Expansion Into GSE Deals Will Diversify Future Income Streams

Key Takeaways

• Strengthened capital and investment strategies, including reinsurance and senior notes, aim to reduce costs and enhance earnings.
  
• Focused capital allocation with share buybacks and dividends are designed to boost earnings per share by optimizing share count.
  
• Inflationary pressures and expense management challenges may hurt long-term profitability and earnings, while reliance on reinsurance could reduce net premiums and impact revenue.

Catalysts

Operates as a private mortgage insurance company in the United States.

• The company is strengthening its capital position by executing reinsurance agreements and issuing investment-grade senior notes, which should help reduce financing costs and enhance earnings through interest savings.
  
• Enact Holdings is focused on capital allocation priorities, including robust share buybacks and dividend programs, which are expected to improve earnings per share through reduced share count.
  
• The company demonstrates strong credit performance with high-quality new insurance written (NIW) and robust cure rates, maintaining a low loss ratio, which supports potential improvements in net margins.
  
• Investment income is increasing due to elevated interest rates, enhancing yields on its investment portfolio, which could bolster revenue growth.
  
• Enact Re's expansion in participating in GSE single and multifamily deals presents a growth opportunity by leveraging existing capabilities, potentially driving higher revenue and diversifying income streams.

Enact Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Enact Holdings's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 57.3% today to 47.3% in 3 years time.
• Analysts expect earnings to reach $631.8 million (and earnings per share of $4.85) by about March 2028, down from $688.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 3.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.25%, as per the Simply Wall St company report.

Enact Holdings Future Earnings Per Share Growth

Risks

• The increase in new delinquencies, driven by recent hurricanes, could lead to higher future losses despite robust cure rates, impacting net margins due to potential increases in claims and reserves.
  
• The presence of inflationary pressures and the need to manage expenses could limit the ability to sustain profitability in the long term, affecting earnings if operational costs rise faster than anticipated.
  
• The reliance on quota share reinsurance to manage capital and risk could increase ceded premiums, thereby reducing net premiums earned and adversely impacting the revenue stream.
  
• The potential changes in regulatory policies with new government administration could introduce uncertainty in GSE operations, which might impact the demand for housing insurance and influence future revenues.
  
• The aging insurance portfolio reaching a plateau in delinquency development curves may lead to stable but not improving credit quality, potentially restricting growth in earnings as newer vintages are priced differently.

Valuation

• The analysts have a consensus price target of $38.6 for Enact Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $631.8 million, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $34.09, the analyst price target of $38.6 is 11.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.