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Wells Fargo 'overweight' on mortgage insurance sector outlook

Wells Fargo Securities has an "overweight" group outlook for the private mortgage insurance sector due to favorable credit quality trends, the diminished threat of competition from agencies and the potential for growth in first-time home buyers, analyst Sean Dargan wrote in a Nov. 28 note.

Resuming coverage of Essent Group Ltd., MGIC Investment Corp. and Radian Group Inc., Dargan said that delinquency rate levels of mortgage loans originated after 2009 and mortgage insurer loss ratios on recent vintages are at record lows. The analyst does not expect the Federal Housing Administration to undercut the private insurance rivals on pricing in the short term.

Wells Fargo has an "outperform" rating on each of Essent and MGIC Investment. Unburdened by losses from pre-financial crisis loans, Essent is well-placed to grow its insurance in force, he said. MGIC Investment's large customer base, positive ratings trajectory and a low-cost platform expense ratio make it Wells Fargo's "preferred play" among legacy carriers, Dargan wrote.

The analyst's price targets on Essent and MGIC are $52 and $17, respectively. Dargan's EPS estimates for Essent are $3.08 for 2017, $3.75 for 2018 and $4.45 for 2019. His EPS projections for MGIC Investment are $1.22 for 2017, $1.25 for 2018 and $1.40 for 2019.

For Radian, premium growth rates and credit trends may be less positive, according to the analyst. He set a "market perform" rating on the stock with a price target of $22. The analyst's EPS estimates are $1.76 for 2017, $1.90 for 2018 and $2.15 for 2019.