Essent Group Ltd. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Essent provides U.S. private mortgage insurance and reinsurance, primarily for low-down-payment mortgages sold to Fannie Mae and Freddie Mac. Financial statements are unaudited.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $260.1m | $244.4m | $516.4m | $509.0m |
| Net premiums earned | $213.2m | $212.0m | $424.5m | $427.3m |
| Net investment income | $45.3m | $29.3m | $88.5m | $54.0m |
| Provision (benefit) for losses and LAE | $1.3m | $(76.2)m | $1.1m | $(183.1)m |
| Net income | $172.2m | $231.8m | $343.1m | $505.9m |
| Diluted EPS | $1.61 | $2.16 | $3.20 | $4.69 |
Revenue increased 6% in Q2 and 1% for the six-month period, while net income fell 26% and 32%, respectively. The main comparison is the unusually large favorable reserve development in 2022, including benefits from revised estimates for Early COVID Defaults; 2023 included much smaller favorable prior-year reserve development. Higher investment income partly offset lower income from other invested assets and higher interest expense. Other invested assets recorded losses of $4.9m in Q2 and $7.6m for six months, versus gains of $2.0m and $26.7m in the prior-year periods.
Premium and insurance indicators: Q2 net premiums written were $209.6m versus $210.3m; six-month amounts were $415.5m versus $410.1m. Average net premium rate declined to 0.33% from 0.38% in Q2 and to 0.34% from 0.38% for six months, partly reflecting increased ceded reinsurance premiums. Average investment yield rose to 3.5% in Q2 and 3.4% for six months, from 2.5% and 2.3%. NIW was $13.5bn in Q2 versus $20.1bn, and $26.4bn for six months versus $32.9bn. Ending insurance in force grew to $235.6bn from $215.9bn a year earlier; persistency was 85.8%.
Cash, investments, debt and capital
- At June 30, total assets were $6.0bn, stockholders’ equity $4.7bn, investments $5.3bn and cash $68.1m. Investments increased from $5.0bn at year-end 2022; equity rose from $4.5bn.
- Six-month operating cash flow was $352.5m, compared with $243.9m. Investing activities used $261.5m and financing activities used $104.1m; cash declined $13.1m.
- Credit-facility borrowings were $425m, with $400m of revolving capacity available under the $825m committed facility. The facility matures December 2026; its weighted-average borrowing rate was 6.87% at quarter-end. The company reported covenant compliance.
- Management said liquidity was sufficient for operating needs and obligations over the next 12 months. Holding-company cash and investments available for sale were $739.5m. Essent Guaranty’s PMIERs available assets were $3.25bn, or 163% of minimum required assets; its combined U.S. insurance risk-to-capital ratio was 10.5:1.
- Available-for-sale investments had $422.8m of gross unrealized losses at June 30. Management attributed these primarily to interest-rate changes, and reported that about 98% of securities were investment grade.
Material changes, outlook and risks
- Loss experience: Six-month 2023 loss provision was $1.1m, including $63.0m favorable development on prior-year defaults and $64.1m of current-period losses. About 99% of Early COVID Defaults had cured, but defaults with 12 or more missed payments remained above pre-pandemic levels. Management said claim transitions had not returned to pre-pandemic patterns.
- Portfolio seasoning and economy: 64% of insurance in force related to business written since 2021 and was less than three years old. Management expects claims and provisions may rise as the portfolio seasons. Inflation and higher mortgage rates could reduce home-sale activity and affect delinquent borrowers; future reserve estimates depend on defaults and expected ultimate losses.
- Reinsurance: Essent reported approximately $1.4bn of excess-of-loss coverage for 2017–2022 vintages and quota-share arrangements. In Q2, Radnor Re 2019-1 and 2020-1 retired about 90% of outstanding notes through tender offers. A proposed SEC rule on conflicts of interest in asset-backed securities could affect future mortgage insurance-linked note transactions if adopted as proposed.
- Acquisition after quarter-end: Effective July 1, 2023, Essent acquired Agents National Title and Boston National Title for $92.6m cash. Purchase-price allocation was still underway; the company expected to report a preliminary allocation in Q3. Q2 included $0.7m of transaction costs, and six months included $4.1m.
- Capital returns: The company declared $0.50 per share in dividends during the first half and announced a further $0.25 quarterly dividend in August. It repurchased 699,992 shares in Q2; $204.0m remained under its $250m repurchase authorization as of June 30.
- No quantitative earnings guidance was provided in the supplied filing text. Management identified risks including mortgage-market and housing conditions, claims and reserve uncertainty, investment and interest-rate risks, reinsurance availability, GSE requirements and regulatory changes. The company reported no material legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether reserve assumptions remain appropriate as the mortgage-insurance portfolio seasons and long-delinquent loans progress toward cures, foreclosure or claims.
- How lower NIW and average net premium rates, along with higher ceded premiums, affect future premium revenue and profitability.
- The sensitivity of investment values, investment income and reinsurance costs to interest rates, credit conditions and market movements.
- The title-business acquisition’s final purchase-price allocation, integration costs, performance and effect on liquidity and capital allocation.
- Continued PMIERs and regulatory-capital compliance, and any effect of proposed regulation on future ILN reinsurance capacity.