Essent solidifies gain from mortgage insurers' black box pricing shift

Essent Group continued to benefit from the volatility among private mortgage insurers' market share, remaining in second place at the end of the recent quarter as other companies' rankings shifted.

Since January, all six active underwriters have used a technology-driven risk-based methodology known as black box pricing and some have suggested it has resulted in a shift in business among the players.

While in May Chairman and CEO Mark Casale during a Keefe, Bruyette & Woods conference told investors not to read too much into quarterly market share trends given the size of the industry, another speaker, National MI Chief Financial Officer Adam Pollitzer, commented that the adoption of more granular risk-based pricing methods could narrow the market share gap.

Second-quarter results appear to bear this out.

During the quarter, Essent generated $18 billion in new insurance written, up from $11 billion in the first quarter and $12.9 billion in the second quarter of 2018.

Essent reported net earnings of $136.4 million during the quarter, up from $111.6 million one year prior.

"We are pleased with our strong financial results for the second quarter and our continued progress in transitioning our franchise to a buy, manage and distribute model through utilization of EssentEDGE [the pricing engine it released in January] and reinsurance," Casale said in a press release.

"Our performance, along with the use of reinsurance, continues to generate excess capital. As a result, we are pleased to announce our inaugural dividend and believe that it is a tangible demonstration of the benefits in a buy, manage and distribute operating model."

The dividend is for $0.15 per share, payable on Sept. 16 to shareholders of record as of Sept. 4.

Essent's market share nearly matched that of Radian, which ended the period at No. 1 with $18.5 billion in NIW.

But Arch, which has ended most periods at No. 1 since its purchase of United Guaranty, slipped to third overall at $17.2 billion, and was the only MI company to report a year-over-year decline.

That shift "primarily reflects the early stages of the rest of the MI industry adopting and learning to use risk-based pricing, which could lead to greater volatility in quarterly market shares for the next several quarters," parent company Arch Capital CEO Marc Grandisson said during a conference call.

Meanwhile, the cloud on the horizon for the private MIs to continue their overall market share gain versus the Federal Housing Administration program is the likely expiration of the qualified mortgage patch.

"All things being equal, a January 2021 patch expiration would decrease GSE-eligible loan originations," said B. Riley FBR analyst Randy Binner in a research note. "This could adversely affect private mortgage insurers that credit-enhance GSE eligible loans and increase loan flow to FHA mortgage insurance and private market participants. All things are rarely equal, though, and we see the potential for compromise through the comment period, as the patch supports approximately 25% of GSE loan originations."

Furthermore, the portion of the PMIs volume that is actually at risk if the QM patch were to expire may be lower than what many believe, BTIG analyst Mark Palmer said in a separate report.

"Likely mitigating the volume downside for the PMIs, in our view, is the manner in which mortgage lenders 'work' loan files: they often underwrite loans only as far as they need to for a borrower's mortgage to fall into the 'qualified' category, such that various additional sources that enhance a borrowers' ability to repay a loan, such as bonus income, spousal income and part-time income, are not reflected," Palmer said.