ESNT - My Analysis

As I mentioned in the thread above, I have been researching ESNT, building a midsize position. Then this morning I noticed this link regarding MTG’s earnings report, one of ESNT’s competitors:…

If this trend of good news for private mortgage insurers continues with ESNT’s report on August 4th, we might see a very nice pop. MTG was up 10% earlier today.

Here are some salient numbers for ESNT:

Through 1st qtr 2016:

Qtr 1st 2nd 3rd 4th

2013 .22
2014 .18 .23 .29 .33
2015 .38 .41 .44 .48
2016 .52

YoY Earnings Growth
2014 50%
2015 111% 78% 52% 45%
2016 37%

Current 1YPEG = 0.26

2013 42
2014 48 54 65 73
2015 80 84 92 97
2016 103

YoY Revenue Growth
2014 74%
2015 67% 56% 42% 33%
2016 29%

Combined Ratio (percent)
2013 73.8 58.7 54.1 57.0
2014 54.4 48.9 42.9 42.3
2015 39.3 37.6 38.4 37.8
2016 37.2

So earnings and revenue are growing through 2016 1st qtr, though at a slower rate, while the combined ratio is reduced to a ridiculously low 37.2 %. 1YPEG is at .26, which is slowly rising, but still very attractive. So far, so good.

Since I don’t know that much about insurance companies, I found this article that explains some useful valuation metrics and presents a good discussion of how to value insurance companies in general:…

Also, a link to this useful article was previously provided in Post #17322 by PaulWBryant:…

So, fellow investors, here is my attempt at determining whether ESNT was worth risking some of my hard-earned dollars. Be forewarned: I am an engineer, not a financial expert, so inaccuracies and mistakes are almost certainly guaranteed.

Metric 1: Price to Book Value
I agree with the article authors that this should actually be Price to Tangible Book Value, subtracting intangibles and liabilities from BV. Tangible BV is also known as total stockholders equity on the balance sheet. Rule of thumb is P/B over 2.0 might be a bit rich. At a share price of 24, ESNT has P/B of 1.9 based on 2016 1st qtr numbers. Not over 2, so OK but not a screaming buy signal, either.

Metric 2: Premium Growth
YoY premium growth was 46% for 2015 and 25% for 1st qtr 2016. While slowing, still very healthy growth.

Metric 3: Net Income Growth
YoY net income growth was 78% for 2015 and 38% for 1st qtr 2016. Again, very healthy.

Metric 4: Combined Ratio
The lower the better for this metric that measures how well an insurance company turns sold premiums into profit. For all of 2015, the combined ratio was 38.3% and reduced to 37.2% for 1st qtr 2016. This is very good for an insurance company.

Metric 5: Float Calculations
Float for 2015 was $219 mil and they had 20 mil return on investment for 9.1%. Not bad. 1st qtr 2016 float is up to 228 mill with return of 2.7% for qtr. Juicy. Another metric is to calculate (1 – combined ratio) + return on float. For 2015, this is (1-.383) +.091 = 70.8%. Wow. According to the Rokke article, a well-run insurance company will have a 10-15% return. 1st quarter 2106, the return goes to 73.7% annualized. Wow again. Finally taking the last step suggested by Rokke, and dividing by P/B gives 36% based on 2015 numbers and 39%. Most excellent.

Metric 6: Potential Return on Float: Equities / (Fixed Income + Cash)
For ESNT, this ratio was 25.2 in 2015, and was 22.3 for 1st qtr 2016. These are very aggressive numbers and may be cause to worry or celebrate depending on your take. On the one hand, it allows ESNT to make better than average return on their “play money” (also known as float). On the other, if they need to pay out a bunch of claims at just the wrong time, they might be in trouble.

Metric 7: Return on Equity
ROE measures the income level a company generates as a percentage of shareholder’s equity. ESNT ROE was at 14.1% for 2015 and was 4.1% (16.25% annualized) for 1st qtr 2016. An ROE of 10% is a strong number and according to Fuhrmann, mid-teens is ideal for a well-run insurance company.

Based on these metrics, I think that ESNT is positioned to provide very nice returns over at least the next few years. My additional research into the company intangibles has also been positive so far, so I am comfortable with my mid size position. Though not the bargain that it was earlier this year at $17, I think there is still plenty of room to move up from here. If the housing industry crashes, they’ll be in trouble, but I think the chances of that happening anytime soon are remote. If ESNT can keep the motor running as they have so far, they should continue to grow.

OK, let the arrows fly?


Thanks DT, I learned a lot about insurance valuation with your analysis.

(…average up…?)