Essent Group Ltd. quarterly report, Q3 FY2022

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Essent Group Ltd. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; unaudited. Essent provides U.S. private mortgage insurance and reinsurance, primarily supporting low-down-payment mortgages sold to Fannie Mae and Freddie Mac.

Financial performance and position

  • Q3 revenue and earnings: Total revenue was $261.8 million, down 7.7% year over year. Net income was $178.1 million, down 13.3%; diluted EPS was $1.66 versus $1.84.
  • Nine-month results: Revenue was $770.8 million, essentially unchanged year over year. Net income increased to $684.0 million from $500.8 million; diluted EPS was $6.35 versus $4.47.
  • Premiums and business: Q3 net premiums earned were $207.9 million, down 5%; nine-month premiums were $635.3 million, down 3%. Net premiums written rose 3% in Q3 and 2% year to date. Q3 NIW fell to $17.1 billion from $23.6 billion; nine-month NIW was $50.0 billion versus $67.8 billion. IIF was $222.5 billion, up from $208.2 billion a year earlier.
  • Premium rate and persistency: Average net premium rate was 0.35% in Q3 and 0.37% for nine months, compared with 0.40% and 0.41%, respectively, in 2021. Portfolio persistency was 77.9%. The filing does not provide a standalone operating-margin measure.
  • Investment results: Q3 net investment income rose to $32.6 million from $21.6 million; nine-month income rose to $86.6 million from $65.1 million. Nine-month realized investment losses were $7.6 million, including $7.4 million of impairments. Income from other invested assets was $9.6 million in Q3 and $36.3 million year to date.
  • Losses and reserves: Q3 loss and LAE provision was $4.3 million, versus a $7.5 million benefit in 2021. Nine-month provision was a benefit of $178.8 million, versus $34.5 million of expense in 2021. The reserve for losses and LAE was $212.5 million at September 30, down from $407.4 million at year-end 2021.
  • Cash flow: Nine-month operating cash flow was $416.5 million, down from $518.2 million. Investing activities used $253.0 million and financing activities used $165.5 million. Cash ended the period at $79.5 million.
  • Balance sheet and debt: Total assets were $5.56 billion and stockholders’ equity was $4.29 billion. Investments totaled $4.85 billion; available-for-sale investments had $4.58 billion fair value versus $5.08 billion amortized cost. Long-term debt was $425 million outstanding under the credit facility, with a 4.39% weighted-average rate at quarter-end and maturity in December 2026.
  • Liquidity and capital: The company reported $400 million of unused revolving credit capacity and $647.9 million of holding-company cash and available-for-sale investments. Management said liquidity was sufficient for operating needs and committed capital expenditures over the next 12 months. Essent Guaranty’s PMIERs available assets were $3.15 billion, or 179% of its $1.76 billion minimum requirement; the combined U.S. insurer risk-to-capital ratio was 10.1:1.

Material changes versus comparable periods

  • Q3 net income declined, primarily reflecting lower net premiums earned and income from other invested assets, higher loss provision and interest expense, partly offset by higher net investment income and lower tax expense.
  • Nine-month earnings increased substantially, principally because of favorable prior-year loss development, as well as higher investment income and other income; lower premiums and realized investment results partly offset the improvement.
  • The $242.0 million nine-month favorable prior-year loss development included a $164.1 million benefit from revising estimated losses on Early COVID Defaults. About 98% of those defaults had cured by September 30.
  • Rising interest rates drove substantial unrealized investment losses: accumulated other comprehensive loss was $423.6 million at September 30, compared with $50.7 million of accumulated other comprehensive income at year-end 2021. Management attributed most portfolio losses to interest-rate movements rather than credit deterioration; approximately 98% of securities were investment grade.

Outlook, commentary and risks

  • The filing gives no specific earnings or revenue guidance. Management expects the average net premium rate to face pressure from third-party reinsurance, policy cancellations and portfolio mix.
  • Management noted that higher inflation and mortgage rates may reduce home-sale activity and limit options for delinquent borrowers, potentially increasing future loss provisions and PMIERs asset requirements. The mortgage-insurance book is relatively young: 83% of IIF was written since 2020, and management expects claims to rise as the portfolio seasons.
  • Defaults with 12 or more missed payments remained above pre-pandemic levels, and default-to-foreclosure or claim transitions had not returned to pre-pandemic levels. Hurricane Ian may increase defaults in affected Florida counties beginning in Q4; the company could not estimate associated claims, and the event had not materially affected reserves as of September 30.
  • Interest-rate changes create market-value and reinvestment risks. The available-for-sale portfolio’s effective duration was 3.7 years; management estimated a 100-basis-point parallel rate shift would change its fair value by 3.7%.
  • Essent reported compliance with credit-facility covenants, PMIERs and applicable insurer requirements. It reported no material legal proceedings. The board declared a Q4 dividend of $0.23 per share in November; the new $250 million repurchase authorization had not been used as of September 30.
  • A.M. Best affirmed Essent Guaranty’s and Essent Re’s A (Excellent) ratings in September; S&P affirmed Essent Guaranty’s BBB+ rating on November 4, 2022. The filing states these ratings had stable outlooks.

Important facts for investors to verify

  • How much of the nine-month earnings increase depends on the $164.1 million Early COVID Defaults reserve benefit, and whether subsequent claims and cures support those estimates.
  • Whether higher rates, inflation, housing activity and the seasoning of the young insurance portfolio change defaults, claim severity or reserve requirements.
  • The quality and liquidity of investments amid $491.4 million of gross unrealized losses and $7.4 million of recognized nine-month impairments.
  • Whether PMIERs asset headroom and insurer capital remain adequate if defaults increase, including the availability and terms of reinsurance.
  • The effect of lower NIW and net premium rates on future earned premiums, alongside floating-rate debt costs, dividends and the unused share-repurchase authorization.