After IPO, Enact Holdings sees higher credit ratings

After years of limbo amid the uncertainty of parent company Genworth Financial’s now-cancelled acquisition by China Oceanwide, Enact Holdings is a separately traded company, which has boosted its insurer financial strength ratings, President and CEO Rohit Gupta said.

Unlike many recent mortgage industry initial public offerings, the revived stock sale priced in the expected range, and taking into account the increased number of shares purchased by Bayview Asset Management, is actually equal to the proposed May deal that was cancelled due to market volatility. Bayview ended up with 14.7 million shares; if the May sale took place, it was only supposed to acquire 4 million.

Genworth Financial sold over 15.3 million Enact shares to the public — including the underwriters' option — at $19 on Sept. 16. Trading volume topped 3.36 million shares, with a high of $21.35 per share and a close of $20.49. The next day, activity slowed to nearly 664,000 shares trading hands, with a price of $20 per share at close.

"So in the initial days trading is a little bit choppy but outside of that, we are very happy with the results," Gupta said. "More importantly, I think the exciting part for the business with this IPO, we get to get the benefit of increased ratings."

Standard & Poor's. Moody's, and Fitch, all placed Enact on watch for a likely upgrade, "and we expect one to two notch ratings uplift from each rating agency in a very short time period here," he continued.

"We are excited about the ability to unlock the business's potential with that rating increase, because it will give us an ability to participate with more lenders who have traditionally been concerned about our credit ratings," Gupta said, such as depositories that keep mortgages on their balance sheet, which look at those ratings as a sign of counterparty strength.

As for the change in pricing, Enact's pre-IPO roadshow garnered investor feedback that enabled the company to tighten the range and also come in as expected, unlike several offerings that ended up cutting their size, he noted.

Net proceeds to Genworth Holdings totaled approximately $535 million, before other fees and expenses.

The transaction also provides some finality for Enact, whose future has been up in the air for some time. Back in August 2016, Genworth looked at a spin-off to isolate the MI unit as its long-term insurance line was (and remains) floundering.

By that October, Genworth signed a deal to be acquired by China Oceanwide. But as it became increasingly clear that the transaction would not be completed, the company developed a "Plan B" that revived the U.S. MI company's IPO.

The IPO itself gives Enact direct access to capital, whether it is for growth purposes or to sustain itself during another mortgage downturn, Gupta said. Plus, the company now has an independent chairman of the board, with 8 of the board's members considered to be independent, even as Genworth retains 81.6% ownership.

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"The uncertainty related to the Oceanwide transaction in the past as well as the difference in our ratings from our peers, did have a negative impact for those items in our market share for a long period of time," Gupta said. "So now with the ratings coming up, we believe that that unlocks the value for us to compete on a level playing field."

Still, Enact doesn't plan to do anything different in terms of adding market share, even with the stability that the IPO brings, he said.

"We believe that now that [Enact's] ratings will be in the right place in a very short order, we will actually get more market share for the exact same risk and return appetite and the same pricing that we already have in the marketplace," Gupta continued.

The IPO will bring in companies who have stayed away from investing in insurance-linked notes issuances and reinsurance due to the uncertainty regarding Genworth's future as the acquisition saga rolled on and on.

"So moving forward for Enact that would be an upside that we will basically start getting some of those known names back, both in our insurance-linked note deals, and our traditional reinsurance deals, and that would either increase our access to capital or it will reduce our costs, both of that will be beneficial for us," Gupta said.

In the future, once Genworth has sufficient liquidity to meet its own debt maturities, it would like to spin off its Enact stake to its shareholders in a tax-free transaction, he said.

Meanwhile, the North Carolina Department of Insurance, Enact's regulator, has already approved a $200 million dividend payment to all of the company's shareholders, including Genworth, by the end of 2021, Gupta pointed out.

Even though Genworth sold its remaining stakes in the Canadian and Australian MI companies, Enact will still have an international presence as it will purchase Genworth's holdings in the Indian MI business.