Essent Group Ltd. — Q3 2017 Form 10-Q
Business context and reporting period. Bermuda-based Essent provides U.S. residential mortgage insurance and reinsurance, primarily for low-down-payment loans sold to Fannie Mae and Freddie Mac. This unaudited filing covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods unless stated otherwise. Essent reported 16.3% market share for the first nine months, $103.9 billion of insurance in force (IIF), and $25.8 billion of risk in force (RIF) at quarter-end.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net premiums earned | $137.9 million | $110.8 million | $382.2 million | $305.9 million |
| Total revenue | $150.2 million | $121.3 million | $415.4 million | $331.9 million |
| Provision for losses and LAE | $4.3 million | $5.0 million | $9.8 million | $11.7 million |
| Other underwriting and operating expenses | $37.0 million | $32.8 million | $109.1 million | $95.6 million |
| Income before taxes | $107.4 million | $83.4 million | $293.2 million | $224.6 million |
| Net income | $78.4 million | $59.7 million | $217.1 million | $159.9 million |
| Diluted EPS | $0.82 | $0.65 | $2.31 | $1.74 |
- Q3 net income increased 31%; nine-month net income increased 36%. Management attributed improvement principally to higher earned premiums from IIF growth and increased investment income.
- Earned premiums grew 24% in Q3 and 25% year to date, while average premium rates declined to 0.53% from 0.58% and 0.57%, respectively. Average IIF increased to $99.8 billion in Q3 and $92.4 billion year to date.
- Net investment income rose to $10.6 million in Q3 and $28.5 million year to date. Management cited a larger portfolio and higher pre-tax yields: 2.3% for Q3 and 2.2% year to date, versus 2.0% and 2.1% in 2016.
- Loss provisions declined year over year, reflecting favorable development on prior-year defaults, partly offset by more defaults. Nine-month prior-year favorable development was $9.5 million, compared with $4.7 million in 2016.
- At September 30, assets were $2.49 billion, liabilities $705.0 million, and stockholders’ equity $1.78 billion. Investments totaled $2.12 billion and cash $57.7 million. The investment portfolio was predominantly investment-grade fixed income and money market holdings.
- Nine-month operating cash flow was $252.0 million, versus $199.9 million; investing cash outflow was $485.1 million; financing cash inflow was $263.3 million. Cash increased $30.2 million to $57.7 million.
- Credit-facility borrowings were $175 million at a 3.24% weighted-average interest rate, with $200 million available under the committed facility. The facility has $375 million total capacity, including an uncommitted $75 million line, and matures May 17, 2021.
Material changes, outlook and risks
- Essent issued 5.0 million common shares in August at $39.90 per share, receiving approximately $197.7 million net proceeds. Equity rose from $1.34 billion at year-end 2016. The company also drew and repaid amounts under its amended credit facility; quarter-end debt was $175 million.
- New insurance written was $13.2 billion in Q3 and $32.6 billion year to date, up from $10.3 billion and $24.5 billion. Persistency was 82.1%. The portfolio remains relatively young: 78% of IIF originated since January 2015.
- Management expects the expense ratio for full-year 2017 to decline versus 2016 as earned premiums grow faster than operating expenses. It also expects defaults and claims to rise as the young portfolio seasons, with peak claim incidence generally occurring in years three through six. The filing provides no specific earnings or revenue guidance.
- Hurricanes Harvey and Irma could increase defaults from Q4 onward. At September 30, affected counties accounted for about $2.5 billion, or 9.5%, of RIF; the events had not materially affected reserves at that date. By October 31, defaults had risen from 2,153 to 3,051, with 733 of the 898 increase in hurricane-affected areas. Ultimate claims and reserve effects remained uncertain.
- Essent Guaranty was compliant with PMIERs at quarter-end, but available assets of $1.44 billion exceeded minimum required assets of $1.40 billion by approximately $40 million. The GSEs were expected to finalize updated PMIERs no earlier than Q2 2018, with effectiveness no sooner than Q4 2018, according to management’s understanding.
- Combined U.S. insurer risk-to-capital was 14.7:1, below the generally applicable 25:1 maximum. Management said liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months, while noting possible future capital needs from regulatory or GSE changes, portfolio growth, or new initiatives.
- Key risks include uncertainty in loss reserves and portfolio seasoning; hurricane-related claims; housing, employment and interest-rate changes; investment market and credit risks; customer concentration and competition; and changes to GSE rules or eligibility. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Investor verification priorities
- Track hurricane-area delinquencies, claims, and reserve development after October 31, including how policy terms affect recoveries.
- Assess whether favorable prior-year reserve releases persist as the insured portfolio seasons and defaults rise.
- Monitor PMIERs headroom and the impact, if any, of revised GSE requirements and state capital rules.
- Reconcile premium growth with the declining average premium rate, persistency, business mix, and future cancellation trends.
- Review the use of share-offering proceeds and credit-facility borrowings, including holding-company liquidity and subsidiary dividend restrictions.