Essent Group What I love about it?
– It’s a boring business.
– It’s in a great niche market.
– It has a lot of room to grow.
– It has a high barrier to entry.
– It has a great management team.
Essant Group operation is in the PMI (privet mortgage insurance) business.
PMI is an insurance on the mortgage that the lender (banks for example) require the borrower to take on his mortgage if the borrower doesn’t have enough capital or has a low credit score to satisfy the down payment for the mortgage.
In this way, the lender is protecting itself from defaults of the borrower.
What $ESNT does is essentially providing this insurance to the borrowers until they have enough equity in the home, then they don’t need this insurance anymore.
This regulation is required by Fannie Mae & Freddie Mac. both are a public government-sponsored enterprise that provides liquidity to the market by buying in the secondary market those mortgages that the lender underwrite and sell them in pools to other investors.
So why this business is so great?
Let’s start with this that the barriers to entry and register as a PMI provider in the U.S are extremely difficult, in fact, $ESNT is the last one to get this approval and it was in 2009, just after the big crash. before it, the last one to obtain this approval was in 1996!
The business is growing.
as you can expect, when the economy is doing well 2 things happen 1) the house’s value is going up 2)more people can afford themselves to buy houses.
In a multi-trillion business (mortgages) this is good news to $ESNT .
$ESNT has both regular and government-backed competitions.
After the crash of the 2008-2009 market crash, a lot of the PMI players went bust or had the burden of toxic assets on the balance sheet. to the picture came “FHA” which is government-backed PMI.
prior to the 2008 crash, FHS holds 23% of the market share while privet enterprise PMI was holding 77%. today (2019) the FHS and PMI hold 55% and 45%. this mean that Essant group has a lot of room to grow. using the government FHA insurances is much more expensive for the consumer and most of the time is offered to the lowest credit score borrowers.
It is the most profitable PMI provider.
They have a great management team that really understands how to write insurances. this is the reason why they have by far the best return and growth rate in the business.
They are thinking about the downside market.
70% of the insurance liabilities are reinsured. this is limiting the exposure of the company in a major downturn market events. while at the same time they are increasing the equity value.
I believe that the company has a lot of room to grow, and with this great management, I believe it is going to be profitable growth, not a stupid one where the top line is increasing while the bottom line is decreasing.
NMI Holdings, Inc., Radian Group Inc., MGIC Investment Corporation, Arch Capital Group Ltd., SS&C Technologies Holdings, Inc.
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