Essent Group Ltd. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated financial statements; comparison is with Q1 2017 unless otherwise noted. Essent provides U.S. private mortgage insurance and reinsurance.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Prior comparison |
|---|---|---|
| Total revenue | $167.5 million | $127.6 million |
| Net premiums earned | $152.6 million | $117.7 million |
| Net investment income | $13.7 million | $8.4 million |
| Income before taxes | $121.6 million | $86.9 million |
| Net income | $111.1 million; diluted EPS $1.13 | $66.6 million; diluted EPS $0.72 |
| Operating cash flow | $221.9 million | $77.9 million |
| Cash and investments | $33.0 million cash; $2.46 billion investments | $43.5 million cash; $2.31 billion investments at December 31, 2017 |
| Credit facility borrowings | $265 million outstanding; $110 million revolving availability | $250 million outstanding at December 31, 2017 |
| Stockholders’ equity | $2.00 billion | $1.94 billion at December 31, 2017 |
Revenue grew about 31% and net income about 67%. Management attributed earnings growth mainly to expanding insurance in force, higher investment income, and lower income taxes. The effective tax rate was 16.5%, versus 26.8%, reflecting U.S. tax reform and the expected share of earnings generated in Bermuda. Other underwriting and operating expenses rose to $38.1 million from $36.3 million; interest expense increased to $2.5 million from $0.7 million. Net income was partly offset in comprehensive income by a $28.8 million after-tax unrealized investment loss, principally associated with market interest-rate and credit-spread movements. No other-than-temporary investment impairments were recorded.
Business trends and material changes
- New insurance written was $9.3 billion, up from $8.0 billion. Insurance in force reached $115.3 billion, versus $88.0 billion a year earlier; risk in force was $28.3 billion.
- Net premiums written rose 38%; net premiums earned rose 30%. Average premium rate edged down to 0.52% from 0.53%, while average insurance in force increased to $112.9 billion from $85.5 billion.
- Persistency was 83.5%. The default rate increased to 0.86% from 0.45%; defaults totaled 4,442 versus 1,777 a year earlier. The loss provision was $5.3 million, including $4.6 million favorable prior-year development.
- Operating cash flow included $100.9 million of net redemptions of U.S. Mortgage Guaranty Tax and Loss Bonds, so the quarter’s cash generation benefited from this item. Cash declined by $10.6 million overall as investing and financing outflows exceeded operating inflows.
- Available-for-sale investments had $41.2 million of gross unrealized losses at quarter-end, compared with $17.0 million at December 31, 2017. Management said the losses were principally market-related and issuers were current on scheduled payments.
Outlook, risks and notable items
- Management expects the expense ratio for full-year 2018 to decline versus 2017 as earned premiums grow faster than underwriting and operating expenses. It also anticipates the average premium rate will decline about 0.01 percentage point in the remaining nine months of 2018 due to third-party reinsurance. No quantitative earnings guidance is provided.
- In March, Essent Guaranty entered into fully collateralized excess-of-loss reinsurance covering up to $424.4 million of aggregate losses on a 2017 policy portfolio. Essent retains the first $224.7 million layer and losses above the reinsurance limit; coverage declines as the loans amortize. The arrangement reduces net risk in force and PMIERs required assets.
- On May 2, 2018, after quarter-end, the credit facility was expanded from $375 million to $500 million. Following the amendment and additional term borrowing, $225 million of term loans and $40 million of revolving borrowings were outstanding, with $235 million of revolving availability.
- Management stated that liquidity was sufficient for expected obligations and operating needs over the next 12 months. Essent Guaranty was in compliance with PMIERs; available assets were $1.7 billion against $1.3 billion of minimum required assets. The combined U.S. insurance-company risk-to-capital ratio was 13.6:1.
- Management expects claims and loss provisions to rise as the relatively young insurance portfolio seasons; 69% of insurance in force was originated since January 1, 2016. Results remain exposed to housing and employment conditions, interest rates, loan prepayments, investment-market movements, GSE policy and eligibility requirements, and uncertainty in loss-reserve estimates.
- Hurricane-related defaults fell to 1,768 from 2,288 at year-end as 520 loans cured. Reserves for these defaults remained $11.1 million; ultimate claims depend on future default performance and the application of policy terms.
- The filing reports no material legal proceedings and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether premium growth, persistency, cancellations and average premium rates sustain the expansion in insurance in force.
- How defaults and claims develop as newer policy vintages age, including hurricane-related losses and favorable prior-year reserve development.
- The investment portfolio’s sensitivity to interest rates and credit spreads, and whether unrealized losses remain temporary.
- The economics and risk-reduction benefits of the new reinsurance agreement, including premiums, coverage runoff and counterparty protections.
- Credit-facility terms, floating-rate exposure, liquidity availability and any future PMIERs or regulatory-capital changes.
- The extent to which operating cash flow reflects recurring operations versus the quarter’s Tax and Loss Bond redemptions.