Essent .(ESNT) - 2019 Q1 - Quarterly Report

PART I Item 1. Financial Statements (Unaudited) The unaudited Q1 2019 financial statements report total assets of $3.35 billion and net income of $127.7 million, reflecting growth in premiums and investment income Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Total investments | $3,008,824 | $2,791,018 | | Total assets | $3,353,245 | $3,149,971 | | Liabilities & Stockholders' Equity | | | | Reserve for losses and LAE | $53,484 | $49,464 | | Unearned premium reserve | $295,320 | $295,467 | | Total liabilities | $825,442 | $784,254 | | Total stockholders' equity | $2,527,803 | $2,365,717 | | Total liabilities and stockholders' equity | $3,353,245 | $3,149,971 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) Condensed Consolidated Statements of Comprehensive Income (Unaudited) | (In thousands, except per share) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net premiums earned | $177,791 | $152,558 | | Net investment income | $19,880 | $13,714 | | Total revenues | $200,526 | $167,463 | | Provision for losses and LAE | $7,107 | $5,309 | | Total losses and expenses | $50,807 | $45,883 | | Income before income taxes | $149,719 | $121,580 | | Net income | $127,720 | $111,069 | | Diluted EPS | $1.30 | $1.13 | Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - Total stockholders' equity increased from $2.37 billion at the beginning of the period to $2.53 billion at March 31, 2019, primarily driven by net income of $127.7 million and other comprehensive income of $38.4 million[32] Condensed Consolidated Statements of Cash Flows (Unaudited) Condensed Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $138,682 | $221,868 | | Net cash used in investing activities | ($155,039) | ($216,364) | | Net cash used in financing activities | ($8,100) | ($16,070) | | Net decrease in cash | ($24,457) | ($10,566) | Notes to Condensed Consolidated Financial Statements (Unaudited) The notes detail private mortgage insurance operations, customer concentration, reinsurance strategies, increased loss reserves to $53.5 million, and compliance with PMIERs 2.0 regulatory capital requirements - The company offers private mortgage insurance and reinsurance, with one lender representing 10% of total revenue for the three months ended March 31, 2019, indicating customer concentration[41][42] - The company utilizes reinsurance to manage risk, including ceding 25% of GSE-eligible new insurance written to its Bermuda subsidiary, Essent Re, and engaging in fully collateralized excess of loss reinsurance transactions with unaffiliated special purpose insurers[43][72] Reconciliation of Reserve for Losses and LAE | ($ in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Beginning Reserve | $49,464 | $46,850 | | Net Incurred Losses (Current Period) | $7,107 | $5,309 | | - Current Period Provision | $11,828 | $9,952 | | - Favorable Prior Year Development | ($4,721) | ($4,643) | | Net Payments | ($3,087) | ($2,193) | | Ending Reserve | $53,484 | $49,966 | - Essent Guaranty, the company's U.S. insurance subsidiary, was in compliance with the revised PMIERs 2.0 as of March 31, 2019[121] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported strong Q1 2019 results with net income of $127.7 million, driven by a 17% increase in net premiums earned and growth in insurance in force to $143.2 billion, while maintaining a strong capital position and PMIERs 2.0 compliance Overview - The company is a growing private mortgage insurance provider with Essent Guaranty licensed in all 50 states and D.C[129] Key Operating Metrics (Q1 2019) | Metric | Value | | :--- | :--- | | New Insurance Written (NIW) | $11.0 billion | | Insurance in Force (IIF) | $143.2 billion | | Number of Employees | 377 | - Essent Re, the Bermuda-based subsidiary, provides GSE risk share and other reinsurance, also reinsuring 25% of Essent Guaranty's GSE-eligible NIW[131] Key Performance Indicators Insurance in Force (IIF) and Risk in Force (RIF) Summary | (In thousands) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Beginning IIF | $137,720,786 | $110,461,950 | | New Insurance Written (NIW) | $11,000,309 | $9,336,150 | | Cancellations | ($5,539,454) | ($4,547,151) | | Ending IIF | $143,181,641 | $115,250,949 | | Ending RIF | $34,744,417 | $28,267,149 | - The average net premium rate was 0.48% for Q1 2019, down from 0.52% in Q1 2018, primarily due to third-party reinsurance and pricing reductions on future NIW[166] - The persistency rate, representing the percentage of IIF remaining after 12 months, was 85.1% at March 31, 2019[138] - The combined risk-to-capital ratio for U.S. insurance companies was 13.5 to 1 as of March 31, 2019, significantly below the general maximum permitted ratio of 25.0 to 1[167] Results of Operations - Net income for Q1 2019 was $127.7 million, a 15% increase from $111.1 million in Q1 2018, primarily due to higher net premiums earned and increased net investment income[169][170] - Net premiums earned increased by 17% year-over-year, driven by the growth in average IIF to $140.1 billion[171] - The provision for losses and LAE increased to $7.1 million from $5.3 million in the prior year, reflecting portfolio seasoning, while the default rate decreased to 0.65% from 0.86% due to the cure of hurricane-related defaults[177][179] - Other underwriting and operating expenses increased to $41.0 million from $38.1 million, primarily due to business expansion, with compensation and benefits expense slightly decreasing[184] Liquidity and Capital Resources - As of March 31, 2019, the company had substantial liquidity, including $40.5 million in cash, $210.8 million in short-term investments, $2.8 billion in fixed maturity investments, and an additional $275 million available under its revolving credit facility[191] - Essent Guaranty was in compliance with PMIERs 2.0 as of March 31, 2019, with Available Assets of $2.02 billion exceeding the Minimum Required Assets of $1.21 billion[211] U.S. Insurance Subsidiaries Combined Statutory Capital (March 31, 2019) | (In thousands) | Amount | | :--- | :--- | | Policyholders' surplus | $956,097 | | Contingency reserves | $1,030,951 | | Combined statutory capital | $1,987,048 | | Combined net risk in force | $26,813,408 | | Combined risk-to-capital ratio | 13.5:1 | - The investment portfolio totaled $3.0 billion as of March 31, 2019, up from $2.8 billion at year-end 2018, primarily due to investing cash flows from operations[213] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's investment portfolio faces market risks, primarily from interest rate changes and credit quality, with an effective duration of 3.5 years indicating sensitivity to yield curve shifts - The company's investment portfolio is exposed to market risks, primarily changes in interest rates, credit quality, concentration, and prepayment risk[239][240][241] - The effective duration of investments available for sale was 3.5 years at March 31, 2019, implying a 100 basis point (1%) instantaneous parallel shift in the yield curve would cause a 3.5% change in the portfolio's fair value[243] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the reporting period, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[244] - There were no material changes in the company's internal control over financial reporting during the first quarter of 2019[245] PART II. OTHER INFORMATION Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings[248] Risk Factors No material changes to the company's risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes in the company's risk factors from those previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[249] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 131,639 common shares at $43.69 per share to satisfy employee tax withholding obligations, not as part of a public buyback program - The company repurchased 131,639 common shares during the quarter from employees to satisfy tax withholding obligations related to vesting restricted shares, not as part of a share buyback program[250][251] Other Information At the 2019 Annual General Meeting, shareholders elected directors, ratified the auditor, and approved executive compensation on an advisory basis - At the Annual General Meeting on May 1, 2019, shareholders approved all proposals, including the election of Angela L. Heise and Robert Glanville to the board of directors, the re-appointment of PricewaterhouseCoopers LLP as auditor, and a non-binding advisory vote on executive compensation[253][255][256] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL interactive data files - Exhibits filed with the report include CEO/CFO certifications (Sections 302 and 906 of Sarbanes-Oxley) and financial statements in XBRL format[258]