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Enact Holdings: Defensive Play In A Corner Of The Housing Market
ACTEnact (ACT) Seeking Alpha·2024-07-21 08:32

Core Insights - The median home price in the United States has risen significantly over the past decade, recently reaching nearly 435,000, which has led to frustrations among potential home buyers [1] - Mortgage insurers, including Enact Holdings, Radian Group, and MGIC Investment Corp., have outperformed the S&P 500 index over the last two years despite a decline in home sales and refinancing activity [2][3] - Enact Holdings has shown growth in revenue, with total revenue for Q1 2024 at 291.6 million, up from 280.9millioninthepreviousyear,drivenbyrisingpremiumsandinvestmentincome[6]IndustryOverview−Homesalesareprojectedtoremainlowin2024,withanannualleveltrendingtolessthan4.5milliontransactions,markingasignificantdeclinecomparedtopreviousyears[3]−Thevolumeofmortgageinsurancesoldiscloselytiedtomortgageoriginationsandrefinancing,whicharecurrentlyaffectedbyhighinterestrates,limitingrefinancingactivity[3][4]−Despitethechallengesinthehousingmarket,mortgageinsurershavemanagedtomaintainstrongperformance,indicatingpotentialresilienceinthesector[4]CompanyAnalysis:EnactHoldings−EnactHoldingswasspunoutfromGenworthFinancialandhasseenitssharesunderperformrelativetothebroadermarketrecently,withatotalreturnofapproximately8.9280.9 million in the previous year, driven by rising premiums and investment income [6] Industry Overview - Home sales are projected to remain low in 2024, with an annual level trending to less than 4.5 million transactions, marking a significant decline compared to previous years [3] - The volume of mortgage insurance sold is closely tied to mortgage originations and refinancing, which are currently affected by high interest rates, limiting refinancing activity [3][4] - Despite the challenges in the housing market, mortgage insurers have managed to maintain strong performance, indicating potential resilience in the sector [4] Company Analysis: Enact Holdings - Enact Holdings was spun out from Genworth Financial and has seen its shares underperform relative to the broader market recently, with a total return of approximately 8.9% compared to 18.1% for the S&P 500 [5][6] - The company reported a net income drop to 161.0 million in Q1 2024 from 176.0millioninthepreviousyear,attributedtoincreasedincurredlosses[6]−Enact′sbalancesheetremainsstrong,withtotalassetsincreasingby176.0 million in the previous year, attributed to increased incurred losses [6] - Enact's balance sheet remains strong, with total assets increasing by 113 million and liquidity in excellent shape, allowing for a dividend increase and share repurchase program [6] Valuation and Future Outlook - The mortgage insurance sector is currently trading at a premium to book value, with Enact Holdings holding the lowest premium among its peers, indicating a fully valued status [8] - Expectations for interest rate cuts could lead to increased housing inventory and potentially boost transaction volumes, benefiting Enact Holdings [7][9] - The company is expected to see gradual appreciation in share price in line with book value, but significant upside appears limited unless market conditions change favorably [9]