Essent Makes Strong Ascent Into Mortgage Insurance

It 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 insurer Essent Group (NYSE: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.

Even though first-time homebuyers make up a historically low ratio of overall buyers, Essent continues to record strong financial results.

Even though first-time homebuyers make up a historically low ratio of overall buyers, Essent continues to record strong financial results. View Enlarged Image

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 as Radian Group (NYSE:RDN) and Genworth Financial (NYSE:GNW), analysts say, and that difference gives it an edge.

Essent was founded in 2008 and capitalized by investors such as Goldman Sachs Group (NYSE: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.

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