Essent Group Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Essent provides private mortgage insurance and reinsurance, primarily for U.S. residential mortgages sold to Fannie Mae and Freddie Mac.
Financial performance and position
- Revenue: $244.8 million, up 7% from $228.8 million a year earlier. Net premiums earned rose 6% to $219.1 million; net investment income increased to $21.8 million from $20.6 million.
- Profit: Net income was $135.6 million versus $149.5 million, down about 9%. Diluted EPS was $1.21 versus $1.52. The effective tax rate was 15.9%; tax expense included a $5.7 million discrete charge related to deferred state income taxes.
- Losses and expenses: Loss and LAE provision increased to $32.3 million from $8.1 million, reflecting current-period losses of $48.0 million, partly offset by $15.7 million of favorable prior-year development. Operating expenses were $42.2 million, broadly unchanged; interest expense was $2.1 million.
- Cash flow: Operating cash flow was $187.8 million, compared with $163.1 million. Investing activities used $186.3 million and financing activities used $23.3 million; cash declined $21.8 million to $81.0 million.
- Balance sheet and liquidity: Total assets were $5.33 billion and stockholders’ equity $3.92 billion at March 31. Investments totaled $4.80 billion. The company reported $540.3 million of net cash and investments at the holding company, $300 million of undrawn revolving credit capacity, and management said liquidity was adequate for expected needs over the next 12 months.
- Debt: Credit Facility borrowings were $325 million, with a 2.13% weighted-average rate at quarter-end, and contractual maturity in October 2023. The company reported covenant compliance.
- Capital and insurance portfolio: Insurance in force was $197.1 billion; new insurance written was $19.3 billion. Combined U.S. risk-to-capital was 10.6:1. Essent Guaranty reported PMIERs Available Assets of $3.00 billion against Minimum Required Assets of $1.86 billion.
Changes versus Q1 2020
- Premium growth reflected higher average insurance in force, while the average net premium rate fell to 0.42% from 0.48%, partly due to increased ceded premiums, portfolio mix and pricing.
- Defaults rose to 29,080 from 5,841, and the reported default rate increased to 3.70% from 0.83%. The March 2021 inventory included 26,874 defaults classified as COVID-19 related.
- Investment income increased, but the pretax yield fell to 2.0% from 2.5%. Net realized investment gains declined to $0.6 million from $3.1 million.
- Comprehensive income was $76.4 million, down from $139.4 million, including a $59.2 million after-tax unrealized investment loss, compared with a $10.1 million loss in Q1 2020.
Outlook, risks and notable items
- Management said defaults remained elevated in Q1, though below levels reported in earlier pandemic quarters. It expects forbearance, loan modifications and government support may reduce claims from early-pandemic defaults; outcomes remain uncertain.
- COVID-19 default reserves totaled $362.9 million, including $244.8 million for defaults received April–September 2020. Management estimated that a 100-basis-point change in the reserve rate for those early defaults would change reserves by about $35 million. Later defaults are reserved using the normal methodology.
- Management warned that further defaults could increase loss provisions and PMIERs asset requirements and reduce reinsurance profit commissions. The portfolio is relatively young: 75% of insurance in force was written since January 2019, and claim frequency may rise as it seasons.
- In April 2021, Essent Guaranty and Essent Re agreed to increase Essent Re’s quota-share coverage of new business from 25% to 35%, effective January 1, 2021; earlier ceded business remains at 25%.
- After quarter-end, Essent Guaranty paid a $100 million dividend to its parent on May 5. The board declared a $0.17-per-share quarterly dividend and approved a $250 million share repurchase authorization through the end of 2022.
- Essent Guaranty’s S&P outlook changed from negative to stable on April 28. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
- At the May 2021 annual meeting, the advisory executive-compensation proposal received more votes against than for.
Important facts for investors to verify
- How COVID-19 delinquencies cure, transition to claims, and affect reserve adequacy and future loss provisions.
- Whether portfolio seasoning, persistency, refinancing and premium-rate trends support expected premium growth and profitability.
- The effect of higher reinsurance cessions on retained risk, net premiums, commissions and PMIERs capital requirements.
- Investment portfolio sensitivity to interest rates and credit conditions, including the unrealized loss reflected in accumulated other comprehensive income.
- Availability of subsidiary capital and dividends under GSE, regulatory and contractual restrictions, alongside the announced dividend and repurchase plans.