Essent Group Ltd. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Essent provides U.S. private mortgage insurance and reinsurance. Financial statements are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $243.0m | $226.4m | $708.0m | $638.8m |
| Net premiums earned | $222.3m | $203.5m | $640.2m | $569.8m |
| Provision for losses and LAE | $55.3m | $10.0m | $239.2m | $22.1m |
| Net income | $124.5m | $144.6m | $289.4m | $408.8m |
| Diluted EPS | $1.11 | $1.47 | $2.77 | $4.16 |
- Q3 revenue rose about 7%, while net income fell about 14%; nine-month revenue rose about 11%, while net income fell about 29%. Higher COVID-19-related loss provisions were the primary reason earnings declined.
- Net premiums earned grew 9% in Q3 and 12% for the nine months, supported by higher average insurance in force. Average net premium rates declined to 0.46% in Q3 and 0.47% for nine months, versus 0.49% in both prior-year periods, partly due to increased reinsurance cessions and changes in business mix.
- Net investment income was $18.6m in Q3 and $59.1m for nine months, down from $21.1m and $61.6m. Management attributed the decline to lower investment yields, reflecting lower interest rates, more cash and increased premium amortization.
- Operating cash flow was $548.5m for nine months, versus $424.6m. Investing activities used $1.08bn; financing provided $582.2m, including the equity offering and additional credit-facility borrowing. Cash increased to $118.7m.
Financial position, capital and liquidity
- At September 30, total assets were $5.11bn, investments were $4.59bn and stockholders’ equity was $3.75bn, compared with $3.87bn, $3.43bn and $2.98bn, respectively, at year-end 2019.
- Cash was $118.7m; short-term investments were $953.0m and fixed maturities were $3.55bn. Essent reported $685.0m of net cash and investments at the holding company and stated it had sufficient liquidity for the next 12 months.
- Credit-facility borrowings were $425m at September 30, with a 1.90% weighted-average rate; $75m of revolving capacity remained available. In October, the facility was expanded to $625m and its maturity extended to October 2023. The company issued an additional $100m of term loans and used the proceeds, together with holding-company cash, to repay revolving borrowings.
- Essent raised approximately $440m net through a June public offering of 13.8m shares. Common shares outstanding were 112.4m at November 2, 2020. Quarterly dividends were $0.16 per share; a further $0.16 dividend was declared in November.
- Essent Guaranty reported PMIERs available assets of $2.72bn against minimum required assets of $1.74bn and was in compliance. The combined U.S. insurance subsidiaries’ risk-to-capital ratio was 11.6:1. GSE rules required written approval for Essent Guaranty dividends through March 31, 2021.
Material changes, outlook and risks
- New insurance written increased to $36.7bn in Q3 and $78.4bn for nine months, compared with $18.7bn and $47.7bn. Insurance in force reached $190.8bn. Persistency was 64.2%, down from 77.5% at December 31, 2019; elevated refinancing was a factor in cancellations.
- Defaults rose sharply: 35,464 insured loans were in default at September 30, versus 5,232 a year earlier; 32,492 were classified as COVID-19 defaults. The default rate was 4.54%, versus 0.75%. The company recorded $247.2m of reserves for COVID-19 defaults, using an estimated reserve rate of about 7% of risk in force for notices received April through September. Management expects fewer COVID-19 defaults to result in claims than under historical default-to-claim experience, but noted the estimate may change materially. A 100-basis-point change in the reserve rate would change reserves by approximately $35m.
- Management cited forbearance, loan modifications and government/GSE relief as factors that may reduce claims, while warning that extended default resolution could increase severity on loans that do proceed to claim. Outcomes depend on the pandemic, employment, borrower performance after forbearance and economic conditions. No quantified earnings guidance was provided.
- ILN excess-of-loss reinsurance transactions entered a trigger event in June: note principal amortization is suspended and coverage will not amortize while the trigger continues. In October, Essent added up to $399.2m of excess-of-loss cover for a portfolio of policies written September 2019 through July 2020, subject to a $465.7m first-loss retention.
- Other risks include uncertainty in loss-reserve estimates, loan-servicing disruption, housing and investment-market changes, reinsurance availability, GSE eligibility and restrictions on insurance-subsidiary dividends. Investment fair value was $4.50bn, including $161.3m of unrealized gains and $5.5m of unrealized losses. Management reported no material legal proceedings and effective disclosure controls.
Investor verification priorities
- Track COVID-19 default cures, subsequent claims, reserve development and sensitivity to changes in loss assumptions.
- Confirm PMIERs available-asset headroom, the impact of delinquency levels and any changes to GSE capital or dividend requirements.
- Review the October credit-facility amendment, borrowing costs, remaining capacity and holding-company liquidity.
- Assess whether high new-business volumes persist and how refinancing, persistency, pricing and reinsurance affect premium growth and margins.
- Monitor investment income yields, credit quality and liquidity of assets, as well as the status and economics of reinsurance coverage and ILN trigger events.