Essent Group 3Q20 Earnings Analysis

Catalyst:

With the record low mortgage rate, there are more and more people buying new houses in the United States. Buying a new house often requires a mortgage and without a 20% cash deposit of the property value, one would require mortgage insurance. Currently there are three main ways to receive mortgage insurance, through the Veteran Affairs (VA), through the Federal Housing Administration (FHA) and through a Private Mortgage Insurer (PMI). The VA and FHA are government agencies which don't serve most people looking for a new home. Besides, they offer higher rates compared to a PMI. The PMI industry is very small with only six players, including Essent Group. The business of the PMI might also be boosted by the new Work From Home Trend.

Private Mortgage Insurance Growth vs Home Sales Growth

At its current growth rate, Essent Group has the possibility to become the industry leader.

Financial Analysis:

In the Third Quarter of 2020, Essent Group wrote $36.7 billion of new insurance, compared to $28.2 billion for the previous quarter. The total revenues of the company were $243 million, compared to $226 million for the same quarter last year (an increase of 7.5%). The total revenues for the first nine months of the year increased by 10.8% from $638 million to $707 million.

Delinquency rates are on the rise this year and are currently at 4.54% (0.75% a year ago) with a combined ratio rising to 42% for this quarter (102% for 2Q20 and 28% on average for the last 3 financial years). Consequently, the net income of the company fell from $144 million for 3Q19 to $124 million for 3Q20. Total revenues are down by about 30% for the first 9 months of the year.

As far as the balance sheet is concerned, it remains strong, although Essent Group took some extra debts bringing its total debts to $432 million. The total assets of the company are $5.1 billion, with an investment portfolio worth $4.5 billion. The total liabilities are $1.36 billion bringing the book value to $3.7 billion.