A check of the earnings call transcript finds neither KBW's Bose George nor JMP's Christine Worley hinting at any displeasure with results. New to business, Essnet is more growth play than improving credit play and the mortgage business has slowed significantly. George did question whether management had a feel for if market share (12% in 2013) was improving of late (company isn't able to say yet). Management also expects continued shrinkage in the origination market this year, with industry NIW to be around $150B-$160B.
Investors sell the news following Essent Group's (ESNT -7%) earnings beat this morning, but BTIG's Mark Palmer reminds the newish company - unencumbered by legacy losses - is a growth play in the mortgage insurance sector rather than a play on improving credit.
Primary insurance in force of $32B as of Dec. 31 is up 135% from a year ago. New insurance written of $4.5B compares to $4B a year ago. For the full year, NIW of $21.2B vs. $11.2B in 2012.
Net premiums earned of $40.3M compares to $16.5M a year ago. The expense ratio of 55.3% compares to 100.2%.
Homebuilders and private mortgage insurers are partying thanks to incoming FHFA chief Mel Watts' weekend move to postpone an increase in fees which would have raised significantly raised mortgage costs for those with good, but not stellar credit and less than 20% to put down.
"This is a victory for the housing finance industry," says FBR's Edward Mills. "We believe that this is the first of a series of decisions by incoming Director Watt to preserve/expand mortgage credit availability ... We view this announcement as positive for housing generally, but specifically for private mortgage insurers, originators, and homebuilders."
Mortgage insurers: Radian (RDN +4.1%), MGIC (MTG +1.1%), Genworth (GNW +1.6%), Old Republic (ORI +0.7%), NMI Holdings (NMIH +1.1%). Essent Group (ESNT -0.6%) is off a hair, but up 29% since its late-October IPO.
Not showing much reaction today, but potentially set up to disappoint if the GSEs do not allow any private oxygen in mortgage finance are Redwood Trust (RWT -0.2%) and PennyMac Financial (PFSI +1.2%).
A continuing absence of refinancing activity could have mortgage origination volumes off as much as 30% in 2014, say KBW's Bose George and Jade Rahmani, even as purchase volumes rise more than 10%. Their forecast of $1.15T in total activity next year is $50B less than the MBA's estimate, and against about $1.8T in 2013.
For the mortgage sector: Decline earnings from originators and title insurers, stability for the servicers, and increasing earnings for the insurers.
The mortgage insurers - RDN, MTG, ORI, ESNT, NMIH, GNW - will benefit not only from the rise in purchase activity, but from an FHA continuing to cede more market share to the private players.
The team is also bullish on owners of MSRs like Home Loan Servicing Solutions (HLSS) and New Residential (NRZ -0.3%), but neutral on Ocwen (OCN +0.7%) after a big run this year.
KBW also continues to believe the common stock of Fannie (FNMA -0.4%) and Freddie (FMCC +0.8%) is worthless and reform of the GSEs isn't coming until at least 2015.
"Management recognizes that no private mortgage insurer has sustained 25%+ market share for an extended period in the past," says Goldman's Eric Beardsley, reiterating his Buy on both Radian (RDN +1.1%) and MGIC Investment (MTG +0.6%) following presentations from both at this week's Goldman financial services conference.
Though the FHA's retreat from the mortgage insurance market should leave plenty of business for the private operators, there are a couple of well-capitalized new players - NMI Holdings (NMIH +2.5%) and Essent Group (ESNT +1%). Beardsley sees - but isn't worried by - Radian's market share falling from 27% to 24% over the next few years.
Much has been made of the FHA pulling back from the mortgage insurance market, leaving opportunity for the private MI providers like Radian (RDN -1.9%), MGIC Investment (MTG -3.2%), and Genworth (GNW -0.9%), along with newer entrants like Essent Group (ESNT -1.2%) and NMI Holdings (NMIH -1.8%).
Presenting at the Goldman conference today, Radian reminds (slide 13 of presentation) private MI market share spent most of the pre-bust decade at 70%-80% before falling to just just 20% in 2009 and 2010. It's risen since, but only reached 51% in Q3. "And the FHA in fact continues to make statements about pulling back," says CEO Sanford Ibrahim.
"We are positive on private mortgage insurers, as we believe their pace of credit improvement and timing of normalized earnings is underestimated by the market," says analyst Eric Beardsley. "The sector also has one of the strongest secular tailwinds among financials as FHA reform drives increased demand for private mortgage insurance. MGIC Investment (MTG +3.9%) is currently our favorite name in the group primarily because it has the most upside to our price target ($10)."
"Radian (RDN +0.8%) is our second favorite stock in our coverage universe with 18% upside to our price target ($17)."
Trading at 12x estimated 2016 EPS, the good news may already be priced in for new mortgage insurance entrant Essent Group (ESNT), says Goldman's Eric Beardsley, starting the stock at a Hold with $23 price target.
The good news? Essent is a "pure-play growth story" and benefits from the "best in a generation" quality of new originations without having the legacy issues of Radian (RDN) and MGIC (MTG).
Yesterday: FBR starts another new entrant - NMI Holdings (NMIH) - at a Buy.
Newly public mortgage insurer Essent Group (ESNT -1.9%) draws the interest of a number of desks with Macquarie, Barclays, JPMorgan, and KBW all starting the stock off at a Buy, and Credit Suisse at a Hold.
The stock got off to a rousing start, pricing its IPO at $17 - well above the expected range - and then shooting higher in its first day of trade on October 31. It's treaded water since amid tougher competition and lower premiums in the M/I sector.
The publicly traded mortgage insurance space got a bit more crowded with last week's IPO of NMI Holdings (NMIH +0.4%). The company is backed by - among others - Carlyle Group (CG) and Kyle Bass' Hayman Capital which owns a near-10% stake.
The red-hot sector - led by Radian (RDN), MGIC (MTG), and Genworth (GNW) - has traded nervously of late with boosted competition a good excuse to sell.
Soros and Goldman backed Essent Group (ESNT) continues to trade well after coming public at $17 per share in late October.
Maybe Bruce Berkowitz has it exactly right with his plan to take the mortgage guarantee business of the GSEs and turn it into a state-regulated mortgage insurer without government backing. Radian (RDN +2.4%) and MGIC Investment (MTG +1.2%) continue to be among the year's strongest performers (GNW too, though it's not a pure MI play).
We "anticipate increased competition in our industry from new and existing mortgage insurance companies," says Radian (RDN -6.2%) CEO S.A. Ibrahim. "Competitors recently reduced their borrower-paid mortgage insurance premiums by 5 basis points, which we promptly matched.”
Showing relative strength on a red day are the mortgage insurers, particularly MGIC Investment (MTG +3.9%) as KBW doesn't find the air too thin after the stock's more than quintupled over the past year, and upgrades to Buy with price target hiked to $10 from $9.
Others: Radian (RDN +1.4%), and (not a pure-MI play) Genworth (GNW +0.9%).
Freshly IPOed Essent Group (ESNT -0.1%) is about 29% above its offering price.
The mortgage insurer backed by Soros and Goldman is up 28.5% to $21.84 in early trades after pricing its IPO at $17 per share, well above the planned range of $13.50-$15.50.
BTIG's Mark Palmer rates the stock a Buy with price target of $28 - 3.5x estimated book value per share of $7.81. "We believe ESNT is very well positioned to benefit from the improving fundamentals of the U.S. housing market, the growing demand for mortgage insurance, and the U.S. government’s ongoing retreat from the mortgage insurance space."