Essent Group IPO Is A Go

Oct.28.13 | About: Essent Group (ESNT)

Essent Group, Ltd (NYSE:ESNT), a private mortgage insurance firm with principal offices in Hamilton, Bermuda, plans to raise $286 million in its upcoming IPO. The firm plans to offer 19.7 million shares; the expected price range for the IPO is $14.00-$16.00 per share. If the IPO finds the midpoint of that range at $15.00 per share, ESNT will command a market value of $1.2 billion. See S-1 here.

  • ESNT filed on September 16, 2013.
  • Joint Bookrunners include a list of top underwriters including J.P. Morgan, Goldman Sachs, Barclays, Credit Suisse
  • Co-Managers include BofA Merrill Lynch, Dowling & Partners, Keefe Bruyette Woods, Macquarie Capital, Wells Fargo Securities

Summary
Essent Group is a private mortgage insurance company that was formed in response to the needs of the American housing finance industry during the housing crisis, writing its first policy in May of 2010.

The firm has since grown consistently and now has an estimated 12% market share based on new insurance written for the three months ended June 30, 2013. The firm offers mortgage firms the opportunity to work with an insurer specifically designed to handle the post-crisis mortgage insuring business without the entanglements of pre-crisis business.

The firm provides lenders credit protection by agreeing to cover a portion of unpaid principal on a mortgage should the borrower default; the decreased risk permits lenders to extend more mortgage financing to the market in general. As of September 30, 2012, ESNT had master policy relationships with some 865 customers. Twenty of the 25 largest mortgage originators in the US are among these customers.

Valuation
ESNT offers the following figures in its S-1 balance sheet for the nine months ending September 30, 2013:
Revenue: $89,050,000
Net Income: $43,396,000
Total Investments: $339,966,000
Total Assets: $505,173,000
Total Stockholders' Equity: $387,982,000

The nine months ending September 30, 2013 constitute the first period that ESNT reported a positive income in its S-1 filings; it has posted losses of approximately $13.9 million and $33.6 million for calendar 2012 and 2011, respectively.

Conclusion
We are optimistic about the ESNT IPO and rate it a buy in the $14 to $16 range if the size of the deal is not increased. It should be noted that financial IPOs have performed well this year.

The firm has turned the corner to profitability, and its approval from Fannie Mae and Freddie Mac along with its lack of messy pre-crisis obligations seem promising for its future stability. Lenders will no doubt continue to see value in mortgage insurance, given the recent specter of the financial collapse, and the firm's swift expansion in market share indicates that it has been able to capitalize on this advantageous environment.

Business
Government-sponsored enterprises like Fannie Mae and Freddie Mac, which purchase mortgages from banks and other lenders to offer mortgage-backed securities to investors in the secondary mortgage market, are required by their charters to cover loans that they purchase or guaranty with specific credit protections. Private mortgage firms like Essent can provide these credit protections, and in 2010, Essent became the first private mortgage insurer to be approved by Fannie and Freddie since 1995.

Like other private mortgage insurers, Essent must compete with the protection offered by the Federal Housing Administration; it should benefit from increased market share as the FHA prepares to increase its premiums. Essent must of course compete with other private mortgage insurers, as well. Some its competitors in that realm include Genworth Financial, Inc (NYSE:GNW), Old Republic International Corp. (NYSE:ORI), Radian Group Inc (NYSE:RDN), and MGIC Investment Corp (NYSEMKT:MGT).

Management
Founder and CEO Mark A. Casale has been with the firm since its inception and has been a member of its board of directors since 2008.

Mr. Casale has more than 25 years of financial services management experience, including senior roles in the areas of mortgage banking, mortgage insurance, bond insurance and capital markets. He previously served in various roles with Radian, including president of its mortgage insurance subsidiary, Radian Guaranty, Inc. He holds a BS in accounting from St. Joseph's University and an MBA in finance from New York University.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.