11 Million Shares of Exactly What?Essent Group (ESNT $38.88)

Photo: New York Stock Exchange, Dec 23, 2013

Midcap mortgage insurance star Essent Group just raised $365 million to weather the pandemic. Investor reaction was solid. But we're not sure why.

Since when did raising the money needed to ride out a rough patch indicate the rising tide of opportunity? But so it is with Essent Group, the Bermuda-based mortgage insurance company that floated 11 million shares of common stock on June 2nd. The offering ballooned total shares outstanding to about 98 million, 89 million of which are owned by large institutions. 

The offering was priced at $33.25 per share. That’s a cool $365.7 million for Essent. 

The sale essentially quadruples cash on hand, from the $71.3 million listed on the 2019 annual report, out of $3.8 billion in total assets. Essent provides mortgage insurance mostly for US residential homes. It is probably the 10th largest such insurance firm listed on New York Stock Exchange. 

Not surprisingly, Essent insiders boldly bought in to the offering: President Mark Casale pumped $1.7 million of his own money into these shares. That sparked a technical analysis wave, where about 150 or so institutions increased their position on the company. Analysts “buy” ratings outdid “sell” ratings by around 6 to 1. Quarterly revenues were up, with earning per share growing by about 2.5% sequentially. Factor in, that the stock is cheap relative to peers, Essent management deserves credit: Share prices hovered at $35 or so. That’s up dramatically from its pandemic-panic bottom of $19.54 back in March.

All of which feels like opportunity for the well-educated investor, until one stops to think about what Essent does: The company insures mortgages made usually with less than 20 percent of the value of the home as a down payment. Such lower down payments usually indicate lower income buyers, who have less money saved to buy a home. Essent’s exposure to the middle- and lower-class home buyer is further increased as it facilitates the secondary market for such primary mortgages, pools of mortgages, master policies and contract underwriting.

Essent is exactly the same kind of company that got into trouble back in 2008, when the $11 trillion US mortgage market collapsed. 

The private mortgage Insurance market that Essent competes in is brutally competitive. We counted Arch Mortgage Insurance, Genworth Financial (GNW $3.50), and MGIC (MTG, $8.98) among many other players. The Federal Housing Administration, the Veterans Administration also insure such loans. 

According to several contacts within both residential and commercial real estate, the mortgage sector has begun a slog through some of the stiffest macroeconomic headwinds ever witnessed: Pandemic fears are moving the real estate business away from real estates and into virtual online spaces where humans collaborate through machines. 

The real-world places that remain open have become target backdrops for media savvy interest groups looking to make a statement with violence. Its been two weeks of demonstrations nationally. And builders we spoke with point out that even simple violence can vacate an area for years, if not decades. Downtown Newark, New Jersey, essentially never recovered from rioting in the late 1960s. Downtown Jamaica, Queens, struggled well into the 2000s, after riots in the 1997 blackout. 

Macy’s was a struggling operation even before its store was vandalized in Manhattan. When will it reopen? No one knows. 

The risk that real estate faces are not hard to quantify. Calculated Risk, Bill McBride’s all-world blog on the raw economics data behind demand and spending of consumers, broke down recent non-manufacturing and employment data. For the second straight month, both the market to make stuff and employment contracted.

The ensuing demand for mortgages has been dramatically affected by pandemic and economic. Refinance applications are down. but purchase applications were up, apparently on pent-up demand. 

Clearly Essent is a solid company that provides competitive products with reasonable management. But even so, in a new normal of both civil unrest and pandemic restructuring, is the suddenly edgy home mortgage insurance market really the place to be betting in a seamless macroeconomic rebound?

All we're saying is, we’d be asking a lot more questions. A lot more questions.