Enact Holdings, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Enact Holdings, Inc. is a leading provider of private mortgage insurance (PMI) in the United States, focusing on helping more people buy a home by managing their credit risk.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Enact Holdings is a relatively unique player in the mortgage insurance landscape due to its spin-off from Genworth Financial, giving it a different positioning compared to its peers that may be a pro or a con.

Business Overview

Enact Holdings, Inc. (ACT), operates as a mortgage insurance company, primarily focusing on writing and administering policies that insure residential mortgage loans against default. The company’s core business revolves around providing mortgage insurance to lenders, allowing borrowers to secure a home loan with a low down payment, while lenders are protected in case of a default by a borrower.

Revenue Distribution

The company’s revenue model is fairly straightforward. Their revenues come from the premiums they charge on insurance policies on mortgages.

  • Primary insurance: This is their core business, providing mortgage insurance for loans that have a higher LTV.
  • Other: includes other revenue streams, including the reinsurance contracts

As an insurance company, the top line number isn’t what matters most. Insurance companies operate like they are selling a stream of payments rather than selling goods, so their financials will have a different structure.

  • Market Dynamics: The mortgage insurance industry is subject to cyclicality based on housing market trends, interest rates, and the broader economy. Higher interest rates and economic uncertainties, like a potential recession, can reduce the demand for new mortgages and impact the volume of insurance policies.
  • Regulatory Landscape: The regulatory environment is an important aspect in the mortgage insurance industry. Enact is subject to regulatory requirements and the changes in accounting principles which might affect its financials.
  • Competition: Private mortgage insurance is a competitive industry. There are other players in the space like Essent Group Ltd., Radian Group Inc, and MGIC Investment Corporation. These companies compete with one another by providing the same insurance, and the only real difference is in their price/service that they are offering. A company that provides the most premium-to-price ratio will be very beneficial.

Competitive Landscape & Differentiation

Enact Holdings does not possess a wide moat, but a narrow moat. Their pricing strategy, along with the scale and relationships that they have created is making it hard for a competitor to attack their business effectively.

  • Price Premiums: While their coverage is more expensive than some competing programs, it is worth paying as they are reliable and offer good customer support. The brand name of Enact also helps in building customer relations and giving the business some level of resilience.
  • Customer Relations: Their long-standing relations with their customers, a higher customer retention rate, leads to less customer attrition than the average player in the industry.
  • Scale: Their operating scale leads to cost efficiency that is very hard to replicate.

Financial Analysis

When assessing the financials for an insurance business like ENACT, the usual metrics such as revenues, cost of goods, operating profit, net income, and earnings per share are not really that relevant, rather, you want to look at the premiums, incurred losses and reserves.

Income Statement

  • Premium Income: This constitutes the majority of their revenues. For the three months ended September 30, 2024, they generated $240 million in net premiums written (NPW). In general, there is a downward trend in their premiums earned and a higher loss incurred as the year has progressed.
  • Losses and Loss Adjustment Expenses (LAE): These are the actual losses the insurance company has incurred from paying off claims. In the most recent quarters, this number has been significantly higher than the past, implying that their underwriting is worsening over time.
  • Net Income: The Net Income was $100.6 million, in the third quarter of 2024. While the Net Income is up YOY, it is slightly lower than the net income generated in the first two quarters of the year.
  • Key Metrics: Their core metric which is Primary Insurance in-Force (PIIF), has shown a significant increase since 2019, but had a deceleration in growth, as they were increasing their PIIF primarily through the use of more reinsurance. Other key metrics which were reported, which also included non-GAAP metrics which are not useful are: Net insurance written, PIIF, Loss ratio, Net earned premium rate.

Reinsurance can be used to help reduce risk and volatility by transferring a part of the risk to a reinsurer. However, this can also reduce profit when there is good performance because the reinsurance policy would also take a cut. The premiums are now being split. Enact had a higher PIIF by using reinsurance. It would be something to keep an eye on going forward, to see how management does with this issue.

Balance Sheet

  • Assets: The Company’s assets are heavily weighted in fixed maturity securities ($5.03 Billion) and cash and cash equivalents ($870 Million). The fixed maturity securities are graded from AAA to BBB, but many are also comprised of U.S. Government and Agency bonds, making the book value of the asset highly reliable.
  • Liabilities: The company’s liabilities are mainly comprised of deferred tax liabilities ($225 million) and long-term borrowings ($744 million). The level of liabilities is extremely low relative to the assets.
  • Equity: Total equity stood at 4.639 billion, a very strong showing.
  • Financial Strength: Enact has a great liquidity position and a strong balance sheet, a primary advantage.

In general, insurance companies’ balance sheets might not be very useful in looking at an individual company, and should primarily be looked at in conjunction with their profits. Balance sheets for insurance companies are structured differently than most companies, so you need to look at their metrics that directly relate to their businesses.

Recent Concerns, Controversies, and Management’s Response

  • Macroeconomic Concerns: Enact is very susceptible to macroeconomic conditions, including a higher interest rate environment that impacts demand for mortgages and housing. This was brought up in the most recent earnings calls, stating the company is being extremely flexible, to navigate these issues.
  • Credit Quality: Although their FICO levels for the mortgages they insure are increasing, they have a risk that borrowers may still be unable to pay the loans due to their inability to pay.
  • Increased Delinquencies: As the current mortgage environment gets worse, more people are unable to keep up with their payments, leading to increases in their delinquency rates. Enact has been actively implementing measures to make up for this issue, including increased reserves.
  • Share Buybacks: Management has been actively buying back shares, with authorization for a $100 Million and $500 Million share buyback plan. This has significantly reduced the outstanding shares and has led to growth of EPS for shareholders.

Moat Rating: 2/5

Enact possesses a narrow moat due to a few factors:

  • Customer switching costs: Changing from one mortgage insurer to another has a lot of friction, so the customer base tends to stay put.
  • Brand recognition and established reputation: After being present in the market for a while, and being a big player, the company has a good brand recognition which serves as a moat against new entrants.
  • Economies of Scale: As discussed above, Enact has already created a network effect which lets them achieve efficiencies in costs.
  • Regulatory Approval: It is very hard to enter the mortgage insurance industry due to regulations. This provides a strong barrier to new entrants.

The moat isn’t that wide as some competitors also have some of these attributes. However, all in all, Enact has good staying power.

Business Resilience

Their business can show resilience because they are profitable despite having a lot of competition and macroeconomic woes. But their balance sheet health and focus on efficiency, makes them good to withstand a storm and come out even better.

Legitimate Risks to the Moat

  • Economic Downturn: Economic downturns, higher rates, and unemployment cause higher defaults and loss ratios.
  • Increased Competition: Any new entrant that can underbid Enact can cause problems to the business and cause it to lose market share.
  • Credit Quality: A change in the credit worthiness of the mortgage holders can severely affect the business and increase risk of losses.
  • Regulatory Changes: Any major change by government regulators could impact profits and competitiveness.

Understandability Rating: 2/5

The core business of a mortgage insurance company is relatively straightforward to understand. They earn income by the premiums they charge and if nothing goes wrong they are highly profitable, otherwise they are liable to incur losses, which makes their financial a little bit complex to value, and hard to follow for most investors. Therefore, an understandability rating of 2 is warranted.

Balance Sheet Health Rating: 4/5

Enact has a very healthy balance sheet with extremely low debt to asset ratios. The majority of their debt is long-term in nature, and they are also highly liquid. They have very high cash holdings and also a very high tier 1 capital ratio. They also have a strong level of solvency. They are likely to be a strong business in even uncertain times. The company also has good governance structure and management style, as detailed in the filings. Therefore a balance sheet rating of 4 is given.

Final Conclusion

Enact Holdings appears to be a strong company, with a somewhat durable economic moat. Their core business of providing mortgage insurance has proven to be profitable and a great source of cash. The biggest risks are tied to macroeconomic conditions. The management seems to be focusing on shareholder value and they are buying back shares when they are undervalued. However, a lack of high growth prospects and strong industry headwinds are holding it back.