Essent Group Ltd. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited quarterly results, including the fourth quarter. Essent is a Bermuda-domiciled holding company whose principal business is U.S. private mortgage insurance, with related reinsurance operations.
Business context and performance
Essent insures low-down-payment residential mortgages, primarily those sold to Fannie Mae and Freddie Mac. For 2015, it reported an estimated 12.0% flow-market share, wrote $26.2 billion of new insurance, and ended the year with $65.2 billion of insurance in force (IIF). Its U.S. mortgage portfolio remained relatively young: 90% of IIF was originated since January 1, 2013.
Key financial metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $353.3 million | $239.5 million |
| Net premiums earned | $326.5 million | $223.2 million |
| Net income | $157.3 million | $88.5 million |
| Diluted EPS | $1.72 | $1.03 |
| Operating cash flow | $224.1 million | $153.7 million |
| Total assets | $1.469 billion | $1.181 billion |
| Stockholders’ equity | $1.119 billion | $955.7 million |
| Debt outstanding | None | None |
Revenue rose about 48% and net income about 78% year over year, principally as IIF expanded and investment income increased. Net premiums written increased 34% to $370.6 million. Net investment income was $19.9 million, versus $12.3 million. The reported loss ratio was 3.6%, expense ratio 34.6%, and combined ratio 38.3% (compared with 2.8%, 43.6%, and 46.4%, respectively, in 2014).
Fourth quarter: Net premiums earned were $89.4 million, other revenues $8.1 million, income before taxes $63.7 million, and net income $44.5 million. In Q4 2014, the corresponding figures were $67.8 million, $4.9 million, $44.0 million, and $28.9 million.
Liquidity and capital: At year-end, cash was $24.6 million, short-term investments $86.0 million, and fixed-maturity investments $1.191 billion. Management said liquidity was sufficient for expected obligations and operating needs over the next 12 months. Combined statutory capital of the U.S. mortgage-insurance subsidiaries was $913.2 million; combined risk-to-capital was 15.2:1. Essent Guaranty was in compliance with the new GSE PMIERs effective December 31, 2015. The investment portfolio represented 88.6% of total assets and was predominantly investment grade.
Material changes and unusual items
- IIF increased 29% to $65.2 billion; risk in force rose to $16.1 billion from $12.2 billion. NIW increased to $26.2 billion from $24.8 billion, while bulk NIW declined to approximately $0.3 billion from $1.8 billion.
- Loans in default rose to 1,028, or 0.35% of policies in force, from 457, or 0.20%. Management attributed the increase to portfolio growth and seasoning and expects defaults and claims to rise as the book matures.
- The 2015 loss provision included $15.0 million for current-year losses, offset by $3.1 million of favorable prior-year development. Loss and LAE reserves ended the year at $17.8 million.
- Essent recognized $21.8 million of earned premium from policy cancellations, primarily non-refundable single-premium policies. It also recorded a $0.3 million other-than-temporary investment impairment on two securities it intended to sell.
- Investment portfolio duration increased: 34.4% of investments had effective duration of five years or more, compared with 27.0% at year-end 2014. The company reported a 3.8-year duration including cash and estimated that a parallel 100-basis-point rate move would change portfolio fair value by 3.8%.
Outlook, risks and contingencies
Management expected continued growth in IIF and anticipated that earned premiums would grow faster than operating expenses, but gave no specific earnings or revenue guidance. It expected the effective tax rate to decline in 2016 as a larger share of earnings was generated in Bermuda. Management cautioned that the portfolio’s low current default experience reflects its young age and is not necessarily indicative of ultimate claims.
- Business is highly dependent on the GSEs and on continued eligibility under their requirements; housing-finance reform or changes to GSE practices could affect demand or coverage terms.
- Competition from private insurers and government programs, changes in mortgage origination volumes, interest rates, home prices, and policy persistency may affect premiums and profitability. Annual persistency was 80.2%.
- Loss reserves are established for defaulted loans, not for future claims on loans not yet in default; estimates depend on economic assumptions and may change materially as the portfolio seasons.
- Top ten customers generated 36.6% of flow NIW; one customer represented 13% of consolidated revenue. Essent identified customer concentration as a risk.
- Essent Guaranty had negative unassigned surplus of approximately $43.1 million and would require Pennsylvania regulatory approval to pay a dividend in 2016. The company noted that holding-company liquidity could be constrained by limits on subsidiary dividends.
- Essent reported no material legal proceedings. Its U.S. mortgage-insurance subsidiary had received a CFPB inquiry in 2012 concerning captive reinsurance; Essent said it had never had such arrangements.
Most important facts for investors to verify
- Whether growth in premiums and earnings continues as the portfolio seasons and defaults and claims increase.
- Current PMIERs compliance, statutory capital, risk-to-capital ratios, and any subsequent changes in GSE or state capital requirements.
- The adequacy and assumptions underlying loss reserves, including the impact of cures, claims severity, and favorable prior-year development.
- Customer concentration and the status of relationships with major lenders, particularly the customer contributing 13% of 2015 revenue.
- Holding-company liquidity and restrictions on dividends from insurance subsidiaries; the filing states that no debt was outstanding and no common-share dividend was expected for the foreseeable future.
- Exposure to interest-rate and credit-market changes in the investment portfolio, and the effect of any portfolio repositioning or realized losses.