Item 1. Financial Statements
Item 1. Financial Statements
ENACT HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,
2021 December 31,
2020
(Amounts in thousands, except par value amount) (Unaudited)
Assets
Investments:
Fixed maturity securities available-for-sale, at fair value (amortized cost of $ 5,205,916 and no allowance for credit losses as of September 30, 2021)
$ 5,376,067 $ 5,046,596
Short-term investments, at fair value 12,500 —
Total investments 5,388,567 5,046,596
Cash and cash equivalents 451,582 452,794
Accrued investment income 31,372 29,210
Deferred acquisition costs 27,788 28,872
Premiums receivable (allowance for credit losses of $ 948 as of September 30, 2021)
43,425 46,464
Other assets 48,572 48,774
Total assets $ 5,991,306 $ 5,652,710
Liabilities and equity
Liabilities:
Loss reserves $ 648,365 $ 555,679
Unearned premiums 254,806 306,945
Other liabilities 129,464 133,302
Long-term borrowings 739,838 738,162
Deferred tax liability 17,452 36,811
Total liabilities 1,789,925 1,770,899
Equity:
Common stock ($ 0.01 par value, 600,000 shares authorized, 162,840 shares issued and outstanding)
1,628 1,628
Additional paid-in capital 2,369,822 2,368,699
Accumulated other comprehensive income 133,955 208,378
Retained earnings 1,695,976 1,303,106
Total equity 4,201,381 3,881,811
Total liabilities and equity $ 5,991,306 $ 5,652,710
See Notes to Condensed Consolidated Financial Statements
2
ENACT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands, except per share amounts) 2021 2020 2021 2020
Revenues:
Premiums $ 243,063 $ 251,423 $ 738,085 $ 720,474
Net investment income 35,995 33,197 105,943 97,890
Net investment gains (losses) 580 ( 1,609 ) ( 2,129 ) ( 1,953 )
Other income 671 1,325 3,114 4,534
Total revenues 280,309 284,336 845,013 820,945
Losses and expenses:
Losses incurred 34,124 44,475 119,501 290,785
Acquisition and operating expenses, net of deferrals 55,151 54,994 175,823 155,473
Amortization of deferred acquisition costs and intangibles 3,669 3,873 11,104 11,453
Interest expense 12,756 5,512 38,238 5,512
Total losses and expenses 105,700 108,854 344,666 463,223
Income before income taxes
174,609 175,482 500,347 357,722
Provision for income taxes 37,401 37,467 107,196 78,482
Net income $ 137,208 $ 138,015 $ 393,151 $ 279,240
Net income per common share:
Basic $ 0.84 $ 0.85 $ 2.41 $ 1.71
Diluted $ 0.84 $ 0.85 $ 2.41 $ 1.71
Weighted average common shares outstanding:
Basic 162,840 162,840 162,840 162,840
Diluted 162,852 162,840 162,844 162,840
See Notes to Condensed Consolidated Financial Statements
3
ENACT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands) 2021 2020 2021 2020
Net income $ 137,208 $ 138,015 $ 393,151 $ 279,240
Other comprehensive income (loss), net of taxes:
Net unrealized gains (losses) on securities without an allowance for credit losses
( 25,899 ) — ( 74,704 ) —
Net unrealized gains (losses) on securities with an allowance for credit losses
— — — —
Net unrealized gains (losses) on securities not other-than-temporarily impaired — 30,799 — 90,316
Total comprehensive income $ 111,309 $ 168,814 $ 318,447 $ 369,556
See Notes to Condensed Consolidated Financial Statements
4
ENACT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
Three months ended September 30, 2021
(Amounts in thousands) Common
stock
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
equity
Balances as of June 30, 2021 $ 1,628 $ 2,369,601 $ 159,854 $ 1,558,768 $ 4,089,851
Cumulative effect of change in accounting, net of taxes — — — — —
Comprehensive income (loss):
Net income — — — 137,208 137,208
Other comprehensive loss, net of taxes — — ( 25,899 ) — ( 25,899 )
Total comprehensive income — — — — 111,309
Stock-based compensation expense and exercises and other — 221 — — 221
Capital contributions from Genworth Financial, Inc. — — — — —
Balance as of September 30,
2021 $ 1,628 $ 2,369,822 $ 133,955 $ 1,695,976 $ 4,201,381
Three months ended September 30, 2020
(Amounts in thousands) Common
stock
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
equity
Balances as of June 30, 2020 $ 1,628 $ 2,366,099 $ 152,948 $ 1,511,263 $ 4,031,938
Cumulative effect of change in accounting, net of taxes — — — — —
Comprehensive income (loss):
Net income — — — 138,015 138,015
Other comprehensive loss, net of taxes — — 30,799 — 30,799
Total comprehensive income — — — — 168,814
Dividends to Genworth — — — ( 435,654 ) ( 435,654 )
Capital contributions from Genworth Financial, Inc. — 1,532 — — 1,532
Balance as of September 30,
2020 $ 1,628 $ 2,367,631 $ 183,747 $ 1,213,624 $ 3,766,630
5
Nine months ended September 30, 2021
(Amounts in thousands) Common
stock
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
equity
Balances as of December 31, 2020 $ 1,628 $ 2,368,699 $ 208,378 $ 1,303,106 $ 3,881,811
Cumulative effect of change in accounting, net of taxes — — 281 ( 281 ) —
Comprehensive income (loss):
Net income — — — 393,151 393,151
Other comprehensive loss, net of taxes — — ( 74,704 ) — ( 74,704 )
Total comprehensive income — — — — 318,447
Stock-based compensation expense and exercises and other — 221 — — 221
Capital contributions from Genworth Financial, Inc. — 902 — — 902
Balance as of September 30,
2021 $ 1,628 $ 2,369,822 $ 133,955 $ 1,695,976 $ 4,201,381
Nine months ended September 30, 2020
Common
stock
Additional
paid-in
capital
Accumulated
other
comprehensive
income (loss)
Retained
earnings
Total
equity
Balances as of December 31, 2019 $ 1,628 $ 2,361,978 $ 93,431 $ 1,370,038 $ 3,827,075
Comprehensive income (loss):
Net income — — — 279,240 279,240
Other comprehensive loss, net of taxes — — 90,316 — 90,316
Total comprehensive income — — — — 369,556
Dividends to Genworth — — — ( 435,654 ) ( 435,654 )
Capital contributions from Genworth Financial, Inc. — 5,653 — — 5,653
Balances as of September 30, 2020 $ 1,628 $ 2,367,631 $ 183,747 $ 1,213,624 $ 3,766,630
See Notes to Condensed Consolidated Financial Statements
6
ENACT HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
(Amounts in thousands) 2021 2020
Cash flows from operating activities:
Net income $ 393,151 $ 279,240
Adjustments to reconcile net income to net cash provided by operating activities:
Net (gains) losses on investments 2,129 1,953
Amortization of fixed maturity securities discounts and premiums ( 6,884 ) ( 2,551 )
Amortization of deferred acquisition costs and intangibles 11,104 11,453
Acquisition costs deferred ( 5,525 ) ( 9,291 )
Deferred income taxes 824 12,593
Stock-based compensation expense 221 —
Other 908 5,653
Change in certain assets and liabilities:
Accrued investment income ( 2,162 ) ( 4,806 )
Premiums receivable 3,039 3,244
Other assets ( 4,666 ) 5,173
Loss reserves 92,686 239,682
Unearned premiums ( 52,139 ) ( 55,089 )
Other liabilities ( 21,604 ) 73,292
Net cash provided by operating activities 411,082 560,546
Cash flows from investing activities:
Purchases of fixed maturity securities available-for-sale ( 1,192,098 ) ( 1,494,972 )
Purchases of short-term investments ( 12,500 ) —
Proceeds from sales of fixed maturity securities available-for-sale 292,697 233,642
Proceeds from maturities of fixed maturity securities 499,607 369,361
Net cash used in investing activities ( 412,294 ) ( 891,969 )
Cash flows from financing activities:
Proceeds from the issuance of long-term debt — 738,753
Dividends paid — ( 435,654 )
Net cash provided by (used in) financing activities — 303,099
Net decrease in cash and cash equivalents ( 1,212 ) ( 28,324 )
Cash and cash equivalents at beginning of period 452,794 585,058
Cash and cash equivalents at end of period $ 451,582 $ 556,734
Supplementary disclosure of cash flow information:
Non-cash contributions of capital from Genworth Financial, Inc. $ 902 $ 5,653
See Notes to Condensed Consolidated Financial Statements
7
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
(1) Nature of Business, Organization Structure and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include on a consolidated basis the accounts of Enact Holdings, Inc. (“EHI,” together with its subsidiaries, the “Company,” “we,” “us” or “our”) (formerly known as Genworth Mortgage Holdings, Inc.). EHI is a subsidiary of Genworth Financial, Inc. (“Genworth” or “Parent”) and has been since EHI’s incorporation in Delaware in 2012. On May 3, 2021, EHI amended its certificate of incorporation to change its name from Genworth Mortgage Holdings, Inc. This amendment also authorized EHI to issue 600,000,000 shares of common stock, each having a par value of $ 0.01 per share. Concurrently, we entered into a share exchange agreement with Genworth Holdings, Inc. (“Genworth Holdings”), pursuant to which Genworth Holdings exchanged its 100 shares of common stock, representing all of the previously issued and outstanding capital stock, for 162,840,000 newly-issued shares of common stock, par value $ 0.01 , of EHI. All of the share and per share information presented in the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been adjusted to reflect the share exchange on a retroactive basis for all periods and as of all dates presented.
On September 15, 2021, we priced our initial public offering (“IPO”) of common stock, which resulted in the issuance and sale of 13,310,400 shares of common stock at the IPO price of $ 19.00 per common share. All shares were offered by the selling stockholder, our parent company, Genworth Holdings. In addition to the shares sold in the IPO, 14,655,600 common shares were sold in a concurrent private sale (“Private Sale”) at a price per share of $ 17.86 , which is equal to the IPO price less the underwriting discount share. Genworth Holdings also granted the underwriters a 30-day option to purchase up to an additional 1,996,560 common shares (“Over-Allotment Option”) at the IPO price less the underwriting discount. On September 16, 2021, the underwriters exercised their option to purchase all 1,996,560 common shares permitted under the terms of the underwriting agreement. The IPO, Private Sale and Over-Allotment Option (collectively the “Offering”) closed on September 20, 2021, and Genworth Holdings retained all net proceeds from the Offering. The gross proceeds of the Offering, before payment of underwriter fees and other expenses, were approximately $ 553 million. Costs directly related to the Offering, including underwriting fees and other expenses, were approximately $ 24 million.
On November 29, 2019, Genworth completed a holding company reorganization whereby Genworth contributed 100% of the issued and outstanding voting securities of the Company to Genworth Holdings. Post-contribution, we were a direct, wholly owned subsidiary of Genworth Holdings, and Genworth Holdings was a direct, wholly owned subsidiary of Genworth. After our IPO, Genworth Holdings is still a wholly owned subsidiary of Genworth but we are no longer a wholly owned subsidiary of Genworth Holdings. We are engaged in the business of writing and assuming residential mortgage guaranty insurance. The insurance protects lenders and investors against certain losses resulting from nonpayment of loans secured by mortgages, deeds of trust, or other instruments constituting a lien on residential real estate.
We offer private mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“primary mortgage insurance”). Our primary mortgage insurance enables borrowers to buy homes with a down payment of less than 20% of the home’s value. Primary mortgage insurance also facilitates the sale of these low down payment mortgage loans in the secondary mortgage market, most of which are sold to government sponsored enterprises. We also selectively enter into insurance transactions with lenders and investors, under which we insure a portfolio of loans at or after origination.
We operate our business through our primary insurance subsidiary, Genworth Mortgage Insurance Corporation (“GMICO”), with operations in all 50 states and the District of Columbia. GMICO is an approved insurer by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home
8
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
Loan Mortgage Corporation (“Freddie Mac”). Fannie Mae and Freddie Mac are government-sponsored enterprises and we refer to them collectively as the “GSEs.”
We also perform fee-based contract underwriting services for mortgage lenders. The provision of underwriting services by mortgage insurers eliminates the duplicative lender and mortgage insurer underwriting activities and expedites the approval process.
We operate our business in a single segment, which is how our chief operating decision maker (who is our chief executive officer) reviews our financial performance and allocates resources. Our segment includes a run-off insurance block with reference properties in Mexico (“run-off business”), which is immaterial to our condensed consolidated financial statements. In April 2021, we entered into an agreement to purchase our Parent’s minority ownership interest in its mortgage guarantee business in India for a cash purchase price that is not material to us. The closing of the transaction is subject to customary closing conditions, including receipt of any required regulatory approvals.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Potential impacts, risks and uncertainties of the coronavirus pandemic (“COVID-19”) may include declines in investment valuations and impairments, deferred acquisition cost (“DAC”) or intangible assets impairments or the acceleration of amortization, deferred tax asset recoverability and increases to loss reserves, among other matters. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes for the years ended December 31, 2020 and 2019.
On July 20, 2020, Genworth reached a settlement agreement with AXA S.A. (“AXA”) regarding a dispute over payment protection insurance mis-selling claims sold by Genworth’s former lifestyle protection insurance business that was acquired by AXA in 2015. As part of the settlement agreement, Genworth issued a secured promissory note agreeing to pay AXA in two installments in 2022. Under the terms of the secured promissory note, as amended, Genworth pledged as collateral to AXA a 19.9 % security interest in our outstanding common stock. On March 3, 2021, Genworth repaid the first installment payment originally due to AXA in June 2022 and a portion of the second installment payment due to AXA in September 2022 from cash proceeds received from the sale of Genworth Mortgage Insurance Australia Limited. On September 21, 2021, Genworth used a portion of the net proceeds from our IPO to repay the remaining outstanding balance of the secured promissory note of approximately £ 215 million ($ 296 million), excluding future claims still being processed. Following the full repayment of the secured promissory note, AXA released its 19.9 % security interest in our outstanding common shares.
(2) Accounting Changes
Accounting Pronouncements Recently Adopted
On January 1, 2021, we adopted new accounting guidance related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. We adopted this new accounting guidance using the
9
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
retrospective method or modified retrospective method for certain changes and prospective method for all other changes, which did not have a significant impact on our consolidated financial statements and disclosures.
On January 1, 2021, we early adopted new accounting guidance related to accounting for credit losses on financial instruments. The guidance requires entities to recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value.
The new guidance retains most of the existing impairment guidance for available-for-sale fixed maturity securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. Available-for-sale fixed maturity securities in an unrealized loss position are evaluated to determine whether the decline in fair value is related to credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency/agencies and adverse conditions specifically related to the security, among other factors. If a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments. When developing the estimate of cash flows expected to be collected, we utilize an analytical model that provides for various loss scenarios and consider the industry sector, current levels of subordination, geographic location and other relevant characteristics of the security or underlying assets, as well as reasonable and supportable forecasts. Losses are written off against the allowance when deemed uncollectible or when we intend to sell or expect we will be required to sell a security prior to recovering our amortized cost. We exclude accrued interest related to available-for-sale fixed maturity securities from the estimate of allowance for credit losses. Accrued interest is included in accrued investment income in our condensed consolidated balance sheet. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our available-for-sale fixed maturity securities is written off after 90 days and once collectability is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses). We adopted the guidance related to our available-for-sale fixed maturity securities using the modified retrospective method, which did not have a significant impact on our consolidated financial statements.
The new guidance further requires that expected credit losses on premiums receivable are measured in accordance with the credit loss requirements for financial instruments measured at amortized cost. Due to the short-term nature of our premiums receivable, we consider lifetime expected credit losses on premiums receivable to be consistent with our current allowance and as a result the new accounting guidance did not have an impact on premiums receivable upon adoption.
The new guidance also requires the recognition of an allowance for expected credit losses as a liability in our consolidated balance sheet for off-balance sheet credit exposures, including private placement investments. We adopted the guidance related to our off-balance sheet credit exposures using the modified retrospective method, which did not have an impact on our consolidated financial statements.
10
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
(3) Investments
Net Investment Income
Sources of net investment income were as follows for the periods indicated:
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands)
2021 2020 2021 2020
Fixed maturity securities available-for-sale $ 37,055 $ 34,512 $ 110,007 $ 99,621
Cash, cash equivalents and short-term investments 13 86 65 2,135
Gross investment income before expenses and fees 37,068 34,598 110,072 101,756
Investment expenses and fees ( 1,073 ) ( 1,401 ) ( 4,129 ) ( 3,866 )
Net investment income $ 35,995 $ 33,197 $ 105,943 $ 97,890
Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands)
2021 2020 2021 2020
Fixed maturity securities available-for-sale:
Gross realized gains $ 839 $ 158 $ 1,423 $ 906
Gross realized (losses) ( 128 ) ( 37 ) ( 1,261 ) ( 1,129 )
Net realized gains (losses) 711 121 162 ( 223 )
Impairments:
Total other-than-temporary impairments — ( 1,730 ) — ( 1,730 )
Portion of other-than-temporary impairments included in other comprehensive income (loss) — — — —
Net other-than-temporary impairments — ( 1,730 ) — ( 1,730 )
Net change in allowance for credit losses on fixed maturity securities available-for-sale ( 131 ) — ( 2,291 ) —
Net investment gains (losses) $ 580 $ ( 1,609 ) $ ( 2,129 ) $ ( 1,953 )
11
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following table represents the allowance for credit losses aggregated by security type for fixed maturity available-for-sale securities as of and for the three months ended September 30, 2021:
(Amounts in thousands) Beginning balance Cumulative effect of change in accounting Increase from securities without allowance in previous periods Securities sold Ending balance
Fixed maturity securities:
Non-U.S. corporate $ — $ — $ — $ — $ —
Total fixed maturity securities available-for-sale $ — $ — $ — $ — $ —
The following table represents the allowance for credit losses aggregated by security type for fixed maturity available-for-sale securities as of and for the nine months ended September 30, 2021:
(Amounts in thousands) Beginning balance Cumulative effect of change in accounting Increase from securities without allowance in previous periods Securities sold Ending balance
Fixed maturity securities:
Non-U.S. corporate $ — $ 357 $ 2,157 $ ( 2,514 ) $ —
Total fixed maturity securities available-for-sale $ — $ 357 $ 2,157 $ ( 2,514 ) $ —
Unrealized Investment Gains (Losses)
Net unrealized gains and losses on available-for-sale securities reflected as a separate component of accumulated other comprehensive income (“OCI”) were as follows as of the dates indicated:
(Amounts in thousands)
September 30, 2021 December 31, 2020
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses
$ 170,151 $ —
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses
— —
Net unrealized gains (losses) on fixed maturity securities not other-than-temporarily impaired
— 264,680
Net unrealized gains (losses) on fixed maturity securities other-than-temporarily impaired
— —
Subtotal 170,151 264,680
Income taxes ( 36,196 ) ( 56,302 )
Net unrealized investment gains (losses) $ 133,955 $ 208,378
12
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The change in net unrealized gains (losses) on available-for-sale securities reported in accumulated other comprehensive income was as follows as of and for the periods indicated:
Three months ended
September 30,
(Amounts in thousands)
2021 2020
Beginning balance $ 159,854 $ 152,948
Cumulative effect of change in accounting, net of taxes — —
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities ( 32,185 ) 37,225
Provision for income taxes 6,848 ( 7,697 )
Change in unrealized gains (losses) on investment securities ( 25,337 ) 29,528
Reclassification adjustments to net investment (gains) losses, net of taxes of $ 149 and $( 339 ), respectively
( 562 ) 1,271
Change in net unrealized investment gains (losses) ( 25,899 ) 30,799
Ending balance $ 133,955 $ 183,747
Nine months ended
September 30,
(Amounts in thousands)
2021 2020
Beginning balance $ 208,378 $ 93,431
Cumulative effect of change in accounting, net of taxes 281 —
Unrealized gains (losses) arising during the period:
Unrealized gains (losses) on investment securities ( 94,724 ) 109,822
Provision for income taxes 20,148 ( 21,063 )
Change in unrealized gains (losses) on investment securities ( 74,576 ) 88,759
Reclassification adjustments to net investment (gains) losses, net of taxes of $ 34 and $( 414 ), respectively
( 128 ) 1,557
Change in net unrealized investment gains (losses) ( 74,704 ) 90,316
Ending balance $ 133,955 $ 183,747
Amounts reclassified out of accumulated other comprehensive income to net investment gains (losses) include realized gains (losses) on sales of securities, which are determined on a specific identification basis.
13
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
Fixed Maturity Securities Available-For-Sale
As of September 30, 2021, the amortized cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as available-for-sale were as follows:
(Amounts in thousands)
Amortized
cost
Gross unrealized gains Gross unrealized losses Allowance for credit losses
Fair
value
U.S. government, agencies and GSEs $ 62,579 $ 2,539 $ ( 1 ) $ — $ 65,117
State and political subdivisions 449,370 12,650 ( 2,237 ) — 459,783
Non-U.S. government 22,423 343 ( 8 ) — 22,758
U.S. corporate 2,825,145 132,821 ( 9,860 ) — 2,948,106
Non-U.S. corporate 690,717 23,390 ( 1,504 ) — 712,603
Other asset-backed 1,155,682 13,216 ( 1,198 ) — 1,167,700
Total fixed maturity securities available-for-sale $ 5,205,916 $ 184,959 $ ( 14,808 ) $ — $ 5,376,067
As of December 31, 2020, the amortized cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as available-for-sale were as follows:
Gross unrealized gains
Gross unrealized losses
(Amounts in thousands)
Amortized
cost
Not
other-than-
temporarily
impaired
Other-than-
temporarily
impaired
Not
other-than-
temporarily
impaired
Other-than-
temporarily
impaired
Fair
value
U.S. government, agencies and GSEs $ 134,215 $ 4,009 $ — $ — $ — $ 138,224
State and political subdivisions 172,631 14,749 — ( 3 ) — 187,377
Non-U.S. government 29,592 1,439 — — — 31,031
U.S. corporate 2,695,009 194,961 — ( 1,345 ) — 2,888,625
Non-U.S. corporate 578,295 32,251 — ( 2,877 ) — 607,669
Other asset-backed 1,172,174 21,830 — ( 334 ) — 1,193,670
Total fixed maturity securities available-for-sale $ 4,781,916 $ 269,239 $ — $ ( 4,559 ) $ — $ 5,046,596
14
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
Gross Unrealized Losses and Fair Values of Fixed Maturity Securities Available-For-Sale
The following table presents the gross unrealized losses and fair values of our fixed maturity securities for which an allowance for credit losses has not been recorded, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of September 30, 2021:
Less than 12 months
12 months or more
Total
(Amounts in thousands)
Fair
value
Gross unrealized losses
Number of securities
Fair value
Gross unrealized losses
Number of securities
Fair value
Gross unrealized losses
Number of securities
Fixed maturity securities:
U.S. government, agencies and GSEs $ 104 $ ( 1 ) 1 $ — $ — — $ 104 $ ( 1 ) 1
State and political subdivisions 170,402 ( 2,237 ) 33 — — — 170,402 ( 2,237 ) 33
Non-U.S. government 10,777 ( 8 ) 1 — — — 10,777 ( 8 ) 1
U.S. corporate 409,396 ( 8,433 ) 61 21,543 ( 1,427 ) 2 430,939 ( 9,860 ) 63
Non-U.S. corporate 145,571 ( 1,477 ) 23 2,183 ( 27 ) 1 147,754 ( 1,504 ) 24
Other asset-backed 255,275 ( 1,174 ) 44 3,726 ( 24 ) 1 259,001 ( 1,198 ) 45
Total for fixed maturity securities in an unrealized loss position $ 991,525 $ ( 13,330 ) 163 $ 27,452 $ ( 1,478 ) 4 $ 1,018,977 $ ( 14,808 ) 167
% Below cost:
<20% Below cost $ 991,525 $ ( 13,330 ) 163 $ 27,452 $ ( 1,478 ) 4 $ 1,018,977 $ ( 14,808 ) 167
Total for fixed maturity securities in an unrealized loss position $ 991,525 $ ( 13,330 ) 163 $ 27,452 $ ( 1,478 ) 4 $ 1,018,977 $ ( 14,808 ) 167
Investment grade $ 963,517 $ ( 12,835 ) 155 $ 27,452 $ ( 1,478 ) 4 $ 990,969 $ ( 14,313 ) 159
Below investment grade 28,008 ( 495 ) 8 — — — 28,008 ( 495 ) 8
Total for fixed maturity securities in an unrealized loss position $ 991,525 $ ( 13,330 ) 163 $ 27,452 $ ( 1,478 ) 4 $ 1,018,977 $ ( 14,808 ) 167
We did not recognize an allowance for credit losses on securities in an unrealized loss position included in the table above. Based on a qualitative and quantitative review of the issuers of the securities, we believe the decline in fair value is largely due to recent market volatility and is not indicative of credit losses. The issuers continue to make timely principal and interest payments.
For all securities in an unrealized loss position without an allowance for credit losses, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost.
15
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following table presents the gross unrealized losses and fair values of our fixed maturity securities, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of December 31, 2020:
Less than 12 months
12 months or more
Total
(Amounts in thousands)
Fair
value
Gross unrealized losses
Number of securities
Fair value
Gross unrealized losses
Number of securities
Fair value
Gross unrealized losses
Number of securities
Fixed maturity securities:
U.S. government, agencies and GSEs $ — $ — — $ — $ — — $ — $ — —
State and political subdivisions 4,717 ( 3 ) 2 — — — 4,717 ( 3 ) 2
Non-U.S. government — — — — — — — — —
U.S. corporate 44,296 ( 1,231 ) 8 2,886 ( 114 ) 1 47,182 ( 1,345 ) 9
Non-U.S. corporate 32,533 ( 2,877 ) 8 — — — 32,533 ( 2,877 ) 8
Other asset-backed 24,823 ( 60 ) 5 26,028 ( 274 ) 6 50,851 ( 334 ) 11
Total for fixed maturity securities in an unrealized loss position $ 106,369 $ ( 4,171 ) 23 $ 28,914 $ ( 388 ) 7 $ 135,283 $ ( 4,559 ) 30
% Below cost:
<20% Below cost $ 98,694 $ ( 1,846 ) 22 $ 28,914 $ ( 388 ) 7 $ 127,608 $ ( 2,234 ) 29
20%-50% Below cost 7,675 ( 2,325 ) 1 — — — 7,675 ( 2,325 ) 1
Total for fixed maturity securities in an unrealized loss position $ 106,369 $ ( 4,171 ) 23 $ 28,914 $ ( 388 ) 7 $ — $ 135,283 $ ( 4,559 ) 30
Investment grade $ 98,694 $ ( 1,846 ) 22 $ 26,028 $ ( 274 ) 6 $ 124,722 $ ( 2,120 ) 28
Below investment grade 7,675 ( 2,325 ) 1 2,886 ( 114 ) 1 10,561 ( 2,439 ) 2
Total for fixed maturity securities in an unrealized loss position $ 106,369 $ ( 4,171 ) 23 $ 28,914 $ ( 388 ) 7 $ — $ 135,283 $ ( 4,559 ) 30
Contractual Maturities of Fixed Maturity Securities Available-For-Sale
The scheduled maturity distribution of fixed maturity securities as of September 30, 2021, is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
(Amounts in thousands)
Amortized
cost
Fair
value
Due one year or less $ 249,955 $ 253,601
Due after one year through five years 2,089,009 2,214,808
Due after five years through ten years 1,433,056 1,462,586
Due after ten years 278,214 277,372
Subtotal 4,050,234 4,208,367
Other asset-backed 1,155,682 1,167,700
Total fixed maturity securities available-for-sale $ 5,205,916 $ 5,376,067
As of September 30, 2021, securities issued by finance and insurance, consumer—non-cyclical and technology and communications industry groups represented approximately 28 %, 16 %, and 14 %, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 9% of our investment portfolio.
16
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
As of September 30, 2021, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of equity.
(4) Fair Value
Recurring Fair Value Measurements
We have fixed maturity securities and short-term investments, which are carried at fair value. The fair value of fixed maturity securities and short-term investments are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, that security is valued using market information for similar securities, which is also a market approach. When market information is not available for a specific security (or similar securities) or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.
Further, while we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information.
In general, we first obtain valuations from pricing services. If prices are unavailable for public securities, we obtain broker quotes. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for similar securities are not readily observable and these securities are not typically valued by pricing services.
Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.
Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.
For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums
17
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating or public bond spread as Level 3. In general, a significant increase (decrease) in credit spreads would have resulted in a significant decrease (increase) in the fair value for our fixed maturity securities as of September 30, 2021.
For remaining securities priced using internal models, we determine fair value using an income approach. We maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.
Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from pricing services to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.
A summary of the inputs used for our fixed maturity securities and short-term investments based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.
Level 1 measurements
There were no fixed maturity securities classified as Level 1 as of September 30, 2021, and December 31, 2020.
Level 2 measurements
Fixed maturity securities:
Third-party pricing services
In estimating the fair value of fixed maturity securities, approximately 90 % of our portfolio was priced using third-party pricing services as of September 30, 2021. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.
18
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following table presents a summary of the significant inputs used by our pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of September 30, 2021:
(Amounts in thousands)
Fair value
Primary methodologies
Significant inputs
U.S. government, agencies and GSEs $ 65,117 Price quotes from trading desk, broker feeds Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread
State and political subdivisions $ 459,783 Multi-dimensional attribute-based modeling systems, third-party pricing vendors Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes
Non-U.S. government $ 22,758 Matrix pricing, spread priced to benchmark curves, price quotes from market makers Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources
U.S. corporate $ 2,584,949 Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models, OAS-based models Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports
Non-U.S. corporate $ 541,755 Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources
Other asset-backed $ 1,149,314 Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers Spreads to daily updated swap curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports
19
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
Internal models
A portion of our U.S. corporate and non-U.S. corporate securities are valued using internal models. The fair value of these fixed maturity securities was $ 185.5 million and $ 84.5 million, respectively, as of September 30, 2021. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.
Short-term investments:
The fair value of short-term investments classified as Level 2 is determined after considering prices obtained by pricing services.
Level 3 measurements
Broker quotes
A portion of our U.S. corporate, non-U.S. corporate and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $ 30.4 million as of September 30, 2021.
Internal models
A portion of our U.S. corporate, non-U.S. corporate and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as the interest rate yield curve, as well as published credit spreads for similar securities, which includes significant unobservable inputs. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $ 252.0 million as of September 30, 2021.
20
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following tables set forth our assets by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
September 30, 2021
(Amounts in thousands)
Total
Level 1
Level 2
Level 3
Fixed maturity securities:
U.S. government, agencies and GSEs $ 65,117 $ — $ 65,117 $ —
State and political subdivisions 459,783 — 459,783 —
Non-U.S. government 22,758 — 22,758 —
U.S. corporate 2,948,106 — 2,770,419 177,687
Non-U.S. corporate 712,603 — 626,270 86,333
Other asset-backed 1,167,700 — 1,149,314 18,386
Total fixed maturity securities 5,376,067 — 5,093,661 282,406
Short-term investments 12,500 — 12,500 —
Total $ 5,388,567 $ — $ 5,106,161 $ 282,406
December 31, 2020
(Amounts in thousands)
Total
Level 1
Level 2
Level 3
Fixed maturity securities:
U.S. government, agencies and GSEs $ 138,224 $ — $ 138,224 $ —
State and political subdivisions 187,377 — 187,377 —
Non-U.S. government 31,031 — 31,031 —
U.S. corporate 2,888,625 — 2,769,252 119,373
Non-U.S. corporate 607,669 — 511,918 95,751
Other asset-backed 1,193,670 — 1,179,889 13,781
Total fixed maturity securities 5,046,596 — 4,817,691 228,905
Total $ 5,046,596 $ — $ 4,817,691 $ 228,905
We did not have any liabilities recorded at fair value as of September 30, 2021, and December 31, 2020.
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
Beginning
balance
as of
July 1,
2021
Total realized and
unrealized gains
(losses)
Purchases
Sales
Issuances
Settlements
Transfer
into
Level 3 (1)
Transfer
out of
Level 3 (1)
Ending
balance
as of
September 30, 2021
Total gains
(losses)
attributable to
assets still held
(Amounts in thousands)
Included
in net
income
Included
in OCI
Included
in net
income
Included
in OCI
Fixed maturity securities:
U.S. corporate $ 129,613 $ ( 30 ) $ ( 2,778 ) $ 53,000 $ — $ — $ ( 3,426 ) $ 4,318 $ ( 3,010 ) $ 177,687 $ ( 30 ) $ ( 2,769 )
Non-U.S. corporate 91,157 958 ( 644 ) 6,000 — — ( 14,148 ) 3,010 — 86,333 ( 83 ) 235
Other asset-backed 10,015 — ( 170 ) 10,000 — — ( 1,459 ) — — 18,386 — ( 146 )
Total $ 230,785 $ 928 $ ( 3,592 ) $ 69,000 $ — $ — $ ( 19,033 ) $ 7,328 $ ( 3,010 ) $ 282,406 $ ( 113 ) $ ( 2,680 )
(1) The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.
21
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
Beginning
balance
as of
July 1,
2020
Total realized and
unrealized gains
(losses)
Purchases
Sales
Issuances
Settlements
Transfer
into
Level 3 (1)
Transfer
out of
Level 3 (1)
Ending
balance
as of
September 30, 2020
Total gains
(losses)
attributable to
assets still held
(Amounts in thousands)
Included
in net
income
Included
in OCI
Included
in net
income
Included
in OCI
Fixed maturity securities:
U.S. corporate $ 108,868 $ 246 $ 1,778 $ 26,999 $ — $ — $ ( 4,899 ) $ — $ ( 5,500 ) $ 127,492 $ ( 31 ) $ 1,948
Non-U.S. corporate 99,074 ( 5 ) ( 519 ) 3,000 — — ( 105 ) — — 101,445 ( 5 ) ( 519 )
Other asset-backed 8,515 — 328 24,993 — — ( 1,182 ) — ( 4,846 ) 27,808 — 212
Total $ 216,457 $ 241 $ 1,587 $ 54,992 $ — $ — $ ( 6,186 ) $ — $ ( 10,346 ) $ 256,745 $ ( 36 ) $ 1,641
(1) The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.
Beginning
balance
as of
January 1,
2021
Total realized and
unrealized gains
(losses)
Purchases
Sales
Issuances
Settlements
Transfer
into
Level 3 (1)
Transfer
out of
Level 3 (1)
Ending
balance
as of
September 30, 2021
Total gains
(losses)
attributable to
assets still held
(Amounts in thousands)
Included
in net
income
Included
in OCI
Included
in net
income
Included
in OCI
Fixed maturity securities:
U.S. corporate $ 119,373 $ ( 92 ) $ ( 3,750 ) $ 71,000 $ — $ — $ ( 8,914 ) $ 7,397 $ ( 7,327 ) $ 177,687 $ ( 92 ) $ ( 4,029 )
Non-U.S. corporate 95,751 868 3,147 42,786 — — ( 25,044 ) 3,010 ( 34,185 ) 86,333 ( 168 ) ( 683 )
Other asset-backed 13,781 — ( 104 ) 10,000 — — ( 2,723 ) — ( 2,568 ) 18,386 — ( 130 )
Total $ 228,905 $ 776 $ ( 707 ) $ 123,786 $ — $ — $ ( 36,681 ) $ 10,407 $ ( 44,080 ) $ 282,406 $ ( 260 ) $ ( 4,842 )
______________
(1) The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.
(Amounts in thousands) Beginning
balance
as of
January 1,
2020
Total realized and
unrealized gains
(losses)
Purchases
Sales
Issuances
Settlements
Transfer
into
Level 3 (1)
Transfer
out of
Level 3 (1)
Ending
balance
as of
September 30, 2020
Total gains
(losses)
attributable to
assets still held
Included
in net
income
Included
in OCI
Included in net income Included in OCI
Fixed maturity securities:
U.S. corporate $ 99,862 $ 193 $ 3,120 $ 46,553 $ — $ — $ ( 5,333 ) $ 5,016 $ ( 21,919 ) $ 127,492 $ ( 73 ) $ 4,330
Non-U.S. corporate 77,189 ( 14 ) ( 1,987 ) 25,000 — — ( 981 ) 23,468 ( 21,230 ) 101,445 ( 14 ) ( 3,278 )
Other asset-backed 4,038 — ( 69 ) 29,867 — — ( 1,182 ) — ( 4,846 ) 27,808 — ( 185 )
Total
$ 181,089 $ 179 $ 1,064 $ 101,420 $ — $ — $ ( 7,496 ) $ 28,484 $ ( 47,995 ) $ 256,745 $ ( 87 ) $ 867
______________
(1) The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.
22
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following table presents the gains and losses included in net income (loss) from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands)
2021 2020 2021 2020
Total realized and unrealized gains (losses) included in net income:
Net investment income $ 928 $ 241 $ 776 $ 179
Net investment gains (losses) — — — —
Total $ 928 $ 241 $ 776 $ 179
Total gains (losses) included in net income attributable to assets still held:
Net investment income $ ( 113 ) $ ( 36 ) $ ( 260 ) $ ( 87 )
Net investment gains (losses) — — — —
Total $ ( 113 ) $ ( 36 ) $ ( 260 ) $ ( 87 )
The amount presented for realized and unrealized gains (losses) included in net income for fixed maturity securities primarily represents amortization and accretion of premiums and discounts on certain fixed maturity securities.
The following table presents a summary of the significant unobservable inputs used for certain asset fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2021:
(Amounts in thousands)
Valuation
technique
Fair value (1)
Unobservable
input
Range (bps)
Weighted-
average (2) (bps)
Fixed maturity securities:
U.S. corporate Internal models $ 157,800 Credit spreads 52 - 148
90
Non-U.S. corporate Internal models $ 78,134 Credit spreads 67 - 126
95
______________
(1) Certain classes of instruments classified as Level 3 are excluded as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value.
(2) Unobservable inputs weighted by the relative fair value of the associated instrument.
Liabilities Not Required to Be Carried at Fair Value
The following table provides fair value information for financial instruments that are reflected in the accompanying unaudited condensed consolidated financial statements at amounts other than fair value. We have certain financial instruments that are not recorded at fair value, including cash and cash equivalents and accrued investment income, the carrying value of which approximate fair value due to the short-term nature of these instruments and are not included in this disclosure.
23
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following represents our estimated fair value of financial liabilities that are not required to be carried at fair value, classified as Level 2, as of the dates indicated:
September 30, 2021 December 31, 2020
(Amounts in thousands)
Carrying
amount
Fair value
Carrying
amount
Fair value
Long-term borrowings $ 739,838 $ 810,480 $ 738,162 $ 800,367
As of September 30, 2021, we were also committed to fund $ 29.9 million in private placement investments.
(5) Loss Reserves
Activity for the liability for loss reserves for the nine months ended September 30 is summarized as follows:
(Amounts in thousands)
2021 2020
Loss reserves, beginning balance $ 555,679 $ 235,062
Run-off reserves ( 654 ) ( 1,597 )
Net loss reserves, beginning balance 555,025 233,465
Losses and LAE incurred related to current accident year 104,939 281,621
Losses and LAE incurred related to prior accident years 14,468 10,222
Total incurred (1)
119,407 291,843
Losses and LAE paid related to current accident year ( 1,574 ) ( 1,130 )
Losses and LAE paid related to prior accident years ( 25,194 ) ( 49,889 )
Total paid (1)
( 26,768 ) ( 51,019 )
Net loss reserves, ending balance 647,664 474,289
Run-off reserves 701 455
Loss reserves, ending balance $ 648,365 $ 474,744
______________
(1) Losses and loss adjustment expenses (“LAE”) incurred and paid exclude losses related to our run-off business.
The liability for loss reserves represents our current best estimate; however, there may be future adjustments to this estimate and related assumptions. Such adjustments, reflecting any variety of new and adverse trends, could possibly be significant, and result in future increases to reserves by amounts that could be material to our results of operations, financial condition and liquidity.
Losses incurred related to insured events of the current accident year relate to defaults that occurred in that year and represent the estimated ultimate amount of losses to be paid on such defaults. Losses incurred related to insured events of prior accident years represent the (favorable) or unfavorable development of reserves as a result of the actual rates at which delinquencies go to claim (“claim rates”) and claim amounts being different than those we estimated when originally establishing the reserves. Such estimates are based on our historical experience, which we believe is representative of expected future losses at the time of estimation. As a result of the extended period of time that may exist between the reporting of a delinquency and the claim payment, as well as changes in economic conditions and the real estate market, significant uncertainty and variability exist on amounts ultimately paid.
24
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
For the nine months ended September 30, 2021, losses and LAE incurred of $ 104.9 million related to insured events of the current accident year was primarily attributable to new delinquencies, a portion of which was from borrowers participating in deferred or reduced payments (“forbearance”) as a result of COVID-19. When establishing loss reserves for borrowers in forbearance, we assume a lower rate of delinquencies becoming active claims, which has the effect of producing a lower reserve compared to delinquencies that are not in forbearance. Historical experience with localized natural disasters, such as hurricanes, indicates a higher cure rate for borrowers in forbearance. As COVID-19 is an ongoing health crisis, unlike a hurricane that occurs at a point in time with the rebuild starting soon afterward, our prior hurricane experience was one consideration, among many, in the establishment of loss reserves. 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. We also recorded additional reserves of $ 14.5 million in incurred losses attributable to prior accident years primarily due to our expectation that pre-COVID-19 delinquencies will have a modestly higher claim rate than our prior best estimate given the slower emergence of cures to date.
For the nine months ended September 30, 2020, losses and LAE incurred of $ 281.6 million related to insured events of the current accident year was primarily attributable to a significant increase in the number of new delinquencies driven mostly by borrower forbearance as a result of COVID-19. We also strengthened reserves on existing delinquencies related to insured events of the current and prior accident years primarily due to a deterioration in early cure emergence patterns and modest increases to claim severity.
(6) Reinsurance
We reinsure a portion of our policy risks to other companies in order to reduce our ultimate losses, diversify our exposures and comply with regulatory requirements. We also assume certain policy risks written by other companies.
Reinsurance does not relieve us from our obligations to policyholders. In the event that the reinsurers are unable to meet their obligations, we remain liable for the reinsured claims. We monitor both the financial condition of individual reinsurers and risk concentrations arising from similar geographic regions, activities and economic characteristics of reinsurers to lessen the risk of default by such reinsurers.
The following table sets forth the effects of reinsurance on premiums written and earned for the periods indicated:
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands)
2021 2020 2021 2020
Net premiums written:
Direct $ 252,719 $ 252,259 $ 738,848 $ 698,628
Assumed 78 102 249 343
Ceded ( 18,500 ) ( 12,537 ) ( 53,150 ) ( 33,586 )
Net premiums written $ 234,297 $ 239,824 $ 685,947 $ 665,385
Net premiums earned:
Direct $ 261,485 $ 263,858 $ 790,986 $ 753,717
Assumed 78 102 249 343
Ceded ( 18,500 ) ( 12,537 ) ( 53,150 ) ( 33,586 )
Net premiums earned $ 243,063 $ 251,423 $ 738,085 $ 720,474
25
ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The difference between written premiums of $ 685.9 million and earned premiums of $ 738.1 million represents the decrease in unearned premiums for the nine months ended September 30, 2021. The decrease in unearned premiums was primarily the result of elevated policy cancellations in our single premium mortgage insurance product driven by low interest rates and higher mortgage refinancing for the nine months ended September 30, 2021.
Insurance-linked note excess of loss reinsurance treaties
On September 2, 2021, we obtained $ 371.5 million of excess of loss reinsurance coverage from Triangle Re 2021-3 Ltd. (“Triangle Re 2021-3”) on a portfolio of existing mortgage insurance policies written from January 2021 through June 2021. In connection with entering into the reinsurance agreement with Triangle Re 2021-3, we believe that the risk transfer requirements for reinsurance accounting were met as Triangle Re 2021-3 is assuming significant insurance risk and a reasonable possibility of significant loss. At closing, we retain the first layer of aggregate losses up to $ 303.5 million. Triangle Re 2021-3 provides 72 % reinsurance coverage for losses above our retained layer up to $ 371.5 million.
On April 16, 2021, we obtained $ 302.7 million of excess of loss reinsurance coverage from Triangle Re 2021-2 Ltd. (“Triangle Re 2021-2”) on a portfolio of existing mortgage insurance policies written from September 2020 through December 2020. In connection with entering into the reinsurance agreement with Triangle Re 2021-2, we believe that the risk transfer requirements for reinsurance accounting were met as Triangle Re 2021-2 is assuming significant insurance risk and a reasonable possibility of significant loss. For the reinsurance coverage, we retain the first layer of aggregate losses up to $ 188.6 million. Triangle Re 2021-2 provides 76 % reinsurance coverage for losses above our retained first layer up to $ 302.7 million.
On March 2, 2021, we obtained $ 495.0 million of excess of loss reinsurance coverage from Triangle Re 2021-1 Ltd. (“Triangle Re 2021-1”) on a portfolio of existing seasoned mortgage insurance policies written from January 2014 through December 2018 and from October 2019 through December 2019. In connection with entering into the reinsurance agreement with Triangle Re 2021-1, we believe that the risk transfer requirements for reinsurance accounting were met as Triangle Re 2021-1 is assuming significant insurance risk and a reasonable possibility of significant loss. Triangle Re 2021-1 reinsurance coverage is derived by applying a reinsurance cession percentage to the mortgage insurance coverage for each loan to get to an Aggregate Exposed Principal Balance (“AEPB”). This AEPB accounts for any existing reinsurance and ensures we retain a minimum 5 % vertical risk retention on each loan. For the reinsurance coverage, we retain the first layer of aggregate losses up to $ 212.1 million. Triangle Re 2021-1 provides 100 % reinsurance coverage for losses above our retained first layer up to $ 495.0 million.
On October 22, 2020, we obtained $ 349.6 million of excess of loss reinsurance coverage from Triangle Re 2020-1 Ltd. (“Triangle Re 2020-1”) on a portfolio of existing mortgage insurance policies written from January 2020 through August 2020. In connection with entering into the reinsurance agreement with Triangle Re 2020-1, we concluded that the risk transfer requirements for reinsurance accounting were met as Triangle Re 2020-1 is assuming significant insurance risk and a reasonable possibility of significant loss. For the reinsurance coverage, we retain the first layer of aggregate losses up to $ 521.8 million. Triangle Re 2020-1 provides 67 % reinsurance coverage for losses above our retained first layer up to $ 349.6 million.
Other excess of loss reinsurance treaties
On February 4, 2021, we executed an excess of loss reinsurance transaction with a panel of reinsurers, which provides up to $ 210.4 million of reinsurance coverage on a portion of current and expected new insurance written (“NIW”) for the 2021 book year, effective January 1, 2021.
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ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
Effective April 1, 2020, we executed an excess of loss reinsurance transaction with a panel of reinsurers covering a portion of the loss tier on subject loans written between book years 2009 and 2019 to help mitigate higher levels of delinquencies as a result of COVID-19.
Effective January 1, 2020, we executed an excess of loss reinsurance transaction with a panel of reinsurers covering a portion of the loss tier on the then current and expected NIW for the 2020 book year. We also entered into excess of loss reinsurance agreements with other external panels of reinsurers covering our 2016 through 2019 books of business.
(7) Borrowings
In 2020, we issued $ 750 million aggregate principal amount of 6.5 % senior notes due in 2025 (the “2025 Senior Notes”). Interest on the 2025 Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year. The 2025 Senior Notes mature on August 15, 2025. The first two interest payments of approximately $ 23.6 million and $ 24.4 million were paid in February 2021 and August 2021, respectively.
The following table sets forth long-term borrowings as of the dates indicated:
(Amounts in thousands) September 30,
2021 December 31,
2020
6.5 % Senior Notes, due 2025
$ 750,000 $ 750,000
Deferred borrowing charges ( 10,162 ) ( 11,838 )
Total $ 739,838 $ 738,162
(8) Income Taxes
We compute the provision for income taxes on a separate return with benefits for loss method. If during the nine months ended September 30, 2021 and 2020, we had computed taxes using the separate return method, the provision for income taxes would have been unchanged.
(9) Related Party Transactions
We have various agreements with Genworth that provide for reimbursement to and from Genworth of certain administrative and operating expenses that include, but are not limited to, information technology services and administrative services (such as finance, human resources, employee benefit administration and legal). These agreements provide for an allocation of corporate expenses to all Genworth businesses or subsidiaries. We incurred costs for these services of $ 37.2 million and $ 35.1 million for the nine months ended September 30, 2021 and 2020, respectively. Reimbursement was not required for certain of these administrative and operating expenses. As a result, we recorded capital contributions from Genworth of $ 0.9 million and $ 5.7 million for the nine months ended September 30, 2021 and 2020, respectively.
Our investment portfolio is managed by Genworth. Under the terms of the investment management agreement we are charged a fee by Genworth. All fees paid to Genworth are charged to investment expense and are included in net investment income in the condensed consolidated statements of income. The total investment expenses paid to Genworth were $ 4.2 million and $ 3.9 million for the nine months ended September 30, 2021 and 2020, respectively.
Our employees participate in certain benefit plans sponsored by Genworth and certain share-based compensation plans that utilize shares of Genworth common stock and other incentive plans.
We provide certain information technology and administrative services (such as facilities and maintenance) to Genworth. We charged Genworth $ 0.2 million and $ 1.1 million for these services for the nine months ended September 30, 2021 and 2020, respectively.
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ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
We have a tax sharing agreement in place with Genworth, such that we participate in a single U.S. consolidated income tax return filing. All intercompany balances related to this agreement are settled at least annually.
The condensed consolidated financial statements include the following amounts due to and from Genworth relating to recurring service and expense agreements as of September 30:
(Amounts in thousands)
2021 2020
Amounts payable to Genworth $ 7,294 $ 9,588
Amounts receivable from Genworth $ 150 $ 1,318
(10) Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the sum of the weighted-average number of common shares outstanding and the weighted-average number of dilutive potential common shares. Dilutive potential common shares relate to our share-based compensation arrangements.
The calculation of basic and diluted net income per share is as follows.
Three months ended
September 30, Nine months ended
September 30,
(Amounts in thousands)
2021 2020 2021 2020
Net income (loss) $ 137,208 $ 138,015 $ 393,151 $ 279,240
Average common shares outstanding - basic 162,840 162,840 162,840 162,840
Dilutive effect of share-based compensation arrangements 12 — 4 —
Adjusted average common shares outstanding - diluted 162,852 162,840 162,844 162,840
Net income (loss) per share:
Basic $ 0.84 $ 0.85 $ 2.41 $ 1.71
Diluted $ 0.84 $ 0.85 $ 2.41 $ 1.71
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ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
(11) Changes in Accumulated Other Comprehensive Income
The following tables present a rollforward of accumulated other comprehensive income for the periods indicated:
(Amounts in thousands)
Net unrealized
investment
gains (losses)
Total
Balance as of July 1, 2021, net of tax
$ 159,854 $ 159,854
Cumulative effect of change in accounting, net of taxes — —
Other comprehensive income (loss) before reclassifications ( 25,337 ) ( 25,337 )
Amounts reclassified (from) to other comprehensive income (loss) ( 562 ) ( 562 )
Total other comprehensive income (loss) ( 25,899 ) ( 25,899 )
Balance as of September 30, 2021, net of tax $ 133,955 $ 133,955
(Amounts in thousands)
Net unrealized
investment
gains (losses) Total
Balance as of July 1, 2020, net of tax
$ 152,948 $ 152,948
Other comprehensive income (loss) before reclassifications 29,528 29,528
Amounts reclassified (from) to other comprehensive income (loss) 1,271 1,271
Total other comprehensive income (loss) 30,799 30,799
Balance as of September 30, 2020, net of tax $ 183,747 $ 183,747
(Amounts in thousands)
Net unrealized
investment
gains (losses)
Total
Balance as of January 1, 2021, net of tax
$ 208,378 $ 208,378
Cumulative effect of change in accounting, net of taxes 281 281
Other comprehensive income (loss) before reclassifications ( 74,576 ) ( 74,576 )
Amounts reclassified (from) to other comprehensive income (loss) ( 128 ) ( 128 )
Total other comprehensive income (loss) ( 74,704 ) ( 74,704 )
Balance as of September 30, 2021, net of tax $ 133,955 $ 133,955
(Amounts in thousands)
Net unrealized
investment
gains (losses) Total
Balance as of January 1, 2020, net of tax
$ 93,431 $ 93,431
Other comprehensive income (loss) before reclassifications 88,759 88,759
Amounts reclassified (from) to other comprehensive income (loss) 1,557 1,557
Total other comprehensive income (loss) 90,316 90,316
Balance as of September 30, 2020, net of tax $ 183,747 $ 183,747
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ENACT HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2021 and 2020
(Unaudited)
The following table presents the effect of the reclassifications of significant items out of accumulated other comprehensive income on the respective line items of the consolidated statements of income, for the periods indicated:
Amount reclassified from accumulated other comprehensive income
Affected line item in the condensed consolidated statements of income
Three months ended September 30, Nine months ended September 30,
(Amounts in thousands)
2021 2020 2021 2020
Net unrealized gains (losses) on investments $ 711 $ ( 1,610 ) $ 162 $ ( 1,971 ) Net investment gains (losses)
Benefit (expense) from income taxes ( 149 ) 339 ( 34 ) 414 Provision for income taxes
(12) Subsequent Events
In April 2021, we entered into an agreement to purchase Genworth’s minority ownership interest in a mortgage guarantee business in India. On November 1, 2021, we completed the purchase for a cash purchase price that is not material to us.
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