Fitch Ratings has upgraded Enact Holdings Inc's (Enact) lead insurance subsidiary Enact Mortgage Insurance Corporation's (EMICO) Insurer Financial Strength rating to 'A-' from 'BBB+'.

Additionally, Fitch has upgraded Enact's senior debt ratings to 'BBB-' from 'BB+'. The Rating Outlook is Stable.

The upgrades reflect improving financial flexibility and debt service capabilities along with strong capitalization, financial performance and risk management. In upgrading the ratings, Fitch expects that in a period of ongoing high economic inflation, rising interest rates and a likely U.S. recession, Enact will be able to remain within rating sensitivities with respect to financial performance and capital.

Key Rating Drivers

Moderate Company Profile: Enact Holdings, Inc. (Enact) is the fourth-largest of the six active U.S. mortgage insurers (USMIs) based on insurance in force (IIF) and new insurance written (NIW) both at 16.4% market share in 2022. Enact is one of four legacy USMIs that wrote business prior to 2009. As a result, Enact has residual exposure to mortgages written under the previous underwriting standards, although this exposure is gradually diminishing. As of YE 2022, vintage years 2020-2022 represented 81% of IIF.

Financial Flexibility Improves: The restrictions and conditions that had previously been imposed by Fannie Mae and Freddie Mac following the issuance of the company's outstanding Senior Notes were removed in 1Q23, with the company no longer subject to more stringent capital requirements than peers. Enact's financial flexibility also benefited from the addition of a five-year, unsecured revolving credit facility with syndicate of lenders with an initial aggregate principal amount of $200 million.

Strong Capital Position: Enact Mortgage Insurance Corp.'s (EMICO) reported risk-adjusted capital, based on the private mortgage insurer eligibility requirements (PMIERs) coverage ratio, is strong for the rating level. PMIERs remained conservative at 165% at YE22, equal to the prior-year end. Enact maintained financial leverage of 14.2% at YE 2022, down from 15.5% in the prior year. The combined risk-to-capital ratio was 12.8x at YE 2022, consistent with recent periods.

Financial Performance: The GAAP combined ratio of 15.4% in 2022 compared with 38.1% in 2021. The improvement reflects increased favorable reserve development of 33.4 points in 2022, up from 1.6 points in 2021, primarily related to pandemic related delinquencies from 2020 and 2021 curing at levels above original reserve expectations. The percentage of loans in default on primary mortgage insurance declined to 2.08% at Dec. 31, 2022 from 2.65% at Dec. 31, 2021.

Favorable Risk Management: Enact employs a multi-tier, risk-based pricing approach and uses credit risk transfer (CRT) in the form of traditional reinsurance and mortgage insurance-linked notes (MILNs) to manage its potential exposure in a severe economic downturn. Enact reported a modest level of operating leverage compared with peers, as reflected in the ratio of PMIERs capital credit from CRT divided by gross PMIERs minimum required assets.

Parent Considerations: Enact's standalone IFS assessment is 'a-', with a Stable Outlook. Enact's ultimate parent, Genworth Financial, Inc, is expected to maintain ownership interest of at least 80% of Enact. Genworth has a significantly weaker credit profile than Enact.

Fitch believes the partial IPO; commitments to an independent board, capital committee and chairperson; and commitment to strong PMIERs compliance, represent a substantial decoupling of Enact from Genworth. The majority ownership of Enact by Genworth is considered neutral to the company's ratings.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A decline in company profile score to below 'bbb+';

A decline in capital strength, such as a decline in the reported PMIERs coverage ratio to consistently below 130%, or an indication that holding company capital is not available to support the insurance entities;

Due to its monoline nature, any strongly negative event for the mortgage insurance industry;

Adverse actions taken by Genworth Financial to either remove capital or diminish earnings capacity could result in a negative ownership pressure on the ratings.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An improvement in company profile score to 'a-';

Consistently maintaining PMIERs coverage ratio above 150%;

Due to its monoline nature, any strongly positive event for the mortgage insurance industry.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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