Essent Group Ltd. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Essent provides U.S. private mortgage insurance and reinsurance. Financial statements are unaudited and presented on a consolidated basis.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $283.5 million | $243.0 million | $771.6 million | $708.0 million |
| Net premiums earned | $218.7 million | $222.3 million | $655.2 million | $640.2 million |
| Net income | $205.4 million | $124.5 million | $500.8 million | $289.4 million |
| Diluted earnings per share | $1.84 | $1.11 | $4.47 | $2.77 |
| Losses and LAE provision/(benefit) | $(7.5) million | $55.3 million | $34.5 million | $239.2 million |
Q3 revenue and net income rose year over year, chiefly due to lower loss provisions and higher income from other invested assets. Nine-month improvement also reflected higher premiums earned. The filing does not present a headline profit-margin measure.
- Unusual investment income: Other invested assets generated $40.7 million of Q3 income and $41.4 million for nine months, versus losses in the comparable 2020 periods. 2021 included $39.5 million of net unrealized gains, including $21.1 million previously accumulated in other comprehensive income. Management began recording unrealized gains and losses on these investments in earnings rather than OCI in Q3.
- Loss reserves: Nine-month favorable prior-year development was $49.5 million. COVID-19 default reserves totaled $380.6 million at quarter-end, including $243.4 million for Early COVID Defaults. Management estimated that a 100-basis-point change in the reserve rate on Early COVID Defaults would change reserves by approximately $35 million.
- Cash flow: Operating cash flow was $518.2 million for the first nine months, compared with $548.5 million in 2020. Investing activities used $403.4 million; financing activities used $151.8 million. Cash declined to $65.8 million from $102.8 million at year-end 2020.
- Balance sheet and debt: Total assets were $5.59 billion and stockholders’ equity was $4.17 billion at September 30. Investments totaled $5.03 billion, including $4.87 billion of available-for-sale investments. Credit facility borrowings were $325 million gross ($322.6 million carrying value); the facility matures October 2023. The company reported $300 million of available revolving capacity and $513 million of holding-company net cash and available-for-sale investments.
- Capital and liquidity: Essent Guaranty’s PMIERs available assets were $3.16 billion, or 162% of its $1.95 billion minimum required assets. Combined U.S. insurer risk-to-capital was 10.5:1. Management said liquidity was sufficient for operating needs and obligations over the next 12 months.
Material changes and operating trends
- NIW was $23.6 billion in Q3 and $67.8 billion for nine months, down from $36.7 billion and $78.4 billion, respectively, in 2020. Insurance in force increased to $208.2 billion from $190.8 billion a year earlier; persistency was 62.2%.
- Q3 net premiums earned declined 2% year over year, while nine-month premiums earned increased 2%. The average net premium rate fell to 0.40% for Q3 and 0.41% for nine months, from 0.46% and 0.47%. The company cited reinsurance cessions, portfolio mix, pricing and fewer single-premium cancellations.
- Default inventory was 19,721 at September 30, down from 35,464 a year earlier. New defaults remained elevated but were below the 2020 peak; nine-month cures were 29,052. Q3 claims paid were $1.1 million, versus $2.6 million.
- The company increased Essent Re’s quota-share coverage of Essent Guaranty’s new insurance written from 25% to 35%, effective January 1, 2021; earlier business remains at its original 25% cession.
- Stockholders’ equity increased from $3.86 billion at year-end, principally from earnings, partly offset by dividends, share repurchases and lower unrealized investment gains. The company repurchased $89.2 million of shares through September 30 under a $250 million authorization.
Outlook, risks and contingencies
- No quantitative earnings guidance was provided. Management expects losses and claims to rise as the relatively young book seasons; 83% of insurance in force was written since January 2019. It expects Early COVID Defaults to have lower claim conversion than historical defaults, but said reserve estimates may change with pandemic conditions, borrower performance and government programs.
- Management identified economic conditions, unemployment, housing values, interest rates, mortgage originations, GSE policy, reinsurance availability and investment-market changes as relevant risks. A 100-basis-point parallel yield-curve move would change the fair value of available-for-sale investments by approximately 3.8%, based on portfolio duration.
- Essent did not exercise its option to terminate a third-party quota-share reinsurance agreement effective December 31, 2021; the maximum profit commission available under it increases to 63% in 2022 and thereafter.
- The board declared a $0.19 per-share quarterly dividend in November 2021. October 2021 repurchases were 416,000 shares at a cost of $19.5 million. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How the $39.5 million of unrealized gains in other invested assets affected reported earnings, and whether similar gains recur.
- Whether COVID-19 defaults cure, transition to claims or require reserve revisions; monitor the $380.6 million reserve and the disclosed sensitivity.
- Whether lower NIW and net premium rates are offset by growth in insurance in force, persistency and investment income.
- Whether PMIERs asset coverage, statutory capital and permitted subsidiary dividends remain adequate as defaults and risk in force evolve.
- Investment portfolio credit quality, duration and liquidity, alongside the company’s share repurchases, dividends and credit facility maturity.