operating trends and enabling more meaningful
comparisons with our peers. Although "adjusted operating income" is a non-GAAP
financial measure, for the reasons discussed above we believe this measure aids
in understanding the underlying performance of our operations. Our senior
management, including our chief operating decision maker (who is our Chief
Executive Officer), use "adjusted operating income" as the primary measure to
evaluate the fundamental financial performance of our business and to allocate
resources.
"Adjusted operating income" is defined as U.S. GAAP net income excluding the
effects of (i) net investment gains (losses) and (ii) restructuring costs and
infrequent or unusual non-operating items.
(i)Net investment gains (losses)-The recognition of realized investment gains or
losses can vary significantly across periods as the activity is highly
discretionary based on the timing of individual securities sales due to such
factors as market opportunities or exposure management. Trends in
41
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the profitability of our fundamental operating activities can be more clearly
identified without the fluctuations of these realized gains and losses. We do
not view them to be indicative of our fundamental operating activities.
Therefore, these items are excluded from our calculation of adjusted operating
income.
(ii)Restructuring costs and infrequent or unusual non-operating items are also
excluded from adjusted operating income if, in our opinion, they are not
indicative of overall operating trends.
In reporting non-GAAP measures in the future, we may make other adjustments for expenses and gains we do not consider reflective of core operating performance in a particular period. We may disclose other non-GAAP operating measures if we believe that such a presentation would be helpful for investors to evaluate our operating condition by including additional information. Adjusted operating income is not a measure of total profitability, and therefore should not be considered in isolation or viewed as a substitute for U.S. GAAP net income. Our definition of adjusted operating income may not be comparable to similarly named measures reported by other companies, including our peers.
Adjustments to reconcile net income to adjusted operating income assume a 21%
tax rate (unless otherwise indicated).
The following table includes a reconciliation of net income to adjusted
operating income for the periods indicated:
Three months ended
September 30,
(Amounts in thousands) 2022 2021
Net income $ 190,986 $ 137,208
Adjustments to net income:
Net investment (gains) losses 42 (580)
Costs associated with reorganization (156) 339
Taxes on adjustments 24 50
Adjusted operating income $ 190,896 $ 137,017
Nine months ended
September 30,
(Amounts in thousands) 2022 2021
Net income $ 560,351 $ 393,151
Adjustments to net income:
Net investment (gains) losses 762 2,129
Costs associated with reorganization 170 2,655
Taxes on adjustments
(196) (1,005) Adjusted operating income $ 561,087 $ 396,930
Adjusted operating income increased for the three and nine months ended
September 30, 2022, as compared to September 30, 2021, primarily due to
decreased losses coupled with lower expenses and partially offset by lower
premiums.
42 --------------------------------------------------------------------------------
Key Metrics
Management reviews the key metrics included within this section when analyzing the performance of our business. The metrics provided in this section exclude activity related to our run-off business, which is immaterial to our consolidated results.
The following table sets forth selected operating performance measures on a
primary basis as of or for the periods indicated:
Three months ended
September 30,
(Dollar amounts in millions) 2022 2021
New insurance written $15,069 $23,972
Primary insurance in-force(1) $241,813 $222,464
Primary risk in-force $61,124 $55,866
Persistency rate 82 % 65 %
PIF (count) 949,052 936,934
Delinquent loans (count) 18,856 28,904
Delinquency rate 1.99 % 3.08 %
Nine months ended
September 30,
(Dollar amounts in millions) 2022 2021
New insurance written $51,340 $75,563
Persistency rate 79 % 61 %
_______________
(1)Represents the aggregate unpaid principal balance for loans we insure.
New insurance written (“NIW”)
NIW for the three months ended September 30, 2022 decreased 37% compared to the three months ended September 30, 2021. NIW for the nine months ended September 30, 2022 decreased 32% compared to the nine months ended September 30, 2021. The decreases were primarily due to a smaller market and lower mortgage refinancing originations in the current period largely driven by rising mortgage rates. We manage the quality of new business through pricing and our underwriting guidelines, which we modify from time to time as circumstances warrant.
The following table presents NIW by product for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
(Amounts in millions) 2022 2021 2022 2021
Primary $ 15,069 100 % $ 23,972 100 % $ 51,340 100 % $ 75,563 100 %
Pool - - - - - - - -
Total $ 15,069 100 % $ 23,972 100 % $ 51,340 100 % $ 75,563 100 %
43
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The following table presents primary NIW by underlying type of mortgage for the
periods indicated:
Three months ended Nine months ended
September 30, September 30,
(Amounts in millions) 2022 2021 2022 2021
Purchases $ 14,634 97 % $ 20,988 88 % $ 48,762 95 % $ 57,631 76 %
Refinances 435 3 2,984 12 2,578 5 17,932 24
Total $ 15,069 100 % $ 23,972 100 % $ 51,340 100 % $ 75,563 100 %
The following table presents primary NIW by policy payment type for the periods
indicated:
Three months ended Nine months ended
September 30, September 30,
(Amounts in millions) 2022 2021 2022 2021
Monthly $ 14,138 94 % $ 21,475 90 % $ 47,378 92 % $ 69,720 92 %
Single 890 6 2,431 10 3,798 8 5,563 8
Other 41 - 66 - 164 - 280 -
Total $ 15,069 100 % $ 23,972 100 % $ 51,340 100 % $ 75,563 100 %
44
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The following table presents primary NIW by FICO score for the periods
indicated:
Three months ended
September 30,
(Amounts in millions) 2022 2021
Over 760 $ 6,948 46 % $ 10,708 45 %
740-759 2,554 17 3,830 16
720-739 2,106 14 3,177 13
700-719 1,531 10 2,702 11
680-699 1,085 7 1,875 8
660-679 (1) 527 3 1,010 4
640-659 234 2 504 2
620-639 79 1 166 1
<620 5 - - -
Total $ 15,069 100 % $ 23,972 100 %
Nine months ended
September 30,
(Amounts in millions) 2022 2021
Over 760 $ 23,288 45 % $ 32,990 44 %
740-759 8,555 17 11,661 15
720-739 7,151 14 10,067 13
700-719 5,400 10 8,812 12
680-699 3,500 7 6,868 9
660-679 (1) 2,056 4 3,061 4
640-659 1,017 2 1,562 2
620-639 358 1 542 1
<620 15 - - -
Total $ 51,340 100 % $ 75,563 100 %
______________
(1)Loans with unknown FICO scores are included in the 660-679 category.
45
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LTV ratio is calculated by dividing the original loan amount, excluding financed
premium, by the property's acquisition value or fair market value at the time of
origination. The following table presents primary NIW by LTV ratio for the
periods indicated:
Three months ended
September 30,
(Amounts in millions) 2022 2021
95.01% and above $ 1,741 11 % $ 3,396 14 %
90.01% to 95.00% 6,184 41 8,838 37
85.01% to 90.00% 5,094 34 7,454 31
85.00% and below 2,050 14 4,284 18
Total $ 15,069 100 % $ 23,972 100 %
Nine months ended
September 30,
(Amounts in millions) 2022 2021
95.01% and above $ 7,064 14 % $ 8,404 11 %
90.01% to 95.00% 20,324 39 29,049 39
85.01% to 90.00% 15,921 31 24,464 32
85.00% and below 8,031 16 13,646 18
Total $ 51,340 100 % $ 75,563 100 %
DTI ratio is calculated by dividing the borrower’s total monthly debt
obligations by total monthly gross income. The following table presents primary
NIW by DTI ratio for the periods indicated:
Three months ended
September 30,
(Amounts in millions) 2022 2021
45.01% and above $ 3,728 25 % $ 4,167 17 %
38.01% to 45.00% 5,681 38 7,949 33
38.00% and below 5,660 37 11,856 50
Total $ 15,069 100 % $ 23,972 100 %
Nine months ended
September 30,
(Amounts in millions) 2022 2021
45.01% and above $ 12,247 24 % $ 10,002 13 %
38.01% to 45.00% 18,478 36 25,899 34
38.00% and below 20,615 40 39,662 53
Total $ 51,340 100 % $ 75,563 100 %
Insurance in-force (“IIF”) and Risk in-force (“RIF”)
IIF increased as a result of NIW. Higher interest rates and the declining
refinance market led to lower lapse and cancellations during the third quarter
of 2022 driving increased persistency. Primary persistency was 82% and 65% for
the three months ended September 30, 2022 and 2021, respectively. RIF increased
primarily as a result of higher IIF.
46
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The following table sets forth IIF and RIF as of the dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
Primary IIF $ 241,813 100 % $ 226,514 100 % $ 222,464 100 %
Pool IIF 531 - 641 - 771 -
Total IIF $ 242,344 100 % $ 227,155 100 % $ 223,235 100 %
Primary RIF $ 61,124 100 % $ 56,881 100 % $ 55,866 100 %
Pool RIF 84 - 105 - 117 -
Total RIF $ 61,208 100 % $ 56,986 100 % $ 55,983 100 %
The following table sets forth primary IIF and primary RIF by origination as of
the dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
Purchases IIF $ 199,322 82 % $ 176,550 78 % $ 169,944 76 %
Refinances IIF 42,491 18 49,964 22 52,520 24
Total IIF $ 241,813 100 % $ 226,514 100 % $ 222,464 100 %
Purchases RIF $ 52,134 85 % $ 46,470 82 % $ 44,871 80 %
Refinances RIF 8,990 15 10,411 18 10,995 20
Total RIF $ 61,124 100 % $ 56,881 100 % $ 55,866 100 %
The following table sets forth primary IIF and primary RIF by product as of the
dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
Monthly IIF $ 211,062 87 % $ 194,826 86 % $ 190,702 86 %
Single IIF 28,550 12 29,205 13 29,013 13
Other IIF 2,201 1 2,483 1 2,749 1
Total IIF $ 241,813 100 % $ 226,514 100 % $ 222,464 100 %
Monthly RIF $ 54,247 89 % $ 49,614 87 % $ 48,495 87 %
Single RIF 6,324 10 6,658 12 6,709 12
Other RIF 553 1 609 1 662 1
Total RIF $ 61,124 100 % $ 56,881 100 % $ 55,866 100 %
47
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The following table sets forth primary IIF by policy year as of the dates
indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
2008 and prior $ 6,849 3 % $ 8,196 3 % $ 8,963 4 %
2009 to 2014 2,293 1 3,369 2 3,949 2
2015 3,133 1 4,488 2 5,087 2
2016 6,772 3 8,997 4 10,082 4
2017 6,818 3 8,962 4 10,185 5
2018 7,133 3 9,263 4 10,568 5
2019 17,070 7 21,730 10 24,884 11
2020 58,497 24 69,963 31 75,785 34
2021 83,740 35 91,546 40 72,961 33
2022 49,508 20 - - - -
Total $ 241,813 100 % $ 226,514 100 % $ 222,464 100 %
The following table sets forth primary RIF by policy year as of the dates
indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
2008 and prior $ 1,764 3 % $ 2,112 3 % $ 2,309 4 %
2009 to 2014 609 1 904 2 1,062 2
2015 840 1 1,197 2 1,355 2
2016 1,805 3 2,388 4 2,676 5
2017 1,792 3 2,324 4 2,631 5
2018 1,806 3 2,330 4 2,656 5
2019 4,313 7 5,454 10 6,239 11
2020 14,891 25 17,574 31 18,965 34
2021 20,848 34 22,598 40 17,973 32
2022 12,456 20 - - - -
Total $ 61,124 100 % $ 56,881 100 % $ 55,866 100 %
48
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The following table presents the development of primary IIF for the periods
indicated:
Three months ended
September 30,
(Amounts in millions) 2022 2021
Beginning balance $ 237,563 $ 217,477
NIW 15,069 23,972
Cancellations, principal repayments and other reductions (1) (10,819)
(18,985)
Ending balance $ 241,813 $ 222,464
Nine months ended
September 30,
(Amounts in millions) 2022 2021
Beginning balance $ 226,514 $ 207,947
NIW 51,340 75,563
Cancellations, principal repayments and other reductions (1) (36,041)
(61,046) Ending balance $ 241,813 $ 222,464 ______________
(1)Includes the estimated amortization of unpaid principal balance of covered
loans
The following table sets forth primary IIF by LTV ratio at origination as of the
dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
95.01% and above $ 38,099 16 % $ 35,455 16 % $ 34,259 15 %
90.01% to 95.00% 101,164 42 95,149 42 94,888 43
85.01% to 90.00% 69,803 29 64,549 28 63,349 28
85.00% and below 32,747 13 31,361 14 29,968 14
Total $ 241,813 100 % $ 226,514 100 % $ 222,464 100 %
The following table sets forth primary RIF by LTV ratio at origination as of the
dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
95.01% and above $ 10,809 18 % $ 9,907 17 % $ 9,490 17 %
90.01% to 95.00% 29,379 48 27,608 49 27,509 49
85.01% to 90.00% 17,019 28 15,644 27 15,322 28
85.00% and below 3,917 6 3,722 7 3,545 6
Total $ 61,124 100 % $ 56,881 100 % $ 55,866 100 %
49
-------------------------------------------------------------------------------- The following table sets forth primary IIF by FICO score at origination as of the dates indicated: (Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021 Over 760 $ 99,177 41 % $ 89,982 40 % $ 87,073 39 % 740-759 38,731 16 35,874 16 35,177 16 720-739 33,874 14 31,730 14 31,374 14 700-719 28,384 12 27,359 12 27,371 12 680-699 21,294 9 21,270 9 21,458 10 660-679 (1) 10,842 4 10,549 5 10,309 5 640-659 6,115 3 6,124 3 6,009 3 620-639 2,663 1 2,783 1 2,787 1 <620 733 - 843 - 906 - Total $ 241,813 100 % $ 226,514 100 % $ 222,464 100 % ______________
(1)Loans with unknown FICO scores are included in the 660-679 category.
The following table sets forth primary RIF by FICO score at origination as of the dates indicated: (Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021 Over 760 $ 24,965 41 % $ 22,489 40 % $ 21,767 39 % 740-759 9,808 16 9,009 16 8,824 16 720-739 8,656 14 8,055 14 7,966 14 700-719 7,200 12 6,907 12 6,923 12 680-699 5,356 9 5,334 9 5,383 10 660-679 (1) 2,739 4 2,638 5 2,568 5 640-659 1,541 3 1,530 3 1,497 3 620-639 672 1 702 1 705 1 <620 187 - 217 - 233 - Total $ 61,124 100 % $ 56,881 100 % $ 55,866 100 % ______________
(1)Loans with unknown FICO scores are included in the 660-679 category.
The following table sets forth primary IIF by DTI score at origination as of the
dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
45.01% and above $ 40,846 17 % $ 34,076 15 % $ 31,771 14 %
38.01% to 45.00% 85,226 35 79,147 35 78,303 35
38.00% and below 115,741 48 113,291 50 112,390 51
Total $ 241,813 100 % $ 226,514 100 % $ 222,464 100 %
The following table sets forth primary RIF by DTI score at origination as of the
dates indicated:
(Amounts in millions) September 30, 2022 December 31, 2021 September 30, 2021
45.01% and above $ 10,393 17 % $ 8,631 15 % $ 8,048 14 %
38.01% to 45.00% 21,603 35 19,974 35 19,773 36
38.00% and below 29,128 48 28,276 50 28,045 50
Total $ 61,124 100 % $ 56,881 100 % $ 55,866 100 %
50
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Delinquent loans and claims
Our delinquency management process begins with notification by the loan servicer of a delinquency on an insured loan. "Delinquency" is defined in our master policies as the borrower's failure to pay when due an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, the master policies require an insured to notify us of a delinquency if the borrower fails to make two consecutive monthly mortgage payments prior to the due date of the next mortgage payment. We generally consider a loan to be delinquent and establish required reserves after the insured notifies us that the borrower has failed to make two scheduled mortgage payments. Borrowers may cure delinquencies by making all of the delinquent loan payments, agreeing to a loan modification, or by selling the property in full satisfaction of all amounts due under the mortgage. In most cases, delinquencies that are not cured result in a claim under our policy.
The following table sets forth a roll forward of the number of primary loans in
default for the periods indicated:
Nine months ended
September 30,
(Loan count) 2022
2021
Number of delinquencies, beginning of period 24,820 44,904 New defaults 25,692 24,342 Cures (31,254) (39,697) Claims paid (384) (620) Rescissions and claim denials (18) (25) Number of delinquencies, end of period 18,856
28,904
The following table sets forth changes in our direct primary case loss reserves
for the periods indicated:
Nine months ended
September 30,
(Amounts in thousands) (1) 2022 2021
Loss reserves, beginning of period $ 606,102 $ 516,863
Claims paid (18,776) (21,603)
Change in reserve (111,263) 117,494
Loss reserves, end of period $ 476,063 $ 612,754
______________
(1)Direct primary case reserves exclude LAE, IBNR and reinsurance reserves.
The following tables set forth primary delinquencies, direct case reserves and
RIF by aged missed payment status as of the dates indicated:
September 30, 2022
Direct case Risk Reserves as %
(Dollar amounts in millions) Delinquencies reserves (1) in-force of risk in-force
Payments in default:
3 payments or less 7,446 $ 48 $ 401 12 %
4 - 11 payments 6,119 146 358 41 %
12 payments or more 5,291 282 295 96 %
Total 18,856 $ 476 $ 1,054 45 %
51
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December 31, 2021
Direct case Risk Reserves as %
(Dollar amounts in millions) Delinquencies reserves (1) in-force of risk in-force
Payments in default:
3 payments or less 6,586 $ 35 $ 340 10 %
4 - 11 payments 7,360 111 426 26 %
12 payments or more 10,874 460 643 72 %
Total 24,820 $ 606 $ 1,409 43 %
September 30, 2021
Direct case Risk Reserves as %
(Dollar amounts in millions) Delinquencies reserves (1) in-force of risk in-force
Payments in default:
3 payments or less 6,192 $ 32 $ 319 10 %
4 - 11 payments 9,021 128 529 24 %
12 payments or more 13,691 453 813 56 %
Total 28,904 $ 613 $ 1,661 37 %
______________
(1)Direct primary case reserves exclude LAE, incurred but not reported and
reinsurance reserves.
The total increase in reserves as a percentage of RIF as of September 30, 2022
was primarily driven by the decrease in delinquent RIF. Delinquent RIF decreased
mainly due to lower total delinquencies as cures outpaced new delinquencies in
the first nine months of 2022, while reserves decreased due to our reserve
releases. While the number of loans that are delinquent for 12 months or more
has decreased, it remains elevated compared to pre-COVID-19 levels due, in large
part, to borrowers entering a forbearance plan over a year ago driven by
COVID-19.
Resolution of a delinquency in a forbearance plan, whether it ultimately results
in a cure or a claim, remains difficult to estimate. In addition, due to
foreclosure moratoriums and the uncertainty around the lack of progression
through the foreclosure process there is still uncertainty around the likelihood
and timing of delinquencies going to claim.
Primary insurance delinquency rates differ from region to region in the United
States at any one time depending upon economic conditions and cyclical growth
patterns. Delinquency rates are shown by region based upon the location of the
underlying property, rather than the location of the lender.
52
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The table below sets forth our primary delinquency rates for the ten largest
states by our primary RIF as of September 30, 2022:
Percent of direct
primary case Delinquency
Percent of RIF reserves rate
By State:
California 12 % 10 % 2.02 %
Texas 8 7 2.10 %
Florida (1) 8 8 1.93 %
New York (1) 5 14 2.97 %
Illinois (1) 5 6 2.53 %
Michigan 4 3 1.69 %
Arizona 3 2 1.67 %
North Carolina 3 2 1.62 %
Georgia 3 3 2.26 %
Pennsylvania (1) 3 3 2.11 %
All other states (2) 46 42 1.85 %
Total 100 % 100 % 1.99 %
______________
(1)Jurisdiction predominantly uses a judicial foreclosure process, which
generally increases the amount of time it takes for a foreclosure to be
completed.
(2)Includes the District of Columbia.
The table below sets forth our primary delinquency rates for the ten largest
states by our primary RIF as of December 31, 2021:
Percent of direct
primary case Delinquency
Percent of RIF reserves rate
By State:
California 11 % 12 % 3.17 %
Texas 8 8 2.89 %
Florida (1) 7 9 2.97 %
New York (1) 5 12 3.80 %
Illinois (1) 5 6 3.09 %
Michigan 4 2 1.87 %
Arizona 4 2 2.31 %
North Carolina 3 2 2.18 %
Pennsylvania (1) 3 3 2.38 %
Washington 3 3 2.98 %
All other states (2) 47 41 2.46 %
Total 100 % 100 % 2.65 %
______________
(1)Jurisdiction predominantly uses a judicial foreclosure process, which
generally increases the amount of time it takes for a foreclosure to be
completed.
(2)Includes the District of Columbia.
53
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The table below sets forth our primary delinquency rates for the ten largest
Metropolitan Statistical Areas ("MSA") or Metro Divisions ("MD") by our primary
RIF as of September 30, 2022:
Percent of direct Delinquency
Percent of RIF primary case reserves rate
By MSA or MD:
Chicago-Naperville, IL MD 3 % 4 % 2.85 %
Phoenix, AZ MSA 3 2 1.71 %
New York, NY MD 3 9 3.88 %
Atlanta, GA MSA 2 3 2.47 %
Washington-Arlington, DC MD 2 2 1.79 %
Houston, TX MSA 2 3 2.74 %
Riverside-San Bernardino CA MSA 2 2 2.74 %
Los Angeles-Long Beach, CA MD 2 2 2.13 %
Dallas, TX MD 2 2 1.78 %
Nassau County, NY MD 2 4 3.83 %
All Other MSAs/MDs 77 67 1.85 %
Total 100 % 100 % 1.99 %
The table below sets forth our primary delinquency rates for the ten largest
MSAs or MDs by our primary RIF as of December 31, 2021:
Percent of direct Delinquency
Percent of RIF primary case reserves rate
By MSA or MD:
Chicago-Naperville, IL MD 3 % 4 % 3.68 %
Phoenix, AZ MSA 3 2 2.36 %
New York, NY MD 3 8 5.32 %
Atlanta, GA MSA 2 3 3.28 %
Washington-Arlington, DC MD 2 2 2.96 %
Houston, TX MSA 2 3 3.61 %
Riverside-San Bernardino CA MSA 2 2 3.42 %
Los Angeles-Long Beach, CA MD 2 3 3.95 %
Dallas, TX MD 2 2 2.31 %
Nassau County, NY MD 2 4 5.55 %
All Other MSAs/MDs 77 67 2.44 %
Total 100 % 100 % 2.65 %
The frequency of delinquencies may not correlate directly with the number of
claims received because delinquencies may cure. The rate at which delinquencies
cure is influenced by borrowers' financial resources and circumstances and
regional economic differences. Whether a delinquency leads to a claim correlates
highly with the borrower's equity at the time of delinquency, as it influences
the borrower's willingness to continue to make payments, the borrower's or the
insured's ability to sell the home for an amount sufficient to satisfy all
amounts due under the mortgage loan and the borrower's financial ability to
continue making payments. When we receive notice of a delinquency, we use our
proprietary model to determine whether a delinquent loan is a candidate for a
modification. When our model identifies such a candidate, our loan workout
specialists prioritize cases for loss mitigation based upon the likelihood that
the loan will result in a claim. Loss mitigation actions include loan
modification,
54
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extension of credit to bring a loan current, foreclosure forbearance,
pre-foreclosure sale and deed-in-lieu. These loss mitigation efforts often are
an effective way to reduce our claim exposure and ultimate payouts.
The following table sets forth the dispersion of primary RIF and direct primary
case reserves by policy year and delinquency rates as of September 30, 2022:
Percent of direct Cumulative
Percent primary case Delinquency delinquency
of RIF reserves rate rate (1)
Policy Year:
2008 and prior 3 % 28 % 9.71 % 5.57 %
2009 to 2014 1 4 5.00 % 0.70 %
2015 1 4 3.68 % 0.75 %
2016 3 7 3.14 % 0.83 %
2017 3 8 3.75 % 1.03 %
2018 3 10 4.47 % 1.18 %
2019 7 12 2.65 % 0.94 %
2020 25 16 1.31 % 0.86 %
2021 34 10 0.92 % 0.83 %
2022 20 1 0.26 % 0.25 %
Total portfolio 100 % 100 % 1.99 % 4.26 %
______________
(1)Calculated as the sum of the number of policies where claims were ever paid
to date and number of policies for loans currently in default divided by
policies ever in-force.
The following table sets forth the dispersion of primary RIF and loss reserves
by policy year and delinquency rates as of December 31, 2021:
Percent of direct Cumulative
Percent primary case Delinquency delinquency
of RIF reserves rate rate (1)
Policy Year:
2008 and prior 3 % 24 % 10.54 % 5.59 %
2009 to 2013 1 2 5.54 % 0.74 %
2014 1 3 5.51 % 0.99 %
2015 2 5 4.24 % 1.04 %
2016 4 8 3.69 % 1.16 %
2017 4 10 4.78 % 1.56 %
2018 4 13 5.93 % 1.88 %
2019 10 19 3.89 % 1.68 %
2020 31 14 1.50 % 1.14 %
2021 40 2 0.37 % 0.36 %
Total portfolio 100 % 100 % 2.65 % 4.42 %
______________
(1)Calculated as the sum of the number of policies where claims were ever paid
to date and number of policies for loans currently in default divided by
policies ever in-force.
55 -------------------------------------------------------------------------------- Loss reserves in policy years in 2008 and prior are outsized compared to their representation of RIF. The size of these policy years at origination combined with the significant decline in home prices led to significant losses in these policy years. Although uncertainty remains with respect to the ultimate losses we will experience on these policy years, they have become a smaller percentage of our total mortgage insurance portfolio. The largest portion of loss reserves has shifted to newer book years as a result of COVID-19 given their significant representation of RIF. As of September 30, 2022, our 2015 and newer policy years represented approximately 96% of our primary RIF and 68% of our total direct primary case reserves. Investment Portfolio Our investment portfolio is affected by factors described below, each of which in turn may be affected by COVID-19 as noted above in "-Trends and Conditions." The investment portfolios of our insurance subsidiaries are directed by a newly formed Enact Investment Committee with Genworth serving as the investment manager. The investment portfolio of EHI is directed by a separate newly formed EHI Investment Committee with a third-party investment manager. These parties, with oversight from our Board of Directors and our senior management team, are responsible for the execution of our investment strategy. Our investment portfolio is an important component of our consolidated financial results and represents our primary source of claims paying resources. Our investment portfolio primarily consists of a diverse mix of highly rated fixed income securities and is designed to achieve the following objectives:
•Meet policyholder obligations through maintenance of sufficient liquidity;
•Preserve capital;
•Generate investment income;
•Maximize statutory capital; and
•Increase shareholder value, among other objectives.
To achieve our portfolio objectives, our investment strategy focuses primarily
on:
•Our business outlook, including current and expected future investment
conditions;
•Investments selection based on fundamental, research-driven strategies;
•Diversification across a mix of fixed income, low-volatility investments while
actively pursuing strategies to enhance yield;
•Regular evaluation and optimization of our asset class mix;
•Continuous monitoring of investment quality, duration, and liquidity;
•Regulatory capital requirements; and
•Restriction of investments correlated to the residential mortgage market.
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Fixed Maturity Securities Available-for-Sale
The following table presents the fair value of our fixed maturity securities
available-for-sale as of the dates indicated:
September 30, 2022 December 31, 2021
% of % of
(Amounts in thousands) Fair value total Fair value total
U.S. government, agencies and government-sponsored
enterprises
$ 44,654 1 % $ 58,408 1 % State and political subdivisions 432,229 9 538,453 10 Non-U.S. government 9,252 - 22,416 - U.S. corporate 2,639,184 54 2,945,303 56 Non-U.S. corporate 647,063 14 666,594 13 Residential mortgage-backed 11,743 - - - Other asset-backed 1,093,777 22 1,035,165 20 Total available-for-sale fixed maturity securities $ 4,877,902 100 % $ 5,266,339 100
%
Our investment portfolio did not include any direct residential real estate or
whole mortgage loans as of September 30, 2022 or December 31, 2021. We have no
derivative financial instruments in our investment portfolio.
As of both September 30, 2022 and December 31, 2021, 98% and 97% of our
investment portfolio was rated investment grade, respectively. The following
table presents the security ratings of our fixed maturity securities as of the
dates indicated:
September 30, 2022 December 31, 2021
AAA 10 % 9 %
AA 16 17
A 35 34
BBB 37 37
BB & below 2 3
Total 100 % 100 %
The table below presents the effective duration and investment yield on our
investments available-for-sale, excluding cash and cash equivalents as of the
dates indicated:
September 30, 2022 December 31, 2021
Duration (in years) 3.7 3.9
Pre-tax yield (% of average investment portfolio assets) 3.0 % 2.7 %
We manage credit risk by analyzing issuers, transaction structures and any
associated collateral. We also manage credit risk through country, industry,
sector and issuer diversification and prudent asset allocation practices.
We primarily mitigate interest rate risk by employing a buy and hold investment
philosophy that seeks to match fixed income maturities with expected liability
cash flows in modestly adverse economic scenarios.
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Liquidity and Capital Resources
Cash Flows
The following table summarizes our consolidated cash flows for the periods
indicated:
Nine months ended
September 30,
(Amounts in thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ 402,071 $ 411,082
Investing activities (246,528) (412,294)
Financing activities (45,596) -
Net increase (decrease) in cash and cash equivalents $ 109,947 $ (1,212)
Our most significant source of operating cash flows is from premiums received from our insurance policies, while our most significant uses of operating cash flows are generally for claims paid on our insured policies and our operating expenses. Net cash from operating activities decreased largely due to lower unearned premium declines from cancelled single premium policies. Cash flows from operations were also impacted by changes in reserves, timing of tax payments, stock-based compensation expense and amortization of discounts and premiums on fixed maturity securities. Investing activities are primarily related to purchases, sales and maturities of our investment portfolio. Net cash used by investing activities decreased as a result of lower net purchases of fixed maturity securities in the current year. During the nine months ended September 30, 2022, our cash flows from financing activities included dividends paid of $45.6 million. The amount and timing of future dividends is discussed within "-Trends and Conditions" as well as below. There were no dividends paid or other financing activity during the nine months ended September 30, 2021.
Capital Resources and Financing Activities
We issued our 2025 Senior Notes in 2020 with interest payable semi-annually in arrears on February 15 and August 15 of each year. The 2025 Senior Notes mature on August 15, 2025. We may redeem the 2025 Senior Notes, in whole or in part, at any time prior to February 15, 2025, at our option, by paying a make-whole premium, plus accrued and unpaid interest, if any. At any time on or after February 15, 2025, we may redeem the 2025 Senior Notes, in whole or in part, at our option, at 100% of the principal amount, plus accrued and unpaid interest. The 2025 Senior Notes contain customary events of default, which subject to certain notice and cure conditions, can result in the acceleration of the principal and accrued interest on the outstanding 2025 Senior Notes if we breach the terms of the indenture.
Pursuant to the GSE Restrictions, we were required to retain $300 million of the
net proceeds from the 2025 Senior Notes offering that can be drawn down
exclusively for our debt service or to contribute to EMICO to meet its
regulatory capital needs including PMIERs. The current balance of the 2025
Senior Notes proceeds required to be held by our holding company is
approximately $203 million. See “-Trends and Conditions” for additional
information regarding the GSE Restrictions.
On June 30, 2022, we entered into a credit agreement with a syndicate of lenders
that provides for a five-year, unsecured revolving credit facility (the
"Facility") in the initial aggregate principal amount of $200 million. We may
use borrowings under the Facility for working capital needs and general
corporate purposes, including the execution of dividends to our shareholders and
capital contributions to our insurance subsidiaries. The Facility contains
several covenants, including financial covenants relating to minimum net worth,
capital and liquidity levels, maximum debt to capitalization level and PMIERS
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compliance. We are in compliance with all covenants of the Facility and the
Facility remained undrawn as of September 30, 2022.
Restrictions on the Payment of Dividends
The ability of our regulated insurance operating subsidiaries to pay dividends
and distributions to us is restricted by certain provisions of North Carolina
insurance laws. Our insurance subsidiaries may pay dividends only from
unassigned surplus; payments made from sources other than unassigned surplus,
such as paid-in and contributed surplus, are categorized as distributions.
Notice of all dividends must be submitted to the Commissioner of the NCDOI (the
"Commissioner") within 5 business days after declaration of the dividend or
distribution, and at least 30 days before payment thereof. No dividend may be
paid until 30 days after the Commissioner has received notice of the declaration
thereof and (i) has not within that period disapproved the payment or (ii) has
approved the payment within the 30-day period. Any distribution, regardless of
amount, requires that same 30-day notice to the Commissioner, but also requires
the Commissioner's affirmative approval before being paid. Based on our
estimated statutory results and in accordance with applicable dividend
restrictions, EMICO has the capacity to pay dividends from unassigned surplus of
$156 million as of September 30, 2022, with 30 day advance notice to the
Commissioner of the intent to pay. In addition to dividends and distributions,
alternative mechanisms, such as share repurchases, subject to any requisite
regulatory approvals, may be utilized from time to time to upstream surplus.
In addition, we review multiple other considerations in parallel to determine a
prospective dividend strategy for our regulated insurance operating
subsidiaries. Given the regulatory focus on the reasonableness of an insurer's
surplus in relation to its outstanding liabilities and the adequacy of its
surplus relative to its financial needs for any dividend, our insurance
subsidiaries consider the minimum amount of policyholder surplus after giving
effect to any contemplated future dividends. Regulatory minimum policyholder
surplus is not codified in North Carolina law and limitations may vary based on
prevailing business conditions including, but not limited to, the prevailing and
future macroeconomic conditions. We estimate regulators would require a minimum
policyholder surplus of approximately $300 million to meet their threshold
standard. Given (i) we are subject to statutory accounting requirements that
establish a contingency reserve of at least 50% of net earned premiums annually
for ten years, after which time it is released into policyholder surplus and
(ii) that no material 10-year contingency reserve releases are scheduled before
2024, we expect modest growth in policyholder surplus through 2024. As a result,
minimum policyholder surplus could be a limitation on the future dividends of
our regulated operating subsidiaries.
Another consideration in the development of the dividend strategies for our
regulated insurance operating subsidiaries is our expected level of compliance
with PMIERs. Prior to the satisfaction of the GSE Conditions, the GSE
Restrictions also require EMICO to maintain 120% of PMIERs Minimum Required
Assets through 2022, and 125% thereafter. In addition, under PMIERs, EMICO is
subject to other operational and financial requirements that approved insurers
must meet in order to remain eligible to insure loans purchased by the GSEs.
Refer to "-Trends and Conditions" for recent updates related to these
requirements.
Our regulated insurance operating subsidiaries are also subject to statutory
"risk-to-capital" ("RTC") requirements that affect the dividend strategies of
our regulated operating subsidiaries. EMICO's domiciliary regulator, the NCDOI,
requires the maintenance of a statutory RTC ratio not to exceed 25:1. See
"-Risk-to-Capital Ratio" for additional RTC trend analysis.
We consider potential future dividends compared to the prior year statutory net
income in the evaluation of dividend strategies for our regulated operating
subsidiaries. We also consider the dividend payout ratio, or the ratio of
potential future dividends compared to the estimated U.S. GAAP net income, in
the evaluation of our dividend strategies. In either case, we do not have
prescribed target or maximum thresholds, but we do evaluate the reasonableness
of a potential dividend relative to the actual or estimated income generated in
the proceeding or preceding calendar year after giving consideration to
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prevailing business conditions including, but not limited to the prevailing and
future macroeconomic conditions. In addition, the dividend strategies of our
regulated operating subsidiaries are made in consultation with our Parent.
In April 2022, EMICO completed a distribution of approximately $242 million to
EHI that will support our ability to pay a quarterly dividend. EMICO completed a
similar distribution of $242 million to EHI subsequent to quarter end, in
October 2022. We intend to use these proceeds and future EMICO distributions to
fund a quarterly dividend as well as to bolster our financial flexibility at EHI
and return additional capital to shareholders.
The credit agreement entered into in connection with the Facility contains
customary restrictions on EHI's ability to pay cash dividends. Under the credit
agreement, EHI is permitted to make cash distributions (1) so long as no Default
or Event of Default (as each are defined in the credit agreement) has occurred
and is continuing and EHI is in pro forma compliance with its financial
covenants as described in Note 7 to our unaudited condensed consolidated
financial statements for the three months ended September 30, 2022 and 2021, at
the time of and after giving effect to such payment, (2) within 60 days of
declaration of any cash dividend so long as the payment was permitted under the
credit agreement at the time of such declaration and (3) other customary
exceptions as more fully set forth in the credit agreement.
In addition to the restrictions described above, all dividends from EHI are
subject to Parent consent and EHI Board of Directors approval.
Risk-to-Capital Ratio
We compute our RTC ratio on a separate company statutory basis, as well as for our combined insurance operations. The RTC ratio is net RIF divided by policyholders' surplus plus statutory contingency reserve. Our net RIF represents RIF, net of reinsurance ceded, and excludes risk on policies that are currently delinquent and for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders' surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. Certain states have insurance laws or regulations that require a mortgage insurer to maintain a minimum amount of statutory capital (including the statutory contingency reserve) relative to its level of RIF in order for the mortgage insurer to continue to write new business. While formulations of minimum capital vary in certain states, the most common measure applied allows for a maximum permitted RTC ratio of 25:1.
The following table presents the calculation of our RTC ratio for our combined
insurance subsidiaries as of the dates indicated:
(Dollar amounts in millions) September 30, 2022 December 31, 2021
Statutory policyholders’ surplus $
1,348 $ 1,397 Contingency reserves 3,424 3,042 Combined statutory capital $ 4,772 $ 4,439 Adjusted RIF(1) $ 58,542 $ 54,201 Combined risk-to-capital ratio 12.3
12.2
______________
(1)Adjusted RIF for purposes of calculating combined statutory RTC differs from
RIF presented elsewhere in this periodic report. In accordance with NCDOI
requirements, adjusted RIF excludes delinquent policies.
60 --------------------------------------------------------------------------------
The following table presents the calculation of our RTC ratio for our principal
insurance company, EMICO, as of the dates indicated:
(Dollar amounts in millions) September 30, 2022 December 31, 2021
Statutory policyholders’ surplus $
1,296 $ 1,346 Contingency reserves 3,422 3,041 EMICO statutory capital $ 4,718 $ 4,387 Adjusted RIF(1) $ 58,233 $ 54,033 EMICO risk-to-capital ratio 12.3 12.3 ______________ (1)Adjusted RIF for purposes of calculating EMICO statutory RTC differs from RIF presented elsewhere herein. In accordance with NCDOI requirements, adjusted RIF excludes delinquent policies.
Liquidity
As of September 30, 2022, we maintained liquidity in the form of cash and cash
equivalents of $536 million compared to $426 million as of December 31, 2021,
and we also held significant levels of investment-grade fixed maturity
securities that can be monetized should our cash and cash equivalents be
insufficient to meet our obligations. On August 21, 2020, we issued the 2025
Senior Notes. The GSE Restrictions required us to retain $300 million of the net
2025 Senior Notes proceeds that can be drawn down exclusively for our debt
service or to contribute to EMICO to meet its regulatory capital needs including
PMIERs, until the GSE Conditions are satisfied. See "-Trends and Conditions" for
additional details. We distributed $437 million of the net proceeds to Genworth
Holdings at the closing of the offering of our 2025 Senior Notes. The 2025
Senior Notes were issued to persons reasonably believed to be qualified
institutional buyers in a private offering exempt from registration pursuant to
Rule 144A under the Securities Act and to non-U.S. persons outside of the United
States in compliance with Regulation S under the Securities Act. The current
balance of the 2025 Senior Notes proceeds required to be held by our holding
company is approximately $203 million.
Additionally, on June 30, 2022, we entered into a five-year, unsecured revolving
credit facility with a syndicate of lenders in the initial aggregate principal
amount of $200 million. The Facility may be used for working capital needs and
general corporate purposes, including the execution of dividends to our
shareholders and capital contributions to our insurance subsidiaries. The
Facility remains undrawn as of September 30, 2022.
The principal sources of liquidity in our business currently include insurance
premiums, net investment income and cash flows from investment sales and
maturities. We believe that the operating cash flows generated by our mortgage
insurance subsidiary will provide the funds necessary to satisfy our claim
payments, operating expenses and taxes. However, our subsidiaries are subject to
regulatory and other capital restrictions with respect to the payment of
dividends. To the extent the remaining balance of the $300 million of net
proceeds retained from the 2025 Senior Notes offering is used to provide capital
support to EMICO, the GSEs and the NCDOI may seek to prevent EMICO from
returning that capital to EHI in the form of a dividend, distribution or an
intercompany loan. We currently have no material financing commitments, such as
lines of credit or guarantees, that are expected to affect our liquidity over
the next five years, other than the 2025 Senior Notes and the Facility.
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Financial Strength Ratings
The following EMICO financial strength ratings have been independently assigned by third-party rating organizations and represent our current ratings, which are subject to change. Name of Agency Rating Outlook Action Date of Rating Moody's Investor Service, Inc. Baa1 Stable Upgrade July 21, 2022 Fitch Ratings, Inc. BBB+ Stable Affirmed April 27, 2022 S&P Global Ratings BBB Positive Affirmed March 11, 2022
Contractual Obligations and Commitments
Our loss reserves include delinquencies from borrower forbearance programs due to COVID-19, which have a high degree of estimation. Therefore, it is possible we could have higher contractual obligations related to these loss reserves if they do not cure or progress to claim as we expect. Other than changes in our aforementioned loss reserves, there have been no material additions or changes to our contractual obligations or other off-balance sheet arrangements as compared to the amounts disclosed within our audited consolidated financial statements for the years ended December 31, 2021 and 2020.
Critical Accounting Estimates
As of the filing date of this report, there were no significant changes in our
critical accounting estimates from those discussed in our Annual Report.
New Accounting Standards
Refer to Note 2 in our unaudited condensed consolidated financial statements for
the three and nine months ended September 30, 2022 and 2021, and in our audited
consolidated financial statements for the years ended December 31, 2021 and
2020, for a discussion of recently adopted and not yet adopted accounting
standards.
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