Essent Group Ltd. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020, unless otherwise noted. Amounts are U.S. dollars. Essent provides private mortgage insurance and reinsurance, primarily for U.S. residential mortgages backed by Fannie Mae and Freddie Mac.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net premiums earned | $206.5 million | $177.8 million | +16% |
| Total revenue | $228.8 million | $200.5 million | +14% |
| Provision for losses and LAE | $8.1 million | $7.1 million | +13% |
| Other underwriting and operating expenses | $41.9 million | $41.0 million | +2% |
| Income before taxes | $176.7 million | $149.7 million | +18% |
| Net income | $149.5 million | $127.7 million | +17% |
| Diluted EPS | $1.52 | $1.30 | +17% |
| Operating cash flow | $163.1 million | $138.7 million | +18% |
- Net income margin was approximately 65.3% of revenue, compared with 63.7% a year earlier. The provision for losses and LAE was approximately 3.9% of earned premiums, versus 4.0%.
- Net investment income was $20.6 million, up from $19.9 million. The average portfolio balance rose to $3.5 billion from $2.9 billion, while the pre-tax yield fell to 2.5% from 2.8%.
- At quarter-end, total assets were $4.19 billion, investments were $3.78 billion, cash was $31.1 million, and stockholders’ equity was $3.11 billion. The investment portfolio included $3.71 billion of available-for-sale securities.
- Credit facility borrowings were $425 million, up from $225 million at year-end 2019; the weighted-average rate was 2.87% at quarter-end. The facility matures May 17, 2021. The filing reports $75 million of remaining revolving capacity and compliance with covenants.
- Cash declined by $40.3 million during the quarter. Investing activities used $381.4 million, partly offset by $200 million of additional credit-facility borrowing. Essent paid $15.7 million in dividends.
Business trends and changes from the prior period
- New insurance written was $13.5 billion, versus $11.0 billion; insurance in force reached $165.6 billion, compared with $143.2 billion at March 31, 2019. Risk in force was $38.3 billion.
- Net premiums written increased 8% to $191.7 million. Earned premiums grew faster, primarily with higher average insurance in force and $14.6 million of earned premium from cancellations of non-refundable single-premium policies, versus $4.3 million in Q1 2019.
- Net premiums ceded rose to $14.2 million from $6.0 million, reflecting third-party reinsurance arrangements. Average net premium rate remained 0.48%. Persistency was 73.9%.
- Other income shifted from $2.2 million of income to a $1.4 million loss, primarily due to a $4.2 million unfavorable change in the fair value of embedded derivatives in reinsurance contracts. Realized investment gains increased to $3.1 million from $0.7 million.
- Comprehensive income fell to $139.4 million from $166.1 million, principally reflecting a $10.1 million after-tax decline in unrealized investment gains, compared with a $38.4 million gain in Q1 2019.
- Defaults at quarter-end increased to 5,841 from 4,096 a year earlier; the reported default rate rose to 0.83% from 0.65%. Q1 2020 loss provision included $15.4 million of current-year losses, partly offset by $7.4 million of favorable prior-year development.
Outlook, risks, and notable items
- Management said COVID-19 had not materially affected results, reserves, or financial position through March 31, but expected defaults to increase beginning in Q2 2020. The ultimate effects on delinquencies, claims, reserve estimates, new business, liquidity, and capital requirements remained uncertain.
- CARES Act and GSE forbearance and foreclosure-relief measures may extend default resolution and potentially increase claim severity, but could also help some borrowers avoid foreclosure. Over 95% of insured loans are federally backed; servicers generally advance mortgage-insurance premiums during forbearance.
- Management expected higher defaults to increase loss provisions and PMIERs required assets and reduce quota-share profit commissions. It also warned that mortgage originations and future new insurance written could decline. No quantified earnings or revenue guidance was provided.
- At March 31, Essent Guaranty had $2.45 billion of PMIERs Available Assets against $1.23 billion of Minimum Required Assets and was compliant with PMIERs 2.0. Management expected required assets to rise as defaults increased. The company noted that roughly 97% of its outstanding primary portfolio was in FEMA-declared major disaster areas eligible for the stated PMIERs 0.30 multiplier, subject to the applicable conditions and time limits.
- Management stated it had sufficient liquidity for operating needs and obligations over the next 12 months, while noting that additional capital could be needed under adverse economic conditions, regulatory or GSE changes, or business growth. The investment portfolio experienced COVID-related spread widening and lower trading activity; management concluded reviewed securities had not incurred credit losses and recorded no material credit impairment.
- Combined U.S. insurance-company risk-to-capital was 11.7:1, below the generally cited 25:1 maximum. The company declared a $0.16-per-share quarterly dividend in February and declared another $0.16 dividend in May, payable in June.
- The company adopted the expected-credit-loss accounting standard effective January 1, 2020; adoption had no material effect. Management could not reliably estimate full-year 2020 pretax income or an annual effective tax rate because of COVID-19 uncertainty, so Q1 tax expense used the year-to-date actual effective rate of 15.4%.
Important facts for investors to verify
- How reported delinquencies, forbearance-related defaults, claim frequency and severity, and prior-year reserve development evolve in subsequent quarters.
- Whether the $1.23 billion PMIERs requirement and $2.45 billion of Available Assets change materially as defaults rise, and whether the reported disaster-area multiplier applies to affected loans.
- Reinsurance recoveries, ceded premiums, quota-share profit commissions, and the effect of embedded-derivative fair-value changes.
- Credit-facility availability, covenants, refinancing or repayment needs before the May 2021 maturity, and liquidity held at the parent versus regulated subsidiaries.
- Investment portfolio credit quality and fair-value changes, as well as the effects of lower yields and elevated market volatility on investment income and capital.