Goldman Sachs Group Inc., JPMorgan Chase & Co. and billionaire George Soros are poised for gains from a housing bet placed in the depths of the financial crisis.
Essent Group Ltd., the Bermuda-based mortgage insurer that raised $500 million from a group including those backers in 2009, filed last week to sell shares in the first initial public offering of a home-loan guarantor in almost two decades.
The industry is rebounding from record homeowner defaults that triggered payouts, forced almost half the companies out of the business and pushed some of the biggest survivors to the brink of default. With property prices now rising at the fastest pace since 2006 and the government reducing its role backing home loans, firms that sold policies before housing collapsed — Radian Group Inc. and MGIC Investment Corp. — are attracting new investors to replace capital lost in the slump.
“We still think it’s the best way to play the housing recovery,” Jack Micenko, an analyst at Susquehanna International Group LLP in New York, said of mortgage insurers.
Radian and MGIC, which were unprofitable for most of the past six years, have more than doubled in 2013 in New York trading. Homebuilders in comparison are down 2.5 percent this year after slumping 22 percent since a May peak.
Mortgage insurance is typically required when borrowers pay less than 20 percent of the cost of their home up front. The coverage will play an increasing role in facilitating first-home purchases as the economy strengthens, said Jim Ryan, an analyst at Morningstar Inc.
‘Demand Factors’
“Not many people have the 20 percent to put down, especially first-time homebuyers,” he said. “There’s a lot of good demand factors there.”
Essent, founded by Mark Casale, a 49-year old, former Radian executive, said in May 2009 it had received a commitment of $500 million from investors including JPMorgan, Goldman Sachs and Pine Brook Road Partners. The backers agreed in 2010 to make another $100 million the following year as housing was entering its fourth year of decline.
While Essent was collecting investments, MGIC recorded losses of more than $1 billion in 2009. That year, Triad Guaranty Inc. was ordered by regulators to only pay a portion of claims after being forced to stop selling policies. Triad and another rival, PMI Group Inc., eventually filed for bankruptcy.
Market Turnaround
To aid its expansion, Essent bought Triad’s mortgage insurance technology in late 2009 for about $30 million and by February 2010 received approval from Fannie Mae and Freddie Mac to insure loans.
“We feel like the market is starting to turn around,” Casale said in a Bloomberg interview at the time. “Our timing is actually very good.”
As housing began to rebound in 2012, driven by the Federal Reserve, which was pushing mortgage rates to record lows, Essent’s growth accelerated. It almost tripled sales in the first six months of this year compared to the same period of 2012 and expanded its share of the traditional private mortgage insurance market in the first half of this year to 12 percent, making it the No. 5 seller of the coverage, according to Inside Mortgage Finance.
As of June 30, the company had used $438 million of the cash, according to the regulatory filing, which identifies an entity controlled by Soros Fund Management LLC as an additional investor. Vipul Tandon, a managing director in the private equity group of Soros Fund Management, has served on Essent’s board since 2010, according to the filing. Spokesmen for the investors declined to comment on the IPO.
IPO Filing
The filing proposes a $287.5 million offering, a placeholder amount used to calculate registration fees, which may change. It doesn’t list a share price or say how much Essent’s investors will sell in the offering.
Janice Walker, a spokeswoman for Essent at JD Walker Communications LLC, said executives declined to comment ahead of the IPO.
Essent sold insurance on $10.2 billion of loans in the first six months of this year, up from $3.6 billion a year earlier. Radian, based in Philadelphia, had $24.36 billion in traditional sales and No. 1 United Guaranty, owned by American International Group Inc. sold $24.38 billion.
“New players got into this business five years ago promising they would walk over and destroy existing players,” Radian Chief Executive Officer S.A. Ibrahim said by telephone. “When we were on our backs, they couldn’t destroy us. Share gains in this much more intense competitive environment are going to be more difficult.”
Bigger Pie
The industry can grow by taking business from the government, Ibrahim said. U.S. programs, led by the Federal Housing Administration, accounted for about a quarter of the market in 2005 through 2007, according to data from Inside Mortgage Finance.
As private companies retreated in the crisis, the proportion of insured loans backed by the FHA and Department of Veterans Affairs reached almost 85 percent in 2009. The figure fell to 63 percent in the three months ended June 30.
“Everybody has an opportunity to get bigger because the whole size of the pie will get bigger with the FHA pullback,” Ibrahim said.
Insurers including Genworth Financial Inc. and Milwaukee- based MGIC also have been loosening terms to bring in more business as home prices rise.
“There’s a lot more capital, there’s a lot more competition for each loan,” said Jason Stewart, an analyst at Compass Point Research & Trading LLC. “It’s going to start impacting returns.”
15% Return
Essent said in the filing that it targets an unlevered return on capital of 15 percent on new coverage, after taxes.
Profit was $30.8 million at Essent in the first six months of 2013, compared with a loss of $12.5 million in the same period of 2012. MGIC posted net income of $12.4 million in the second quarter, its first profitable period since 2010, while Radian recorded a loss in the quarter tied to investments. Genworth’s U.S. mortgage insurer was profitable in the six months ended June 30. That’s the first time it recorded a half- year profit since 2007.
Competition is good for the industry, said Donna DeMaio, United Guaranty’s CEO, in an e-mailed statement. She declined to comment on Essent.
Essent has advantages over its competitors because it’s unburdened by losses from pre-crisis loans, giving the company a leg up with customers over rivals, said Rob Haines, an analyst at CreditSights Inc.
Legacy Exposure
“These companies do not look nearly as favorable as a company like Essent, and it gives them an opportunity to capture market share,” Haines said. “Why in the world would you want to buy from a company that has these legacy troubled exposures.”
Essent’s insurer has a BBB+ financial strength rating at Standard & Poor’s, as does New York-based AIG’s United Guaranty. MGIC, Radian and Genworth’s mortgage guarantor all have B strength ratings, which are seven steps lower.
Raising capital in the IPO could help Essent extend its advantage over rivals, Moody’s Investors Service said in a Sept. 23 research note. Moody’s has a Baa3 financial strength rating with a positive outlook on Essent’s insurance unit.
“Our financial strength has been a reason that some customers have done business with us,” Essent said in the filing. “This competitive advantage may be mitigated if our competitors continue to improve their capital positions, profitability and financial strength ratings.”
Radian fell 1 percent today to $13.32 at 10:15 a.m. in New York trading, paring its gain this year to 118 percent. MGIC declined 1.4 percent to $7.17 and is up 170 percent since the end of 2012.
At Essent,“the growth opportunity is still there as it is with the other two, but they don’t have the legacy book,” Micenko said, referring to MGIC and Radian. “The million dollar question is what does valuation look like.”
