Credit: Shutterstock photoIt hasn't been the warmest climate for private mortgage insurers as many potential first-time homebuyers either have shied away from ownership or haven't been able to qualify for mortgage loans.
Still, that hasn't stopped private mortgage insurerEssent Group ( ESNT ) from seeing a rise in business.
Essent, via its wholly owned subsidiary Essent Guaranty, offers private mortgage insurance for single-family mortgage loans. Since going public in October 2013, it's logged at least double-digit profit growth in all but one quarter.
Wary Buyers
In the third quarter, Essent's earnings climbed 61% from the prior year to 29 cents a share. Revenue shot up 77% to $64.6 million. Analysts polled by Thomson Reuters expect full-year earnings of $1.02 a share. That figure should fatten to $1.60 in 2015 and $2.13 in 2016.
Such growth is pretty impressive, considering that it comes amidst a not-so-buoyant mortgage market.
First-time home buyers, who are prime candidates for mortgages and private mortgage insurance, have remained at 29% of all buyers for four straight months and under 30% for the past 18 of the past 19 months, according to the National Association of Realtors. The historical average is around 40%.
Like its peers, Essent fills a void in the mortgage market. Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are restricted from purchasing or guaranteeing loans with less than a 20% down payment not covered by credit protections.
Private mortgage insurers provide credit protection to lenders and mortgage investors "by covering a portion of the unpaid principal balance of a mortgage in the event of a default," according to an Essent filing with the Securities and Exchange Commission. They help "extend affordable homeownership by facilitating the sale of low-down-payment loans into the secondary market," the filing added.
But Essent differs from rival private mortgage insurers such asRadian Group ( RDN ) andGenworth Financial ( GNW ), analysts say, and that difference gives it an edge.
Essent was founded in 2008 and capitalized by investors such asGoldman Sachs Group ( GS ) and billionaire George Soros's Valorina. The original investors wanted to create a new mortgage company that was not exposed to the bad legacy loans wrought by the financial crisis that caused many private mortgage insurers to struggle.
The firm wrote its first policy in May 2010, so it doesn't have mortgage insurance written before 2009 on its books. As a result, Essent is not exposed to the low-quality mortgage loans made during the housing bubble and bust.
"Essent filled a vacuum," said Macquarie Securities analyst Sean Dargan. "It had a clean balance sheet with no (legacy loans) and a strong financial strength rating that is higher than that of Radian,MGIC Investment ( MTG ) and Genworth."
BTIG Research analyst Mark Palmer makes a similar point, saying that Essent's book of business "is comprised of 2010 and later vintage (loans) that are high quality and attractively priced."
Mortgage lending standards were more stringent in 2010 than during the financial crisis, so Essent is providing insurance for "high-quality underwritten policies," Palmer said.
In 2010, Essent Guaranty became the first private mortgage insurer that the GSEs have approved since 1995. Essent is licensed to write coverage in all 50 states and the District of Columbia.
"Its financial strength is reflected by its credit rating," said Palmer.
Moody's Investors Service rates Essent Baa2 with a stable outlook, and Standard & Poor's Rating Services rates it BBB+ with a stable outlook.
Meanwhile, the company keeps growing, even in a stagnant mortgage market.
Since writing its first policy in 2010, Essent estimates that it has grown its share of the private mortgage insurance market to about 14%. The growth is based on new insurance written on a flow basis -- in which loans are insured in individual, loan-by-loan transactions -- for the nine months ended Sept. 30. The most recent market-share estimate compares to a share of 12.1% for the year ended Dec. 31, 2013.
"Essent is growing its book at a faster pace because it's starting from scratch," Dargan said. "It's a new company with adequate capital that's taking market share from some of its weaker competitors."
In the third quarter, Essent's net premiums earned for the third quarter of 2014 rose to $60.3 million from $50.3 million the prior quarter and $34.3 million the previous year.
Its expense ratio fell to 40.6% from 47% the prior quarter and 53.2% the prior year. The expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
'Extremely Low' Default Rate
The percentage of loans in default as of Sept. 30 was 0.15%, compared with 0.13% as of June 30 and 0.09% as of Sept. 30, 2013.
Palmer says that a 0.15% default rate is "extremely low."
Still, Essent's stock performance has been volatile. Shares traded as high as 24.99 in February, fell below 18 in August and currently trade near 24.
"Part of the volatility is due to the fact that the mortgage market has been less than robust," Palmer said. "If a company generates its revenue and profits through underwriting insurance on mortgages, there needs to be more mortgages generated for them to do better."
In terms of the climate for Essent's business, the primary mortgage market hasn't "taken off yet," Palmer said. "We're still seeing mortgage activity at relatively modest levels."
Essent is a part of IBD's Finance-Mortgage & Related Services industry group, which also includesCoreLogic (CLGX),HFF (HF) andLadder Capital (LADR). Essent has a 72 Composite Rating out of a possible 99.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
