Essent Group Ltd. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Essent provides U.S. private mortgage insurance and reinsurance, primarily supporting low-down-payment mortgages sold to Fannie Mae and Freddie Mac. Figures below are in U.S. dollars; financial statements are unaudited.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $244.4 million | $243.3 million | $509.0 million | $488.1 million |
| Net premiums earned | $212.0 million | $217.4 million | $427.3 million | $436.5 million |
| Net investment income | $29.3 million | $21.7 million | $54.0 million | $43.5 million |
| Net income | $231.8 million | $159.8 million | $505.9 million | $295.4 million |
| Diluted EPS | $2.16 | $1.42 | $4.69 | $2.63 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $243.9 million | $339.8 million |
- Losses and loss-adjustment expenses (LAE) were a benefit of $76.2 million in Q2 and $183.1 million for the first half, versus provisions of $9.7 million and $42.0 million, respectively, a year earlier.
- At June 30, total assets were $5.52 billion, investments $4.84 billion, cash $77.9 million, total liabilities $1.25 billion, and stockholders’ equity $4.27 billion. The balance sheet reports credit-facility borrowings at a carrying value of $420.3 million; $425 million principal was outstanding.
- Cash and short-term investments were $433.5 million. The company also reported $400 million of unused revolving-credit capacity and $619.2 million of holding-company net cash and investments available for sale.
Business and period-over-period changes
- Insurance in force reached $215.9 billion, up from $203.6 billion a year earlier; risk in force was $47.3 billion. New insurance written fell to $20.1 billion in Q2 from $25.0 billion, and to $32.9 billion for the first half from $44.3 billion.
- Net premiums earned declined 2% in both the quarter and first half, primarily as the average net premium rate fell to 0.38% from 0.41%, partly offset by higher average insurance in force. Net premiums written rose 4% in Q2 and 1% for the first half.
- Net income increased substantially, chiefly because of favorable prior-year reserve development and higher investment income and income from other invested assets. The company recorded $164.1 million of favorable development related to Early COVID Defaults in the first half.
- Net investment income rose as portfolio yields and average invested balances increased. First-half realized investment losses were $7.8 million, including $7.3 million of impairment charges on securities the company intended to sell.
- Higher market interest rates drove substantial unrealized investment losses: accumulated other comprehensive loss was $286.6 million at June 30, versus income of $50.7 million at year-end 2021. This reduced reported equity growth despite strong net income.
Outlook, risks and notable items
- Management said liquidity was sufficient for operating needs, obligations and committed capital expenditures over the next 12 months. No formal earnings or revenue guidance was provided.
- Approximately 97% of Early COVID Defaults had cured by June 30. Essent lowered its estimated ultimate loss on that cohort from 7% to 2% of initial risk in force; remaining reserves were $70.8 million. Management cautioned that estimates may change with economic conditions and borrower outcomes. A 100-basis-point change in the loss estimate would change reserves by approximately $35 million.
- Default inventory declined to 12,707 from 23,504 a year earlier; the default rate was 1.61%, versus 2.96%. Management noted that 81% of insurance in force was written since 2020 and is less than three years old; claims may increase as this relatively young book seasons.
- Investment-market exposure is significant: a parallel 100-basis-point rate move was estimated to change the fair value of available-for-sale investments by 3.7%. Management also cited inflation, rising rates, housing and employment conditions, GSE and regulatory changes, competition, and uncertainty in loss-reserve estimates as risks.
- Essent Guaranty remained compliant with PMIERs 2.0. Available assets were $3.12 billion, or 167% of minimum required assets. The combined U.S. insurer risk-to-capital ratio was 10.2:1.
- The company completed its prior $250 million share-repurchase authorization and approved a new authorization of up to $250 million through 2023. It declared quarterly dividends of $0.20 and $0.21 per share for Q1 and Q2; an August 2022 dividend of $0.22 was declared for payment in September.
- No material legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the exceptionally favorable COVID-related reserve releases are sustainable and how actual claims compare with the 2% ultimate-loss estimate.
- How the young insurance portfolio performs as it ages, particularly under weaker employment, falling home prices or persistently high interest rates.
- Whether investment income gains offset continued unrealized losses, and the credit quality and liquidity of the investment portfolio.
- Whether new insurance written and premium rates stabilize as mortgage origination volumes and refinancing activity change.
- Availability of capital and liquidity at the holding company versus regulated insurance subsidiaries, including dividend restrictions and credit-facility covenants.