Essent Group Ltd. — 2017 Form 10-K Summary
Business context and reporting period. Essent is a Bermuda-domiciled holding company focused on U.S. private mortgage insurance, principally through Essent Guaranty, and mortgage reinsurance through Essent Re. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below include the three months ended December 31, 2017. The company reported approximately 1,420 customer relationships and $110.5 billion of insurance in force at year-end.
Financial and operating performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $576.5 million | $458.3 million |
| Net premiums earned | $530.1 million | $422.7 million |
| Net investment income | $40.2 million | $27.9 million |
| Provision for losses and LAE | $27.2 million | $15.5 million |
| Net income | $379.7 million | $222.6 million |
| Diluted EPS | $3.99 | $2.41 |
| Operating cash flow | $368.6 million | $274.6 million |
- New insurance written rose to $43.9 billion from $34.9 billion; year-end insurance in force increased 32.7% to $110.5 billion.
- Loss ratio was 5.1% versus 3.7%; expense ratio improved to 27.5% from 30.9%; combined ratio improved to 32.6% from 34.5%.
- Average premium rate declined to 0.53% from 0.57%. Persistency increased to 83.9% from 77.7%.
- At year-end, total assets were $2.67 billion and stockholders’ equity was $1.94 billion. Investments were $2.31 billion and cash was $43.5 million.
- Credit-facility borrowings were $250 million, with $125 million of stated capacity available. Borrowings mature in 2021 and carried a 3.49% weighted-average rate at year-end.
- Cash flow from investing activities was a $690.1 million outflow; financing activities provided $337.6 million. The company ended the year with $16.0 million more cash than at the beginning.
- U.S. mortgage-insurance subsidiaries’ combined statutory capital was $1.53 billion and combined risk-to-capital was 14.2:1. Essent Guaranty had $1.59 billion of PMIERs available assets against $1.54 billion minimum required assets.
Material changes and unusual items
- Net income increased 70.6%, with growth in earned premiums and investment income, and a one-time $85.1 million income-tax benefit from remeasuring deferred taxes after U.S. corporate tax reform. The 2017 effective tax rate was 4.7%; management anticipated approximately 16%–17% for 2018.
- The company completed a public offering of 5.0 million shares in August 2017, generating approximately $197.7 million in net proceeds. Borrowings under the credit facility increased to $250 million from $100 million.
- Defaults increased to 4,783 from 1,757, and the default rate rose to 0.96% from 0.47%. Of 3,026 net additional defaults during 2017, 2,288 were identified as hurricane-related. The year-end hurricane-related loss reserve was $11.1 million.
- Loss provision included $38.2 million of current-year losses, partly offset by $10.9 million of favorable prior-year development. Management cautioned that defaults and claims may rise as the relatively young insurance portfolio seasons.
- Fourth-quarter 2017 net income was $162.6 million, including the effect of tax reform; quarterly income before taxes was $105.4 million. The filing does not separately quantify the tax-reform benefit attributable to Q4.
Outlook, risks, and contingencies
- Management stated it had sufficient liquidity for expected obligations and operating needs over the next 12 months. It expected net premiums earned to grow faster than underwriting and operating expenses, resulting in a lower full-year 2018 expense ratio than in 2017. No specific revenue or earnings guidance was provided.
- Key business exposures include changes to GSE roles or eligibility rules, updated PMIERs, competition from other private insurers and government programs, lower mortgage-insurance demand, customer concentration, and premium adequacy.
- Loss estimates are inherently uncertain: reserves are established for loans in default, rather than for future claims on all performing insured loans. Portfolio seasoning, economic deterioration, home-price declines, and hurricane-related performance could increase claims.
- Investment risks include interest-rate, credit, liquidity, and concentration risk. A 100-basis-point parallel yield-curve move was estimated to change portfolio fair value by 3.4%, including cash.
- Tax reform introduced potential BEAT exposure on certain reinsurance payments to Essent Re. The company also disclosed tax-related uncertainty involving its Bermuda operations and U.S. shareholders.
- The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective internal control over financial reporting. It did not expect to pay dividends for the foreseeable future.
Important facts for investors to verify
- How much of 2017’s earnings increase reflects sustainable operating growth versus the nonrecurring $85.1 million tax benefit, and whether the anticipated 2018 tax rate is realized.
- Whether hurricane-related defaults cure or develop into claims, and how total defaults and reserves change as the insurance portfolio seasons.
- Whether updated PMIERs or other GSE requirements affect the company’s capital cushion, eligibility, or ability to grow insurance in force.
- Whether the $250 million borrowing level, floating interest rate, and holding-company liquidity remain manageable as capital needs and claims evolve.
- Whether customer concentration, competition, mortgage origination trends, and premium-rate pressure affect new business, persistency, and margins.