Essent Group Ltd. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited consolidated results. Essent provides U.S. private mortgage insurance and reinsurance; following July 1 acquisitions, it also operates title insurance and title and settlement services businesses. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $296.1 million | $261.8 million | $812.5 million | $770.8 million |
| Net premiums earned | $246.8 million | $207.9 million | $671.3 million | $635.3 million |
| Net investment income | $47.1 million | $32.6 million | $135.6 million | $86.6 million |
| Provision (benefit) for losses and LAE | $10.8 million | $4.3 million | $11.9 million | $(178.8) million |
| Income before tax | $209.4 million | $210.9 million | $620.0 million | $815.2 million |
| Net income | $178.0 million | $178.1 million | $521.0 million | $684.0 million |
| Diluted EPS | $1.66 | $1.66 | $4.86 | $6.35 |
- Q3 net income was essentially flat year over year; nine-month net income declined 24%, principally reflecting the prior-year reserve benefit, lower income from other invested assets, and higher expenses. Nine-month 2022 included $164.1 million of benefit from reducing estimated losses on early COVID defaults.
- For the first nine months of 2023, operating cash flow was $547.5 million, investing cash outflow $396.3 million, and financing cash outflow $135.7 million; cash increased $15.5 million to $96.8 million.
- At September 30, total assets were $6.09 billion, total liabilities $1.29 billion, and stockholders’ equity $4.81 billion. Investments totaled $5.27 billion. Accumulated other comprehensive loss was $436.4 million, primarily reflecting unrealized investment losses.
- Credit-facility borrowings were $425 million, with a 7.07% weighted-average rate at quarter-end and maturity in December 2026. The $825 million facility had $400 million of available revolving capacity. The company reported compliance with facility covenants.
- Cash, short-term investments and fixed maturities were $96.8 million, $755.9 million and $4.24 billion, respectively. Management said liquidity was sufficient for operating needs and obligations over the next 12 months. Holding-company cash and investments available for sale totaled $648.7 million.
Material changes and operating indicators
- U.S. mortgage insurance NIW was $12.5 billion in Q3 and $38.9 billion for the first nine months, down from $17.1 billion and $50.0 billion, respectively, in the comparable 2022 periods. Ending insurance in force rose to $238.7 billion from $222.5 billion a year earlier; persistency was 86.6%.
- Net premiums earned increased 19% in Q3 and 6% year to date. Growth reflected higher average insurance in force and, in 2023, $20.6 million of title premiums. The nine-month average net premium rate declined to 0.34% from 0.37%.
- Net investment income rose as portfolio yields increased: the reported pre-tax yield was 3.6% for Q3 and 3.5% for the first nine months, compared with 2.7% and 2.5% in 2022. Income from other invested assets shifted to losses of $3.1 million for Q3 and $10.7 million year to date, versus gains of $9.6 million and $36.3 million.
- Other underwriting and operating expenses increased to $54.8 million in Q3 and $145.2 million year to date, partly due to the title acquisition, related costs and increased staffing. Title operations contributed $23.5 million of revenue and a $4.0 million pretax loss since acquisition; the purchase price was $92.6 million, including $38.3 million of provisional goodwill.
- Q3 default inventory was 13,391, versus 12,435 a year earlier; the default rate was 1.62%, versus 1.55%. Claims paid were $3.0 million in Q3 versus $1.3 million, and claim severity increased to 66% from 47%.
- Q3 and nine-month loss provisions included favorable prior-year development of $26.7 million and $89.6 million, respectively, partly offset by current-year losses. Total loss and LAE reserves were $241.3 million at quarter-end, including acquired title reserves.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management noted higher mortgage rates and inflation could reduce home-sale activity and constrain delinquent borrowers’ options. Future loss provisions will depend on defaults, cures and expected ultimate losses; the company said future defaults could increase provisions, reduce reinsurance profit commissions and raise required capital.
- Management expects losses and claims to rise as the relatively young insured portfolio seasons: 67% of U.S. mortgage insurance in force was written since January 2021. Approximately 99% of early COVID defaults had cured by September 30, 2023, but defaults with at least 12 missed payments remained above pre-pandemic levels.
- Interest-rate exposure remains material: available-for-sale investments had a 3.4-year effective duration, and management estimated a parallel 100-basis-point rate move would change their fair value by 3.4%. About 98% of securities in unrealized-loss positions were investment grade; management attributed losses primarily to interest-rate changes, not credit impairment.
- Essent Guaranty reported $3.32 billion of PMIERs available assets, equal to 174% of $1.91 billion minimum required assets, and was compliant with PMIERs 2.0. Combined U.S. mortgage insurance risk-to-capital was 10.3:1. Insurance subsidiaries were reported in compliance with applicable requirements.
- The board declared a $0.25 per-share dividend payable in December 2023 and authorized a new $250 million share-repurchase plan for 2024–2025. The existing plan had $199 million remaining at September 30, 2023.
- The filing identifies a proposed SEC rule on conflicts of interest in asset-backed securities that could affect or restrict future mortgage insurance-linked note transactions if adopted as proposed. The company was assessing its potential impact. No material legal proceedings were reported.
Important facts for investors to verify
- How mortgage defaults, claim severity and reserve development evolve, especially as newer policy vintages mature.
- Whether growth in insurance in force and investment income can offset lower NIW, a reduced average net premium rate and higher operating costs.
- Title-business integration, profitability, and final purchase-price allocation, including provisional goodwill and intangible-asset valuations.
- Investment portfolio sensitivity to interest rates and credit conditions, and the effect of unrealized losses on equity and liquidity.
- Reinsurance costs, recoverability, coverage availability and any consequences of proposed regulation for insurance-linked notes.
- Capital and liquidity levels, PMIERs compliance, debt costs and the capacity for dividends and share repurchases.