Essent Group Ltd. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; the filing was signed February 14, 2020. Essent is a Bermuda-domiciled holding company whose principal business is U.S. private mortgage insurance, supplemented by mortgage reinsurance and limited contract underwriting services.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $867.6 million | $719.4 million | +20.6% |
| Net premiums earned | $777.4 million | $649.5 million | +19.7% |
| Net premiums written | $760.8 million | $685.3 million | +11.0% |
| Net investment income | $83.5 million | $64.1 million | +30.4% |
| Provision for losses and LAE | $33.0 million | $11.6 million | Higher |
| Net income | $555.7 million | $467.4 million | +18.9% |
| Diluted EPS | $5.66 | $4.77 | +18.7% |
| Operating cash flow | $589.8 million | $625.3 million | Lower |
- Profitability: Loss ratio was 4.2% versus 1.8%; expense ratio was 21.3% versus 23.2%; combined ratio was 25.5% versus 25.0%. Return on average equity was 20.8%, compared with 21.7%.
- Insurance scale: New insurance written (NIW) grew to $63.6 billion from $47.5 billion. Year-end insurance in force rose to $164.0 billion from $137.7 billion; risk in force was $38.9 billion. Average net premium rate edged down to 0.49% from 0.50%.
- Claims and reserves: Loans in default increased to 5,947 from 4,024, and the default rate rose to 0.85% from 0.66%. Year-end loss and LAE reserves were $69.4 million, up from $49.5 million. The 2019 provision included $17.6 million of favorable prior-year development; current-year losses were $50.6 million.
- Balance sheet and liquidity: Total assets were $3.87 billion and stockholders’ equity was $2.98 billion, compared with $3.15 billion and $2.37 billion, respectively, in 2018. Cash was $71.4 million; investments totaled $3.43 billion. Management said liquidity was sufficient for operating needs and obligations over the next 12 months.
- Investments: The portfolio was predominantly investment-grade. Pre-tax investment yield increased to 2.8% from 2.6%; effective duration was 3.1 years. Net unrealized investment gains improved accumulated other comprehensive income by $85.2 million during 2019.
- Debt and capital: Credit-facility term borrowings were $225 million, with $275 million of revolving capacity available; the facility matures May 17, 2021. Combined U.S. mortgage-insurer statutory capital was $2.34 billion and the combined risk-to-capital ratio was 12.6:1. Essent Guaranty reported PMIERs 2.0 available assets of $2.34 billion against minimum required assets of $1.50 billion.
- Shareholder returns: Essent initiated a quarterly dividend in 2019, declaring $0.15 per share for each of two quarters and paying $29.3 million in total. A $0.16 quarterly dividend was declared in February 2020. No common shares were repurchased in fourth-quarter 2019.
Fourth-quarter snapshot
For the quarter ended December 31, 2019, net premiums earned were $207.7 million, other revenues were $21.1 million, provision for losses and LAE was $10.9 million, and net income was $147.0 million, or $1.49 diluted EPS. The filing provides unaudited quarterly data.
Material changes and management commentary
- Growth in average insurance in force and higher investment income drove the increase in annual revenue and earnings. Average insurance in force rose to $152.0 billion from $123.4 billion.
- Net premiums earned increased despite a lower average net premium rate, as portfolio growth more than offset the rate decline. Premiums ceded to reinsurers rose to $35.5 million from $10.8 million, reflecting new and full-year reinsurance arrangements.
- Investment income benefited from a larger average cash and investment portfolio, which increased to $3.1 billion from $2.6 billion, and a higher yield.
- Losses and LAE increased as the insured portfolio grew and seasoned. Management noted that 76% of insurance in force was written since 2017 and expected defaults and claims to increase as the portfolio matures; historically, claims incidence is highest in years three through six.
- Operating cash flow declined by $35.5 million, primarily due to increased purchases of U.S. Mortgage Guaranty Tax and Loss Bonds and higher expenses, partly offset by more premiums collected and investment income.
Outlook, risks and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management expects claims and loss provisions to rise as the portfolio seasons and says it continually evaluates capital and reinsurance options. Essent stated it was in compliance with PMIERs 2.0 at year-end.
- Housing-finance policy: The business depends heavily on Fannie Mae and Freddie Mac. Changes to their role, eligibility standards, use of mortgage insurance, or housing-finance reform could affect business volumes and profitability. The timing and effects of proposed reforms remained uncertain.
- Credit and reserving: Loss reserves are established for loans in default, not for all future claims on performing loans. Reserve estimates depend on uncertain claim rates, severity, housing prices, employment, interest rates, and other assumptions. The auditor identified reserve valuation as a critical audit matter.
- Customer concentration: The top ten customers generated 42.8% of flow NIW; one customer accounted for approximately 12% of consolidated revenue. The filing identifies Quicken Loans as exceeding 10% of consolidated revenue.
- Reinsurance and interest rates: Reinsurance reduces retained risk and supports capital relief, but Essent remains directly liable to policyholders and bears reinsurer counterparty risk. Some reinsurance pricing is linked to LIBOR, whose planned transition could affect costs and related instruments.
- Other risks: Competition from other private insurers and government programs, premium adequacy, investment-market and interest-rate exposure, servicing disruptions, cybersecurity, regulatory changes, and tax treatment of Bermuda operations and U.S. shareholders could adversely affect results.
- Unusual items: Favorable prior-year loss development was $17.6 million in 2019; in 2018 it was $24.9 million, including a $9.9 million hurricane-related reserve reduction. The 2019 filing also reports a $0.3 million other-than-temporary investment impairment. The 2017 comparison included a one-time $85.1 million tax benefit from U.S. tax reform.
- Legal and controls: Essent reported no material legal proceedings. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2019.
Important facts for investors to verify
- Whether default rates, claims, reserve development, and claim severity rise as recent loan vintages mature.
- How NIW, cancellations, persistency, and average premium rates affect earned premiums and future profitability.
- The terms, recoverability, and capital benefits of quota-share and excess-of-loss reinsurance, including counterparty exposure.
- Available PMIERs assets, statutory capital, dividend restrictions, and holding-company liquidity relative to portfolio growth and potential stress.
- Exposure to major customers and to changes in GSE rules, housing-finance policy, and competition from government-backed mortgage programs.
- Investment-portfolio credit quality, duration and liquidity, plus the impact of interest rates and the LIBOR transition.