Essent Group Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Unless noted, financial amounts below are in U.S. dollars. Income and cash-flow comparisons are against Q1 2014; balance-sheet comparisons are against December 31, 2014.
Business context
Essent provides U.S. private mortgage insurance and reinsurance, primarily supporting low-down-payment mortgages sold to Fannie Mae and Freddie Mac. It reported estimated private mortgage-insurance market share of 12.1% for the quarter, $5.35 billion of new insurance written (NIW), and $53.25 billion of insurance in force (IIF) at quarter-end.
Key financial metrics
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Net premiums earned | $75.0 million | $44.8 million in Q1 2014; up 68% |
| Total revenue | $80.0 million | $47.8 million in Q1 2014 |
| Net income | $34.8 million; diluted EPS $0.38 | $15.0 million; diluted EPS $0.18 in Q1 2014 |
| Net investment income | $4.3 million | $1.9 million in Q1 2014 |
| Provision for losses and LAE | $2.0 million | $0.9 million in Q1 2014 |
| Operating cash flow | $47.2 million | $12.5 million in Q1 2014 |
| Cash and investments | $1.142 billion, including $21.9 million cash | $1.082 billion at December 31, 2014, including $24.4 million cash |
| Total assets / stockholders’ equity | $1.250 billion / $996.0 million | $1.181 billion / $955.7 million at December 31, 2014 |
| Debt | No debt outstanding | Not stated as a comparative metric |
Management attributed earnings growth principally to higher earned premiums from growth in IIF and higher investment income. Average IIF increased 56% year over year to $52.0 billion; the annualized average premium rate rose to 0.58% from 0.54%. The pre-tax investment yield increased to 1.7% from 1.0%. Other underwriting and operating expenses were $27.5 million, up from $23.5 million. No operating-margin figure was reported in the filing.
Material changes and operating trends
- NIW increased to $5.35 billion from $3.63 billion. Quarter-end IIF rose to $53.25 billion from $34.78 billion a year earlier; risk in force was $12.89 billion versus $8.49 billion.
- Quarter-end defaults increased to 505 from 192 year over year, and the reported default rate rose to 0.21% from 0.12%. The loss reserve was $10.1 million, compared with $3.8 million a year earlier. Q1 2015 included $0.7 million of favorable prior-year reserve development.
- The portfolio remains relatively young: 84% of IIF was written since January 1, 2013. Management expects claims and incurred losses to increase as the book seasons, with claims incidence historically highest in years three through six.
- Combined U.S. statutory capital was $747.9 million and net risk in force was $11.8 billion, producing a 15.8:1 risk-to-capital ratio. Essent said its insurance subsidiaries’ capital exceeded applicable statutory requirements.
Liquidity, outlook, risks and contingencies
Management said liquidity at the holding company and operating subsidiaries was sufficient for expected operating needs, obligations and committed capital expenditures for the next 12 months. Operating cash flow was $47.2 million, while investing activities used $46.4 million, primarily reflecting investment portfolio activity. Net cash decreased by $2.5 million, largely as funds shifted into fixed-maturity investments. Net cash and investments at the holding company were $123.6 million.
The final Private Mortgage Insurer Eligibility Requirements (PMIERs), released by the FHFA on April 17, 2015, become effective December 31, 2015. Essent stated it had sufficient insurance-company assets at March 31 to meet the published risk-based requirement, but cautioned that additional capital could be required as requirements or business needs evolve. Essent Guaranty had negative unassigned surplus and would need Pennsylvania regulatory approval to pay a dividend in 2015.
No formal earnings guidance was provided. Key risks include changes to GSE requirements and eligibility, competition and customer concentration, mortgage-origination and cancellation trends, loss-reserve uncertainty as the portfolio seasons, housing and economic conditions, interest-rate and investment risks, and regulatory or capital changes. The filing reported no material legal proceedings and no material change in previously disclosed risk factors. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Essent continues to meet PMIERs asset and operational requirements ahead of the December 31, 2015 effective date, and whether additional capital is needed.
- How defaults, claims, reserve estimates and favorable prior-year development change as the young insurance portfolio seasons.
- Whether NIW, IIF, persistency (82.8% at quarter-end) and premium rates support continued premium growth amid cancellations and market competition.
- Investment portfolio credit, duration and liquidity exposure; a 100-basis-point parallel yield-curve shift was estimated to change portfolio fair value by 3.4%, including cash.
- How reinsurance and GSE-related business affect earnings, capital availability and subsidiary dividend capacity.