Essent .(US:ESNT)2020-11-06 21:26PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited financial statements detail the company's financial position, operations, and cash flows, showing $5.11 billion in total assets and $289.4 million net income for the nine months ended September 30, 2020, impacted by increased loss provisions Condensed Consolidated Balance Sheets Total assets increased to $5.11 billion as of September 30, 2020, driven by investments, while liabilities rose to $1.36 billion and equity grew to $3.75 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $5,107,088 | $3,873,425 | | Total investments | $4,585,412 | $3,429,620 | | Total Liabilities | $1,360,544 | $888,580 | | Reserve for losses and LAE | $307,737 | $69,362 | | Credit facility borrowings | $424,658 | $224,237 | | Total Stockholders' Equity | $3,746,544 | $2,984,845 | Condensed Consolidated Statements of Comprehensive Income Net income for the nine months ended September 30, 2020, decreased to $289.4 million from $408.8 million due to a substantial increase in the provision for losses Statement of Comprehensive Income Highlights (in thousands, except per share data) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net premiums earned | $640,225 | $569,754 | | Total revenues | $707,955 | $638,805 | | Provision for losses and LAE | $239,220 | $22,057 | | Net income | $289,439 | $408,755 | | Diluted EPS | $2.77 | $4.16 | | Comprehensive income | $365,686 | $500,475 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $548.5 million, while investing activities used $1.08 billion, and financing activities provided $582.2 million for the nine months ended September 30, 2020 Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $548,506 | $424,579 | | Net cash used in investing activities | ($1,083,317) | ($416,414) | | Net cash provided by (used in) financing activities | $582,152 | ($23,529) | | Net increase (decrease) in cash | $47,341 | ($15,364) | Notes to Condensed Consolidated Financial Statements (Unaudited) Notes detail accounting policies, the $4.5 billion investment portfolio, extensive reinsurance use, a significant increase in $307.7 million loss reserves due to COVID-19, and compliance with PMIERs - The company offers private mortgage insurance and reinsurance for U.S. residential properties, primarily through its subsidiaries Essent Guaranty, Inc. and Essent Reinsurance Ltd36 - The company adopted ASU 2016-13 (Credit Losses) on January 1, 2020, which did not have a material effect on its consolidated operating results or financial position40 - The investment portfolio, valued at $4.5 billion, is primarily composed of corporate debt securities (21.9%), U.S. agency mortgage-backed securities (21.2%), and money market funds (21.2%); over 98% of securities in an unrealized loss position had investment-grade ratings4753 - The company utilizes both Quota Share Reinsurance (ceding 20-40% of risk on new policies) and Excess of Loss Reinsurance through Radnor Re transactions to manage risk and capital, with total excess of loss reinsurance in force of approximately $1.6 billion as of September 30, 20206369 - Loss reserves increased dramatically to $307.7 million at September 30, 2020, from $69.4 million at year-end 2019, driven by a surge in COVID-19 related defaults (32,492 in inventory), for which a reserve of $247.2 million was established7781 - In June 2020, the company completed a public offering of 13.8 million common shares, raising net proceeds of approximately $440.0 million, and declared quarterly dividends of $0.16 per share9495 - As of September 30, 2020, Essent Guaranty was in compliance with PMIERs 2.0, with Available Assets of $2.72 billion exceeding the Minimum Required Assets of $1.74 billion143244 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the COVID-19 impact, leading to increased loss provisions and decreased net income despite strong new insurance written, while maintaining robust capital and liquidity Overview and COVID-19 Impact New insurance written grew to $78.4 billion, increasing total insurance in force to $190.8 billion, despite significant COVID-19 impact on delinquencies and loss provisions - New insurance written (NIW) for the nine months ended Sep 30, 2020, was $78.4 billion, a significant increase from $47.7 billion in the same period of 2019153 - Total insurance in force reached $190.8 billion as of September 30, 2020153 - The COVID-19 pandemic and related economic restrictions have caused a significant increase in unemployment, leading to a higher number of delinquencies on insured mortgages154 - The CARES Act provides forbearance for up to 360 days on federally backed mortgages, expected to reduce defaults resulting in claims compared to historical experience155 Key Performance Indicators Insurance in force grew to $190.8 billion, while the average net premium rate decreased to 0.47%, and persistency fell to 64.2%, with a healthy 11.6 to 1 risk-to-capital ratio Insurance in Force (IIF) (in thousands) | Period | IIF, end of period | | :--- | :--- | | Nine Months Ended Sep 30, 2020 | $190,811,292 | | Nine Months Ended Sep 30, 2019 | $160,962,192 | - The average net premium rate for the nine months ended Sep 30, 2020, was 0.47%, down from 0.49% in the prior year period, influenced by increased ceded premiums from reinsurance192 - The persistency rate was 64.2% at September 30, 2020, a decline from 77.5% at December 31, 2019, indicating higher policy cancellations, likely due to refinancing167 - The combined risk-to-capital ratio for U.S. insurance companies was 11.6 to 1 as of September 30, 2020, well below the general maximum permitted ratio of 25.0 to 1193 Results of Operations Net income decreased to $289.4 million due to a significant increase in the provision for losses to $239.2 million, driven by COVID-19 related defaults, despite higher net premiums earned Results of Operations Comparison (in thousands) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net premiums earned | $640,225 | $569,754 | | Provision for losses and LAE | $239,220 | $22,057 | | Other underwriting and operating expenses | $117,866 | $124,138 | | Net income | $289,439 | $408,755 | - The increase in provision for losses was primarily due to an increase in defaults related to COVID-19; the ending default inventory grew to 35,464 from 5,232 in the prior year203204 - As of September 30, 2020, the default inventory included 32,492 defaults classified as COVID-19 related, with a corresponding loss reserve of $247.2 million204206 - The average total reserve per default decreased from $11,700 to $8,700 year-over-year, reflecting a lower reserve rate applied to COVID-19 defaults due to expectations of higher cure rates from forbearance programs205206 Liquidity and Capital Resources The company maintained strong liquidity with $118.7 million cash and $4.5 billion investments, bolstering capital through a $440 million equity offering and remaining PMIERs compliant - As of September 30, 2020, the company had $118.7 million in cash, $1.0 billion in short-term investments, and $3.5 billion in fixed maturity investments223 - Completed a public offering of common shares in June 2020, raising net proceeds of approximately $440 million to strengthen capital resources223 - In October 2020, the credit facility was amended to increase committed capacity from $500 million to $625 million and extend the maturity to October 2023224 - Essent Guaranty was in compliance with PMIERs 2.0, with Available Assets of $2.72 billion, providing a significant buffer over the Minimum Required Assets of $1.74 billion244 - The combined risk-to-capital ratio for U.S. insurance subsidiaries was 11.6:1, based on $2.6 billion in statutory capital and $29.8 billion in net risk in force239 Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk from the investment portfolio relates to interest rate changes, credit quality, and concentration, with an effective duration of 2.5 years as of September 30, 2020 - The company is exposed to market risk from its investment portfolio, primarily driven by changes in interest rates, credit quality, and concentration267268269270 - The effective duration of the investments available for sale was 2.5 years at September 30, 2020; a 100 basis point change in interest rates would result in a 2.5% change in the portfolio's fair value272 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020273 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls274 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings277 Item 1A. Risk Factors The most significant risk factor change relates to the COVID-19 pandemic, which adversely affects business, operations, and financial condition, increasing uncertainty in loss reserves and claims - The COVID-19 pandemic is unprecedented and continues to disrupt the global economy, including the U.S. housing and mortgage markets, which is expected to materially adversely affect the company's business279280 - Key risks from the pandemic include: uncertainty in loss reserve estimates, increased mortgage delinquencies and claims (especially after forbearance periods end), potential reduction in new business volume, and adverse impacts on capital and reinsurance markets284285286287 - Governmental and GSE efforts, such as the CARES Act and forbearance plans, aim to assist borrowers but do not eliminate the risk of ultimate default and claims281282 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No common shares were repurchased during the three months ended September 30, 2020 - No common shares were repurchased during the three months ended September 30, 2020292 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including an amended credit agreement and CEO/CFO certifications - Exhibits filed include the Second Amended and Restated Credit Agreement, CEO and CFO certifications (Rule 13a-14(a) and Section 906), and Inline XBRL financial data294