Essent Group Ltd. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Essent provides private mortgage insurance and reinsurance, primarily for U.S. residential mortgages. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $264.6 | $244.8 |
| Net premiums earned | $215.3 | $219.1 |
| Net investment income | $24.7 | $21.8 |
| Net income | $274.2 | $135.6 |
| Diluted EPS | $2.52 | $1.21 |
| Operating cash flow | $180.6 | $187.8 |
| Cash at period end | $203.8 | $81.5 at Dec. 31, 2021 |
| Total investments | $4,875.4 | $5,133.4 at Dec. 31, 2021 |
| Credit facility borrowings | $425.0 principal | $425.0 at Dec. 31, 2021 |
Net income rose 102% year over year, largely because of a $106.9 million benefit for losses and loss adjustment expenses (LAE), including $131.2 million of favorable prior-year development. That development included a $101.2 million reserve benefit from reducing the estimated ultimate loss rate on Early COVID Defaults from 7% to 4%. Income from other invested assets also increased to $24.7 million from $0.5 million and included $15.0 million of net unrealized gains. These items materially affect comparability; the filing does not present a single operating-margin measure.
Net premiums written declined 2% to $199.7 million. Other underwriting and operating expenses were $40.8 million versus $42.2 million. Net realized investment losses were $7.4 million, including $6.8 million of impairments on securities the company intended to sell. The effective tax rate was estimated at 16.0%; tax expense was $54.3 million.
Net cash increased $122.4 million. Investing activities provided $38.9 million, including proceeds from investment sales; financing used $97.2 million, primarily for share repurchases and dividends. The $825 million credit facility includes a $400 million revolver, of which $400 million was available at quarter-end. The facility matures December 10, 2026; the company reported covenant compliance and a 1.99% weighted-average borrowing rate at March 31.
Mortgage insurance and material changes
- New insurance written (NIW) was $12.8 billion, down from $19.3 billion. Insurance in force (IIF) increased to $206.8 billion from $197.1 billion a year earlier; risk in force was $45.3 billion.
- Average net premium rate declined to 0.39% from 0.42%. Persistency was 69.1% at March 31, 2022.
- Default inventory fell to 14,923 loans from 29,080 a year earlier; the default rate was 1.93% versus 3.70%. Early COVID Defaults had a reported cumulative cure rate of approximately 95%.
- Stockholders’ equity was $4.22 billion, down from $4.24 billion at year-end. Accumulated other comprehensive loss was $152.3 million, reflecting a $203.0 million after-tax quarterly loss on unrealized investment values, primarily associated with higher interest rates.
- Essent Guaranty’s PMIERs available assets were $3.19 billion, or 174% of minimum required assets of $1.84 billion. The combined U.S. insurance-company risk-to-capital ratio was 9.9:1.
Outlook, risks and unusual items
Management stated it had sufficient liquidity at holding companies and operating subsidiaries to meet operating needs and obligations for the next 12 months. No numerical earnings guidance was provided. Management expects losses and claims may increase as the relatively young insured portfolio seasons; 78% of IIF was written since January 1, 2020 and was less than three years old. Future results depend on default and cure trends, housing prices, interest rates, employment, persistency, premium rates, reinsurance and regulatory or GSE capital requirements.
The Early COVID Default reserve remains estimate-sensitive: $136.9 million of reserves remained for these defaults at March 31. A 100-basis-point change in the estimated ultimate loss rate would change reserves by approximately $35 million. Management noted that economic conditions, the continuing effects of the pandemic and government programs could alter estimates. Rising rates also reduced investment fair values; the filing reports $184.3 million of gross unrealized losses on available-for-sale investments, which management attributed principally to rate changes, while recording impairments on securities it intended to sell.
After quarter-end, the board declared a $0.21 per-share dividend payable in June and authorized a new share repurchase plan of up to $250 million through 2023. The prior plan was completed in April with an additional $22.3 million of repurchases. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of the earnings increase reflects reserve releases and investment gains rather than recurring underwriting performance.
- Whether Early COVID Default cure rates and the revised 4% ultimate-loss estimate remain supportable, and how reserves develop as the portfolio seasons.
- Premium-rate, NIW, cancellation and persistency trends, including the effects of rising mortgage rates on refinancing and new originations.
- Investment portfolio fair-value and credit developments, the impact of interest rates, and any further securities sales or impairments.
- Available liquidity and capital at the holding company and regulated subsidiaries, including PMIERs headroom, dividend restrictions and reinsurance counterparty exposure.