Essent Group Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Essent is a Bermuda-based provider of U.S. private mortgage insurance and reinsurance. Financial statements are unaudited.
Business context and operating performance
Essent reported estimated U.S. private mortgage insurance market share of 15.7%. New insurance written (NIW) was approximately $8.0 billion, insurance in force (IIF) was $88.0 billion, and risk in force was $21.8 billion at quarter-end. The portfolio’s persistency rate was 78.2%.
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Net premiums earned | $117.7 million | $94.4 million |
| Total revenues | $127.6 million | $102.5 million |
| Income before taxes | $86.9 million | $67.3 million |
| Net income | $66.6 million | $48.0 million |
| Diluted EPS | $0.72 | $0.52 |
| Net cash from operating activities | $77.9 million | $68.5 million |
| Cash at period-end | $19.7 million | $27.5 million at Dec. 31, 2016 |
| Total investments, fair value | $1.725 billion | $1.615 billion at Dec. 31, 2016 |
Net income margin, calculated as net income divided by total revenues, was approximately 52.2%, versus 46.8% in Q1 2016. Premiums earned increased 25%, primarily reflecting 29% growth in average IIF; the average premium rate declined to 0.53% from 0.56%. Net investment income rose to $8.4 million from $6.2 million, supported by a larger portfolio and a higher reported pretax yield of 2.2%, versus 2.0%.
Financial position, capital and liquidity
- Total assets were $1.988 billion and stockholders’ equity was $1.413 billion at March 31, 2017, up from $1.883 billion and $1.344 billion, respectively, at year-end 2016.
- Revolving-credit-facility borrowings rose to $125 million from $100 million; $75 million of the $200 million facility remained available. The weighted-average borrowing rate was 2.96%, and the company reported covenant compliance.
- Operating cash flow was $77.9 million; investing activities used $103.6 million, financing activities provided $17.9 million, and cash declined by $7.8 million during the quarter.
- Management reported cash and investments of approximately $1.86 billion, including $112.4 million of short-term investments and $1.6 billion of fixed maturities. Holding-company net cash and investments were $41.1 million.
- U.S. insurance subsidiaries’ combined statutory capital was $1.203 billion against combined net risk in force of $17.611 billion, a 14.6:1 risk-to-capital ratio. Essent Guaranty reported PMIERs available assets of $1.24 billion versus minimum required assets of $1.19 billion and was in compliance.
Changes, outlook and notable items
- Compared with Q1 2016, total revenues increased about 25% and net income about 39%. Growth in premiums earned and investment income more than offset higher operating expenses, interest expense and income taxes.
- Loss and loss-adjustment expense provision was $3.7 million, similar to the prior-year quarter. It included $7.1 million of current-year losses, offset by $3.4 million of favorable prior-year reserve development. Ending loss reserves were $29.5 million, versus $20.5 million a year earlier; reported defaults increased to 1,777 from 1,060.
- The portfolio is relatively young: 70% of IIF was originated since January 1, 2015. Management expects claims and loss provisions to rise as the book seasons, with claims historically most frequent in years three through six. Actual outcomes depend on borrower and loan characteristics and economic conditions.
- Management expects the full-year 2017 expense ratio to decline from 2016 as earned premiums grow faster than underwriting and other expenses. No specific revenue or earnings guidance was provided. Management stated it expects sufficient liquidity for operating needs and committed capital expenditures over the next 12 months, while noting that new regulatory or GSE capital requirements, business growth or initiatives could require additional capital.
- Q1 income tax expense included a $3.0 million excess tax benefit under newly adopted share-based payment accounting guidance, which may make future net income more volatile. The adoption also resulted in a $0.1 million cumulative adjustment to retained earnings.
- Contract underwriting remedies paid were $4.8 million in Q1 2017, versus none in Q1 2016; management said potential related claims were not material. There were no material legal proceedings, and the filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether NIW, IIF, persistency and average premium rates continue to support premium growth as competition and refinancing affect policy retention.
- How default inventory, claim severity and loss reserves develop as the young insurance portfolio seasons, including whether favorable prior-year reserve development persists.
- Whether PMIERs assets and statutory capital remain adequate as risk in force grows and regulatory or GSE requirements evolve.
- Debt usage, floating-rate exposure, investment portfolio sensitivity and liquidity available at the holding company versus regulated subsidiaries.
- The effect of the $3.0 million share-based compensation tax benefit and other discrete items on comparisons of reported earnings across periods.