Essent Group Ltd. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Essent provides private mortgage insurance and reinsurance for U.S. residential mortgages, primarily supporting loans sold to Fannie Mae and Freddie Mac. Financial statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net premiums written | $205.9 million | $199.7 million |
| Net premiums earned | $211.3 million | $215.3 million |
| Net investment income | $43.2 million | $24.7 million |
| Income (loss) from other invested assets | $(2.7) million | $24.7 million |
| Total revenues | $256.2 million | $264.6 million |
| Provision (benefit) for losses and LAE | $(0.2) million | $(106.9) million |
| Other underwriting and operating expenses | $48.2 million | $40.8 million |
| Interest expense | $6.9 million | $2.2 million |
| Net income | $170.8 million | $274.2 million |
| Diluted EPS | $1.59 | $2.52 |
| Operating cash flow | $184.8 million | $180.6 million |
At March 31, 2023, total assets were $5.93 billion, including $5.21 billion of investments and $68.6 million of cash. Stockholders’ equity was $4.65 billion. Credit-facility borrowings were $425 million outstanding; the facility matures December 10, 2026, and $400 million of revolving capacity remained available. Management reported covenant compliance and sufficient liquidity for expected obligations over the next 12 months.
Material changes and operating indicators
- Net income declined from the prior-year quarter, chiefly because Q1 2022 included $101.2 million of favorable reserve development related to Early COVID Defaults. Q1 2023 had $32.9 million of favorable prior-year development, largely offset by $32.7 million of current-year loss provision.
- Net premiums earned fell about 2% as the average net premium rate declined to 0.34% from 0.39%, partly offset by higher average insurance in force. Net premiums written rose about 3%.
- Investment income increased as the reported pretax yield rose to 3.4% from 2.1%, reflecting higher yields and a larger average portfolio. Other invested assets produced a $2.7 million loss versus a $24.7 million gain a year earlier, primarily due to lower fair-value adjustments.
- Operating expenses rose to $48.2 million; Q1 included approximately $3.4 million of transaction costs related to the announced title-insurance acquisition. Interest expense increased with higher borrowing rates; the facility’s weighted-average rate was 6.28% for the quarter versus 1.85% a year earlier.
- New insurance written was $12.9 billion versus $12.8 billion. Insurance in force reached $231.5 billion; persistency was 84.4%. The default rate was 1.57%, compared with 1.93% at March 31, 2022.
- Cash from operations was $184.8 million. Investing activities used $149.3 million, and financing activities used $48.1 million, including dividends and share repurchases.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management noted that loss estimates may change with delinquencies and economic conditions, including inflation, mortgage rates, home-sale activity, housing inventory and home prices. It expects claims and losses to increase as the relatively young insured portfolio seasons.
- Approximately 99% of Early COVID Defaults had cured by March 31, 2023, but defaults with 12 or more missed payments remained above pre-pandemic levels, and default-to-claim transitions had not returned to pre-pandemic patterns.
- Essent Guaranty reported $3.23 billion of available assets against $1.92 billion of PMIERs minimum required assets, or 168%, and was compliant with PMIERs 2.0. The combined U.S. insurance risk-to-capital ratio was 10.3:1.
- The investment portfolio had $386.2 million of gross unrealized losses at quarter-end; management attributed these mainly to higher interest rates, reported approximately 98% of securities in loss positions were investment grade, and recorded no investment impairments in Q1 2023.
- In February 2023, Essent announced an agreement to acquire title-insurance operations for $100 million. The filing also notes a proposed SEC rule that, if adopted as proposed, could affect or prohibit certain insurance-linked-note reinsurance transactions.
- The board declared a $0.25-per-share quarterly dividend in May 2023. The $250 million repurchase authorization had $233.4 million remaining at March 31; the company reported additional repurchases in April.
- The company reported no material legal proceedings and said disclosure controls were effective. Management identified no material change in risk factors from its 2022 Form 10-K, while emphasizing the risks described there.
Most important facts for investors to verify
- How much future earnings depend on favorable prior-year reserve development, and whether current and seasoned loan cohorts develop as assumed.
- Whether higher mortgage rates, home prices and borrower payment performance change delinquency, cure and claim trends or reserve needs.
- The sustainability of premium income given the lower average net premium rate, reinsurance costs and policy persistency.
- The investment portfolio’s exposure to interest-rate changes, unrealized losses and less-liquid other invested assets.
- Progress, final terms and financial effects of the proposed $100 million title-insurance acquisition, alongside capital returns and available liquidity.