Essent Group Ltd. — Q2 2015 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted. Essent provides private mortgage insurance and reinsurance for U.S. residential mortgages, principally those sold to Fannie Mae and Freddie Mac.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net premiums earned | $78.4 million | $50.3 million | $153.4 million | $95.1 million |
| Total revenue | $84.1 million | $54.3 million | $164.1 million | $102.1 million |
| Provision for losses and LAE | $2.3 million | $1.0 million | $4.3 million | $1.9 million |
| Other underwriting and operating expenses | $27.1 million | $23.6 million | $54.6 million | $47.1 million |
| Net income | $37.2 million | $19.6 million | $72.0 million | $34.6 million |
| Diluted EPS | $0.41 | $0.23 | $0.79 | $0.41 |
- Premium growth reflected a larger insurance-in-force base and a higher annualized average premium rate: 0.57% versus 0.54%. NIW was $7.3 billion in Q2 and $12.6 billion for the half year, up from $5.9 billion and $9.5 billion, respectively.
- Income before taxes was $54.6 million in Q2 and $105.1 million for the half year. Net income as a share of revenue was approximately 44% and 44%, respectively, versus 36% and 34% in 2014.
- Losses and expenses together were 37.6% of earned premiums in Q2 and 38.4% for the half year, compared with 48.9% and 51.5%. Loss provisions remained low relative to earned premiums, but included favorable prior-year reserve development.
- Net investment income was $4.7 million in Q2 and $9.0 million for the half year. The six-month pretax investment yield was 1.8%, versus 1.3% in 2014.
- Six-month operating cash flow was $89.8 million, versus $45.2 million. Investing activities used $85.4 million; financing activities used $3.2 million. Cash rose $1.2 million to $25.6 million.
- At June 30, total assets were $1.327 billion, including $1.159 billion of investments; total liabilities were $299.7 million and stockholders’ equity was $1.028 billion. The company reported no debt outstanding. Cash and investments totaled approximately $1.185 billion; holding-company net cash and investments were $107.6 million.
Changes, outlook and notable items
- Compared with 2014, six-month net income more than doubled, primarily because of higher earned premiums from insurance-in-force growth and increased investment income. Expenses, loss provisions and taxes also rose.
- Insurance in force reached $57.4 billion, up from $39.4 billion a year earlier; risk in force was $14.0 billion. The portfolio’s 80.3% persistency rate and 12.2% market share are reported as of or for the periods stated in the filing. Cancellations increased to $6.0 billion in the first half, from $2.2 billion a year earlier.
- Management expects claims and loss provisions to increase as the comparatively young book seasons; 87% of insurance in force was originated since January 1, 2013, and management notes that industry claims incidence is generally highest in years three through six. Management also expects expenses to increase with growth, while earned premiums are expected to grow faster and reduce the expense ratio.
- Default inventory increased to 605 loans from 235 a year earlier; the reported default rate rose to 0.23% from 0.13%. The six-month reserve provision included $1.8 million of favorable prior-year development. Reserve estimates and future claims are subject to uncertainty.
- Fannie Mae and Freddie Mac finalized revised Private Mortgage Insurer Eligibility Requirements (PMIERs), effective December 31, 2015. Essent said it had sufficient insurance-subsidiary assets to meet the required amount as of June 30. Combined U.S. insurance-company risk-to-capital was 15.3:1, against a generally applicable maximum of 25:1.
- Dividend access is constrained: Essent Guaranty had negative unassigned surplus and required prior Pennsylvania regulatory approval for a 2015 dividend. Management said the company had sufficient liquidity for expected operating needs and committed capital expenditures over the next 12 months, while noting that additional capital could be needed for new requirements or business growth.
- Contract-underwriting remedies paid were $13.4 million in the first half, compared with $4.0 million in 2014; management considered potential related claims through June 30 not material. ACIS derivative liabilities were $2.7 million, versus $0.7 million at year-end, and are valued using models with significant unobservable inputs.
- Investment fair value included $5.4 million of gross unrealized losses; management attributed these principally to interest-rate changes and reported no other-than-temporary impairments. Portfolio duration including cash was 3.7 years; an instantaneous 100-basis-point parallel rate shift was estimated to change fair value by 3.7%.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loss frequency, severity and reserve development rise as the young insurance portfolio seasons, and how actual claims compare with estimates.
- Whether Essent continues to satisfy PMIERs when they take effect, and whether regulatory capital needs or dividend restrictions affect capital availability.
- Whether NIW, insurance in force, persistency and cancellations support premium growth and the stated expectation of improving expense efficiency.
- How interest rates, credit spreads and prepayment assumptions affect investment values and ACIS derivative valuations.
- Whether contract-underwriting indemnification payments or other contingencies become material; the filing reports no material legal proceedings and no recorded indemnification provision.