During the recent housing market downturn, many mortgage insurers sustained heavy losses and some went out of business. Essent Group Ltd. (ESNT, Financial) is a mortgage insurance company that was formed in 2008 to take advantage of this market dislocation. Unlike many of its competitors, the company has a clean balance sheet with no legacy liabilities. It generates income by covering a portion of the default risk on residential mortgages.
In the next few years, we believe Essent Group is poised to benefit from three important growth opportunities. First, the cyclical recovery in housing and the expected increase of home purchases should benefit the company. Second, the company should also benefit from the secular shift from public mortgage insurance to private mortgage insurance (i.e. the U.S. government wants private capital to assume a greater role in the mortgage finance industry rather than the Federal Housing Administration or FHA). Lastly, Essent is well positioned to increase market share versus many of its competitors who are burdened by lingering legacy issues and are not as well capitalized. We are optimistic about the company's prospects and believe the company can significantly grow earnings in the next few years.
From Ron Baron (Trades, Portfolio)'s Baron Funds' fourth quarter 2013 commentary.
