Essent Group Ltd. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods unless stated otherwise. Essent provides private mortgage insurance and reinsurance, primarily for U.S. residential mortgages.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $243.3 million | $236.1 million | $488.1 million | $464.9 million |
| Net premiums earned | $217.4 million | $211.5 million | $436.5 million | $418.0 million |
| Net investment income | $21.7 million | $19.9 million | $43.5 million | $40.5 million |
| Provision for losses and LAE | $9.7 million | $175.9 million | $42.0 million | $183.9 million |
| Net income | $159.8 million | $15.4 million | $295.4 million | $164.9 million |
| Diluted EPS | $1.42 | $0.15 | $2.63 | $1.64 |
| Operating cash flow | Not separately reported | Not separately reported | $339.8 million | $345.8 million |
Profit rose sharply, principally because loss provisions were much lower than in 2020, when pandemic-related defaults drove a large charge. Results also benefited from higher earned premiums and investment income. Six-month net income included $30.6 million of favorable prior-year loss development; the comparable 2020 figure was $13.3 million. The filing does not provide a clear headline operating-margin measure.
Business trends and material changes
- Q2 new insurance written (NIW) was $25.0 billion, down from $28.2 billion; six-month NIW was $44.3 billion, up from $41.7 billion.
- Insurance in force reached $203.6 billion, versus $174.6 billion a year earlier. Persistency was 58.3%, compared with 60.1% at December 31, 2020.
- Average net premium rate declined to 0.41% from 0.48%, reflecting reinsurance cessions, business mix, pricing and fewer premiums recognized on cancellations of non-refundable single-premium policies. Net premiums earned nevertheless increased as average insurance in force grew.
- In April 2021, Essent increased its affiliated Essent Re quota-share reinsurance on new business from 25% to 35%, effective January 1, 2021; prior vintages remain at their original 25% share.
- The investment portfolio was $4.9 billion at June 30, up from $4.7 billion at year-end 2020. Net unrealized investment gains declined, contributing to a $22.8 million six-month decrease in accumulated other comprehensive income.
Balance sheet, debt and capital
- Total assets were $5.52 billion and stockholders’ equity was $4.08 billion at June 30, 2021, compared with $5.20 billion and $3.86 billion, respectively, at December 31, 2020.
- Cash was $142.1 million; short-term investments were $372.3 million; fixed maturities were $4.37 billion. Management described liquidity as substantial and sufficient for expected needs over the next 12 months.
- Credit-facility borrowings were $325 million, with a weighted-average rate of 2.13%; $300 million of revolving capacity remained available. The facility matures October 16, 2023, and the company reported covenant compliance.
- Essent Guaranty’s PMIERs available assets were $3.02 billion versus $1.73 billion of minimum required assets. The company reported compliance with PMIERs 2.0. Combined U.S. insurance subsidiary risk-to-capital was 10.6:1.
- Operating cash flow was $339.8 million for the first six months. Cash increased by $39.3 million to $142.1 million; investing activities used $239.5 million and financing activities used $61.0 million.
Outlook, risks and unusual items
- COVID-19 claims uncertainty: At June 30, insured loans in default totaled 23,504, including 21,648 classified as COVID-19 defaults. The COVID-19 loss reserve was $380.7 million, including $244.0 million for early-pandemic defaults. Management said estimates could change with borrower performance, economic conditions and government programs; a 100-basis-point change in the reserve rate for early COVID defaults would change reserves by approximately $35 million.
- Management expects early COVID defaults to have lower claim conversion than historical defaults, partly due to forbearance, loan modification and other assistance. It resumed its normal reserving methodology for defaults reported after September 30, 2020. New defaults remained elevated, though below levels reported in 2020.
- Portfolio seasoning is a risk: 80% of insurance in force related to business written since January 1, 2019. Management expects claims and loss provisions to increase as the portfolio ages into historically higher-claim years.
- Investment income increased despite a lower pretax yield: 2.0% in Q2 and the first half of 2021, versus 2.2% and 2.3%, respectively, in 2020. Management cited lower market yields and higher amortization on mortgage- and asset-backed securities.
- Six-month 2021 tax expense included $5.7 million of discrete expense from an increased estimate of deferred state tax liability. Other income included fair-value changes in embedded derivatives within certain reinsurance agreements.
- The board authorized a $250 million share-repurchase plan in May. Essent repurchased $18.4 million of shares in Q2; a further $25.8 million was repurchased in July. The quarterly dividend was increased to $0.18 per share in August, payable September 10, 2021.
- No formal earnings guidance was provided. Key risks include pandemic-related reserve uncertainty, housing and employment conditions, interest-rate and investment-market changes, GSE/PMIERs requirements, reinsurance availability and regulatory restrictions on subsidiary dividends.
- The filing reported no material legal proceedings, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 delinquencies cure, remain delinquent or convert to paid claims, and whether reserve assumptions change.
- How loss provisions and favorable prior-year development evolve as the relatively young insurance portfolio seasons.
- Whether the lower average premium rate and increased reinsurance cessions affect future underwriting profitability and capital relief.
- Investment portfolio duration, credit quality and sensitivity to interest-rate changes; the filing estimates a 4.0-year effective duration for investments available for sale.
- PMIERs asset cushion, subsidiary dividend capacity and the terms and execution of share repurchases and dividends.