2023-09-25 08:41:28 ET
Summary
- Enact Holdings Inc has shown steady growth in both top and bottom line, with potential for long-term growth.
- The company specializes in private mortgage insurance, providing support and risk mitigation in the mortgage lending sector.
- While there are short-term concerns about declining ROE and potential risks associated with rising interest rates, the company's strong shareholder return and discounted price make it an appealing investment.
Introduction
Enact Holdings, Inc. ( ACT ) has been on a very steady climb the last few months and it still doesn't look that expensive in my opinion. The company has grown both the top and bottom line quite well in the business and I think this will continue over the long term. What I am looking at mostly right now is the company's ability to properly raise the ROE and deliver more value to shareholders through raising the dividend and buying back shares. The last quarter showed the company having some troubles in the ROE part, as it declined 1.3% on a QoQ basis. I think however that these are short-term issues and don't neglect the long-term case for ACT right now.
I like the business and the commitment it has to its shareholders is enticing and enough to justify a buy case right now in my opinion.
Company Structure
ACT holds a prominent position in the American private mortgage insurance market, focusing primarily on the issuance and underwriting of residential mortgage guaranty insurance for individually assessed, prime-based loans. This specialization underscores the company's role in providing essential support and risk mitigation within the mortgage lending sector.
In the world of private mortgage insurance, a crucial industry that revolves around safeguarding mortgage lenders from the risks associated with loan defaults, the fundamental process typically involves requiring borrowers with lower levels of equity in their homes to pay a premium. This premium is typically integrated into their monthly mortgage payments. This mechanism serves as a protective measure for lenders, ensuring that they are financially protected in case borrowers default on their mortgage obligations.
Over the years the company has been able to deliver a very strong shareholder return. For example, over just the last 12 months the book value and dividend for the company has grown by over 14%. If that is a trend that can continue for ACT then over the long term it will yield a fantastic return and beat out the market by quite a bit I think. ACT sees itself as very qualified and well-positioned right now to capitalize on the beneficial market trends appearing. With increased risk-based capital and materially higher sufficiency levels, I think that ACT can grow its asset base quite well over the coming years. With a steady ROE margin, the potential earnings being delivered to shareholders also further increases.
Looking at the premiums for the company it has been rising steadily over the last few quarters and is up 1% sequentially driven by insurance in force growth and also offset by some older and higher priced policies too. Lower originations however are driving down the NIW for the company but I think this should be shortlived as it's a result of higher mortgage rates, creating less incentives for buyers.
Earnings Transcript
On August 2 ACT held this last earnings call and on it was Rohit Gupta, the CEO of the company. Below I am including some of the comments he made that I think are worthwhile reading as they give some good insight into the recent performance and where they are heading.
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“Insurance-in-force grew 9% year-over-year to a record $258 billion, driven by new insurance written of $15 billion and elevated persistency of 84%. during the quarter, we delivered solid new business production, disciplined growth in our insured portfolio, favorable credit performance, continued acceleration in investment income and expense efficiency”.
ACT has been able to capitalize on the current market environment and deliver a strong shareholder return as well. The YoY growth in insurance in force has been a key driver behind the ROE staying elevated and lending more capital available for distribution as well. In the medium term, I think this is a trend that will continue.
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“We continue to see evidence that manufacturing quality in the mortgage industry remains strong and that despite ongoing challenges to affordability, credit risk remains within our risk appetite. In addition, looking beyond housing, research indicates that serious delinquency rates for prime borrowers are at or below pre-pandemic levels across consumer sectors”.
I think this comment quite clearly demonstrates the positive market conditions that are still at play here. The spending power of Americans is still quite strong and delinquency rates haven't reached a level where the risks are too great to not be invested.
Risk Associated
It's crucial to begin by acknowledging the strong GAAP net income and adjusted operating income figures that ACT has reported for the year. However, it's worth noting that there has been a significant 4% sequential decrease and a substantial 32% year-on-year contraction in new insurance written (NIW). This decline can be attributed to the recent surge in interest rates, and it raises valid concerns about ACT's potential for future expansion and growth.
As interest rates in the United States continue to rise, there is a corresponding risk of increased delinquency rates. Should these delinquency rates experience a significant spike, it would pose challenges for ACT, leading to rising expenses and losses. Such developments could exert downward pressure on the company's share price, potentially affecting its overall performance in the market. I think however that the actual downside right now is quite limited as based on earnings multiple, ACT already trades at a discount to the sector and its historical multiple too. This should cushion some of the fall if there is one.
Investor Takeaway
One of the main appeals right now with ACT I think is the price point. The company is trading at a near 25% discount to the sector based on earnings and the p/b is below 1 as well. The latter is something I tend to look for quite often in the financial sector. Besides this, ACT has proven itself very shareholder-friendly over the years and I think this will continue. In conclusion, I think ACT can deliver a strong return and will be rating it a buy currently.
For further details see:
Enact Holdings: Short-Term Challenges But Long-Term Value