Essent Group Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. Essent provides U.S. private mortgage insurance and reinsurance, primarily supporting low-down-payment mortgages sold to Fannie Mae and Freddie Mac.
Key financial and operating metrics
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Total revenue | $200.5 million | $167.5 million |
| Net premiums earned | $177.8 million | $152.6 million |
| Net investment income | $19.9 million | $13.7 million |
| Provision for losses and LAE | $7.1 million | $5.3 million |
| Net income | $127.7 million | $111.1 million |
| Diluted EPS | $1.30 | $1.13 |
| Net margin | 63.7% (approx.) | 66.3% (approx.) |
| Operating cash flow | $138.7 million | $221.9 million |
| Cash and investments | $3.05 billion at March 31, 2019 | $2.86 billion at December 31, 2018 |
| Total assets / stockholders’ equity | $3.35 billion / $2.53 billion | $3.15 billion / $2.37 billion at December 31, 2018 |
| Credit facility debt | $225 million principal; $223.8 million carrying value | $225 million principal at December 31, 2018 |
- New insurance written was approximately $11.0 billion, versus $9.3 billion. Insurance in force reached $143.2 billion, versus $115.3 billion a year earlier; risk in force was $34.7 billion.
- Average net premium rate declined to 0.48% from 0.52%. Persistency was 85.1% at March 31.
- Default inventory was 4,096 loans, compared with 4,442 a year earlier; the default rate declined to 0.65% from 0.86%. The ending loss and LAE reserve was $53.5 million.
- Cash was $40.5 million and short-term investments were $210.8 million. The company reported $275 million of available revolving credit capacity; the $225 million outstanding facility borrowing carried a 4.48% weighted-average rate and matures May 17, 2021.
- Operating cash flow was lower year over year, primarily reflecting the prior-year decrease in U.S. Mortgage Guaranty Tax and Loss Bonds; investing activities used $155.0 million and financing activities used $8.1 million.
Material changes versus the prior comparable period
- Net income rose 15%, chiefly on higher earned premiums from portfolio growth and higher investment income. Revenue increased 20%; net premiums earned increased 17%.
- Net investment income increased 45%, supported by a larger average portfolio ($2.9 billion versus $2.4 billion) and a higher pretax yield (2.8% versus 2.4%).
- Loss provision rose to $7.1 million from $5.3 million, although both periods included favorable prior-year reserve development: $4.7 million in 2019 and $4.6 million in 2018.
- Other underwriting and operating expenses rose to $41.0 million from $38.1 million. Management attributed the increase mainly to ongoing business expansion; employee count was 377 versus 395.
- Income tax expense rose to $22.0 million from $10.5 million. The estimated annual effective tax rate was 16.0% versus 16.5%; the smaller excess tax benefit from share vesting ($2.0 million versus $9.5 million) contributed to the higher reported expense.
- Comprehensive income was $166.1 million, versus $82.3 million, including a $38.4 million after-tax investment unrealized gain compared with a $28.8 million loss. Equity increased from year-end partly due to this market-value movement.
Outlook, risks and unusual items
- Management expects the 2019 expense ratio to decline versus 2018 as earned premiums grow faster than underwriting and operating expenses. The filing provides no numerical earnings or revenue guidance.
- Management expects claims and loss provisions to increase as the relatively young insurance portfolio seasons; 64% of insurance in force was written since January 1, 2017. Actual defaults and claims remain sensitive to housing prices, interest rates, employment, borrower and loan characteristics, and economic conditions.
- Management stated it had sufficient liquidity at the company and subsidiary levels to meet operating needs and obligations for the next 12 months. Additional capital could be needed for regulatory or GSE requirements, portfolio growth, or new business; financing or reinsurance alternatives may not be available on acceptable terms.
- Essent Guaranty was in compliance with PMIERs 2.0, effective March 31, 2019. Its reported available assets were $2.02 billion against minimum required assets of $1.21 billion. The combined U.S. insurance-company risk-to-capital ratio was 13.5:1.
- Reinsurance supports risk and capital management, but entails counterparty and contract risks. Radnor Re entities were not consolidated; reported maximum exposure to loss was $46.7 million in total, including $45.3 million off balance sheet.
- Investment risks include interest-rate, credit, liquidity, concentration and prepayment risk. Investment duration was 3.5 years; management estimated a 100-basis-point parallel yield-curve move would change portfolio fair value by 3.5%.
- One lender represented 10% of Q1 revenue. The company also highlighted exposure to GSE policy changes, competition, mortgage-market conditions, reserve-estimation uncertainty and potential restrictions on subsidiary dividends. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Adoption of the new lease standard had no material effect. The filing reported no other-than-temporary investment impairments in either comparative quarter.
Important facts for investors to verify
- Whether continued growth in insurance in force can offset lower premium rates and reinsurance cessions.
- How reserve adequacy and claims develop as recent insurance vintages season, including whether favorable prior-year development persists.
- Continued compliance with PMIERs 2.0 and applicable statutory capital and liquidity requirements.
- The investment portfolio’s credit quality, duration and liquidity under changing interest rates or adverse market conditions.
- Dependence on major lenders and the GSEs, and the terms, cost and effectiveness of reinsurance arrangements.
- Whether the expected 2019 expense-ratio improvement materializes and how operating cash flow develops relative to reported earnings.