Essent .(ESNT) - 2019 Q4 - Annual Report

Special Note Regarding Forward-Looking Statements This section highlights that the Annual Report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ materially - This Annual Report includes forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. These statements are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause actual results to differ significantly[10][11] - Key factors that could cause actual results to differ materially include: changes in or to Fannie Mae and Freddie Mac (GSEs), failure to meet GSE eligibility requirements, competition, lenders/investors seeking alternatives to private mortgage insurance, increase in government mortgage insurance programs, decline in low down payment mortgage originations, uncertainty of loss reserve estimates, decrease in policy duration, deteriorating economic conditions, U.S. Federal tax reform, definitions of 'Qualified Mortgage' and 'Qualified Residential Mortgage', Basel III Capital Accord, investment portfolio risk, interest rate fluctuations, inadequacy of premiums, dependence on management, IT system disturbances, changes in customer capital requirements, declines in home values, limited capital/reinsurance, contract underwriting risks, industry loss reserve practices, mortgage loan servicing disruptions, legal proceedings, customer technological demands, non-U.S. operations subject to U.S. taxation, passive foreign investment company status, and potential restrictions on insurance subsidiaries' dividend payments[11][13] Part I Item 1. Business Essent Group Ltd. is a private mortgage insurance company playing a crucial role in the U.S. housing finance system by providing credit protection for low down payment loans Overview Essent Group Ltd. provides credit protection to lenders and mortgage investors, facilitating secondary market sales of low down payment loans and meeting GSE requirements - Essent Group Ltd. is an established and growing private mortgage insurance company, providing credit protection to lenders and mortgage investors by covering a portion of unpaid principal balance in case of default. This facilitates the sale of low down payment loans into the secondary market, meeting GSE credit protection requirements[17][18] - Essent Guaranty, Inc. (primary U.S. subsidiary) is licensed in all 50 states and D.C., approved by Fannie Mae and Freddie Mac since 2010. Essent Reinsurance Ltd. (Bermuda-based subsidiary) provides insurance/reinsurance for GSE risk share and other transactions, and reinsures 25% of Essent Guaranty's NIW[19][21] Metric | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | New Insurance Written (NIW) | ~$63.6 billion | ~$47.5 billion | ~$43.9 billion | | Insurance In Force (IIF) (as of Dec 31, 2019) | ~$164.0 billion | - | - | | Top 10 Customers (% of NIW on flow basis) | 42.8% | 43.5% | 45.8% | | Employees (as of Dec 31, 2019) | 387 | - | - | Our Industry The U.S. residential mortgage market is one of the largest globally, with significant GSE participation and a growing role for private mortgage insurance post-financial crisis - The U.S. residential mortgage market is one of the largest globally, with over $11.1 trillion of debt outstanding as of September 30, 2019. Government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac are major participants, holding or guaranteeing approximately 44.1% ($4.9 trillion) of total U.S. residential mortgage debt[23][25] - Mortgage insurance is crucial for secondary market sales and risk mitigation. From 2000-2019, an average of 24.7% of total annual mortgage origination volume utilized mortgage insurance. In 2019, total U.S. residential mortgage origination volume was estimated at $2.07 trillion, with purchase originations ($1.27 trillion) increasing as a percentage of the overall market[26][27] - Post-2007-2008 financial crisis, the private mortgage insurance industry's share of the insured market more than doubled from 15.4% in 2009 to an estimated 46% in 2019, covering 19% of total mortgage origination volume. This recovery is attributed to improved financial positions of insurers, private capital influx, and increased FHA premium rates[34][35] Competition The private mortgage insurance industry is highly competitive, facing rivals from other private insurers, government agencies, and alternative financing options - The private mortgage insurance industry is highly competitive, with six active private mortgage insurers. Competition is based on pricing, customer relationships, underwriting guidelines, financial strength, and technology[41] - Essent competes directly with federal agencies like the FHA and VA, whose market share increased post-financial crisis but has since decreased as private mortgage insurance recovered. Competition also comes from state-sponsored funds and alternatives like 'piggyback loans' or investors retaining credit risk[42][43] Our Products and Services Essent offers primary and pool mortgage insurance with various premium structures, subject to specific termination guidelines and rescission rights, alongside contract underwriting and reinsurance services - Essent offers primary mortgage insurance (protection on individual loans, typically 25% coverage, ranging 6-35%) and pool insurance (additional credit enhancement for secondary market transactions). Premiums are typically borrower-paid (BPMI) or lender-paid (LPMI) and can be monthly, single, annually, or split[44][45][46][48][49] - Mortgage insurance coverage generally cannot be terminated by the insurer except for non-payment or material policy violations. Borrowers can request cancellation based on GSE guidelines (e.g., 80% LTV) or HOPA requirements (e.g., automatic termination at 78% LTV)[51][52] - A master policy sets general terms, including rescission rights for fraud. A new master policy, effective March 1, 2020, will implement revised GSE Rescission Relief Principles, requiring rescission relief for current loans after 60 payments and permitting it after 12 payments with independent validation[54][56][57] - Essent also provides limited contract underwriting services, assessing loan application compliance and indemnifying customers for underwriting errors. Its Bermuda-based subsidiary, Essent Re, offers mortgage-related insurance and reinsurance, including 25% of Essent Guaranty's NIW under a quota share agreement[58][59] Our Mortgage Insurance Portfolio This section provides a detailed breakdown of Essent's mortgage insurance portfolio by policy year, credit score, loan-to-value, and default rates, highlighting its geographic diversity and expected seasoning Insurance in Force (IIF) by Policy Year (as of December 31, 2019) | Policy Year | IIF ($ in thousands) | % of Total | | :---------- | :------------------- | :--------- | | 2019 | $59,475,337 | 36.3% | | 2018 | $35,318,382 | 21.5% | | 2017 | $29,606,165 | 18.1% | | 2016 | $19,022,616 | 11.6% | | 2015 | $9,896,050 | 6.0% | | 2014 and prior | $10,687,303 | 6.5% | | Total | $164,005,853 | 100.0% | Portfolio by Credit Score (IIF as of December 31, 2019) | FICO Score | IIF ($ in thousands) | % of Total | | :--------- | :------------------- | :--------- | | >=760 | $68,123,523 | 41.5% | | 740-759 | $27,886,603 | 17.0% | | 720-739 | $24,069,139 | 14.7% | | 700-719 | $19,183,219 | 11.7% | | 680-699 | $13,713,164 | 8.4% | | <=679 | $11,030,205 | 6.7% | | Total | $164,005,853 | 100.0% | Portfolio by LTV (IIF as of December 31, 2019) | LTV Range | IIF ($ in thousands) | % of Total | | :--------------- | :------------------- | :--------- | | 85.00% and below | $17,128,008 | 10.5% | | 85.01% to 90.00% | $46,771,386 | 28.5% | | 90.01% to 95.00% | $76,611,494 | 46.7% | | 95.01% and above | $23,494,965 | 14.3% | | Total | $164,005,853 | 100.0% | Loans in Default and Default Rate (as of December 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Number of policies in force | 702,925 | 608,135 | | Loans in default | 5,947 | 4,024 | | Percentage of loans in default | 0.85% | 0.66% | - The portfolio is geographically diverse, with no single state accounting for more than 10% of IIF or Gross RIF, and no single metropolitan statistical area exceeding 3%. The weighted average life of the mortgage insurance portfolio was 23.3 months as of December 31, 2019, and default levels are expected to increase as the portfolio seasons[72][121] Customers Essent serves residential mortgage loan originators, categorized by their decision-making processes, with a significant portion of new business concentrated among its top ten customers - Essent's customers are originators of residential mortgage loans, categorized as 'Centralized' (corporate-level MI decisions, typically larger national originators) and 'Decentralized' (field/branch-level decisions, regional/mid-size lenders)[77][78] - The top ten customers generated 42.8% of New Insurance Written (NIW) on a flow basis in 2019, down from 43.5% in 2018 and 45.8% in 2017. Quicken Loans Inc. accounted for over 10% of consolidated revenue in 2019[81] Sales and Marketing Sales and marketing strategies focus on building strong customer relationships through comprehensive service, training, and a non-commission-based sales force aligned with long-term corporate goals - Sales and marketing efforts focus on building strong customer relationships through regular portfolio and risk management reviews, joint product development, and comprehensive customer service and training[83][84][85] - The sales force includes national account managers for large lenders and regional account managers for smaller lenders and national lender branches. Compensation is non-commission-based, including an equity ownership program, to align with long-term corporate objectives[87][88][91] Information Technology and Cybersecurity Essent's highly automated business relies on robust IT systems for electronic applications and approvals, supported by continuous investment and a comprehensive cybersecurity program - Essent's business is highly automated, relying on IT systems for electronic insurance applications and approvals, with direct connections to customer origination and servicing systems. The company continuously invests in new customer-facing technology and integrates with third-party providers[92][93] - A comprehensive 'defense-in-depth' information security program, benchmarked against the NIST Cybersecurity Framework, is in place to protect data. This program is overseen by an information security committee and the board of directors[95][96] Underwriting Essent employs strict underwriting guidelines and proprietary models for risk analysis and pricing, utilizing both delegated and non-delegated underwriting processes - Essent maintains strict underwriting guidelines, restricting coverage based on borrower FICO scores, debt-to-income levels, LTV ratios, and documentation. It limits coverage for high-risk features like cash-out refinance or investment properties[97][99] - Proprietary models are used for granular risk analysis and pricing within a risk-adjusted return framework, with guidelines regularly enhanced based on data and macroeconomic trends. Underwriting decisions often align with GSE automated loan underwriting systems[100][101] - Underwriting is conducted through 'Delegated Underwriting' (62% of IIF in 2019, where customers underwrite based on agreed guidelines, subject to QA reviews) and 'Non-Delegated Underwriting' (38% of IIF in 2019, where Essent independently underwrites)[102] Risk Management Essent's risk management framework, overseen by its board, employs a loan life cycle approach, supported by modeling, analytics, stress testing, and third-party reinsurance - Essent's risk management framework, overseen by its board and a management risk committee, covers mortgage insurance portfolio, investment, liquidity, and regulatory compliance risks. It employs a 'loan life cycle' approach[104][105] - The loan life cycle risk management includes customer qualification (diligence of potential customers), policy acquisition (underwriting guidelines, pricing, risk limits), and portfolio management (quality assurance reviews, surveillance, loss mitigation)[107][108][109][110] - A dedicated modeling and analytics team supports risk management by developing proprietary behavioral models for credit, prepayment, and loss severity trends, and performing stress tests within an economic capital framework. Essent also uses third-party reinsurance for risk exposure and capital management[111][112][114] Defaults and Claims This section defines loan default, outlines servicer collection efforts, and details claims settlement options, noting the expected increase in defaults as the portfolio matures - A loan is considered in default when the servicer notifies Essent of at least two consecutive missed monthly payments. Servicers are expected to make collection efforts and pursue loss mitigation (forbearance, loan modification, foreclosure, short sales, deeds in lieu)[116][117] Number of Loans in Default and Default Rate (as of December 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Number of policies in force | 702,925 | 608,135 | | Loans in default | 5,947 | 4,024 | | Percentage of loans in default | 0.85% | 0.66% | - Essent expects default levels to increase as its portfolio matures, given that the weighted average life of its portfolio was 23.3 months as of December 31, 2019, and peak default periods are historically 3-6 years post-origination. Claims settlement options include a percentage option, third-party sale option, or acquisition option[121][123] Investment Portfolio Essent's investment portfolio prioritizes capital preservation, income generation, and liquidity, primarily consisting of investment-grade securities managed under a board-approved policy - The investment portfolio, including cash, represents 90.4% of total assets as of December 31, 2019. Primary objectives are capital preservation, investment income generation, and maintaining sufficient liquidity for operations and claims[126] - Predominantly all investment securities are rated investment-grade. The portfolio is managed by senior management and external asset managers according to a board-approved investment policy that defines limits for asset sectors, issuers, credit ratings, and duration[126][127][129] Regulation Essent is subject to extensive federal and state regulation, including PMIERs 2.0 compliance, state insurance laws, and federal acts like Dodd-Frank, with ongoing housing finance reform and Basel III potentially impacting the industry - Essent is subject to comprehensive regulation by Federal regulators and state insurance departments, primarily for policyholder protection. Essent Guaranty is approved by Fannie Mae and Freddie Mac and complies with the Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0) as of December 31, 2019[131][132][135] - State insurance laws regulate various aspects including licenses, policy forms, premium rates, minimum capital levels, contingency reserves, and dividend limitations. The NAIC's Mortgage Guaranty Insurance Working Group (MGIWG) is reviewing solvency regulation and capital models[137][139][142] - Federal laws like the Dodd-Frank Act (QM and QRM rules), Homeowners Protection Act (HOPA), Real Estate Settlement Procedures Act (RESPA), SAFE Act, and privacy laws (GLB, CCPA) indirectly or directly affect private mortgage insurers. Ongoing housing finance reform discussions aim to reduce government's role and expand private capital[145][147][153][156][158][161][162][164][168][170] - The Basel III Capital Accord, governing banking organizations' capital requirements, could discourage the use of private mortgage insurance if it increases capital requirements for insured residential mortgages. Essent Reinsurance Ltd. is regulated as a Class 3A insurer in Bermuda, subject to Bermuda's Insurance Act 1978, which imposes solvency, liquidity, auditing, and reporting standards[176][178][180][182] Employees As of December 31, 2019, Essent Group Ltd. had 387 employees, primarily in the U.S., with no union representation and good employee relations - As of December 31, 2019, Essent Group Ltd. had 387 employees, with 381 based in the United States and 6 in Bermuda. None of the employees are represented by a labor union, and employee relations are considered good[201] Corporate Structure Essent Group Ltd. is a Bermuda-organized company with primary U.S. mortgage insurance operations through Essent Guaranty, Inc. and a Bermuda-domiciled reinsurer, Essent Reinsurance Ltd - Essent Group Ltd. is a Bermuda-organized limited liability company. Its primary U.S. mortgage insurance operations are conducted through Essent Guaranty, Inc., a Pennsylvania-domiciled insurer licensed in all 50 states and D.C. It also has a wholly-owned Bermuda-domiciled reinsurer, Essent Reinsurance Ltd., with a Class 3A insurance license[202][204] Item 1A. Risk Factors Essent faces significant risks from regulatory changes, intense competition, customer loss, declining originations, increasing claims, economic downturns, and tax implications for its non-U.S. operations - Legislative or regulatory actions, particularly those affecting the GSEs (Fannie Mae and Freddie Mac) and the U.S. housing market, could significantly reduce revenues or adversely affect profitability. Ongoing discussions about GSE reform and changes to their charters or business practices (e.g., PMIERs eligibility requirements) create uncertainty[208][212][215][216][218] - Intense competition within the private mortgage insurance industry, including from government-supported programs (FHA/VA) and alternative products, could lead to loss of customers, lower premiums, or wider credit guidelines. The loss of a significant customer (top ten represented 42.8% of NIW in 2019, one customer >10% of revenue) could materially impact business[220][221][222][225][229] - A decline in the volume of low down payment mortgage originations would reduce new insurance written and revenues. Claims are expected to increase as the company's portfolio matures, as historical data suggests peak default periods occur 3-6 years after loan origination. Loss reserve estimates are inherently uncertain and based on defaults, not ultimate losses on all risk in force, potentially leading to disproportionate adverse effects on earnings[234][235][236][238][239][240][269][272] - Adverse economic conditions (e.g., downturns, declining home values, natural disasters) could increase homeowner defaults and claims. Regulatory changes under the Dodd-Frank Act (Qualified Mortgage and Qualified Residential Mortgage rules) and the Basel III Capital Accord could reduce market size, create incentives for government mortgage insurance, or increase capital requirements for customers, thereby discouraging private mortgage insurance use[241][242][243][247][248][249][250][251][255] - Risks related to the investment portfolio include fluctuations in value, interest rate changes, and potential inability to meet future liabilities. Declining policy persistency (e.g., due to lower interest rates or increased home equity) could reduce future revenues. The delegated underwriting program may subject the business to unanticipated claims if customers fail to adhere to guidelines[256][257][258][259][260][261][263][267] - A downgrade in financial strength ratings could adversely affect new business volume, premium rates, and access to reinsurance. The security of information technology systems is a significant operational risk, with potential for interruptions, failures, or improper disclosure of confidential information. The company's holding company structure and regulatory constraints (e.g., dividend restrictions) could negatively impact liquidity and necessitate additional capital[273][281][282][283][284][285][286][287][291] - Inability to collect from reinsurers or unavailability of reinsurance at commercially reasonable rates could increase retained risk. The transition away from LIBOR to alternative benchmark rates poses risks to financial instruments. The company is also exposed to litigation and regulatory risks, including class action lawsuits and administrative enforcement actions (e.g., RESPA, FCRA)[292][293][297] - Tax-related risks include potential U.S. federal income and branch profits taxation for non-U.S. subsidiaries, implications under 'controlled foreign corporation' (CFC) rules for 10% U.S. shareholders, 'related party insurance income' (RPII) rules, and adverse tax consequences if considered a 'passive foreign investment company' (PFIC). Changes in Bermuda law or U.S. tax legislation could also have adverse impacts[308][309][313][317][320][324][302][305][307] - Risks related to common share ownership include share price volatility, potential dilution from future equity offerings, and difficulties for U.S. persons in effecting service of process or enforcing judgments against the Bermuda-domiciled company. Provisions in bye-laws may also reduce or increase voting rights under certain circumstances[327][328][330][335][336][345][346][349][351][354][355] Item 1B. Unresolved Staff Comments This item indicates that there are no unresolved staff comments from the SEC Item 2. Properties Essent Group Ltd. leases office facilities for its U.S. operations in Radnor, Winston-Salem, Irvine, and Bermuda, deeming them adequate for current and future needs - Essent leases office facilities for its U.S. operations in Radnor, Pennsylvania (headquarters), Winston-Salem, North Carolina, and Irvine, California[359] - Office facilities are also leased in Bermuda for the company's Bermuda-based reinsurance company[359] - Management believes current facilities are adequate for present needs and that suitable additional space will be available when needed[359] Item 3. Legal Proceedings The company is not currently involved in any material legal proceedings - Essent Group Ltd. is not currently subject to any material legal proceedings[360] Item 4. Mine Safety Disclosures This item is not applicable to the company Part II Item 5. Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Essent Group Ltd.'s common shares trade on the NYSE under "ESNT", with approximately 11 record holders as of February 10, 2020, and no share repurchases in Q4 2019 - Essent Group Ltd.'s common shares trade on the New York Stock Exchange (NYSE) under the symbol "ESNT"[364] - As of February 10, 2020, there were approximately 11 holders of record of the company's common shares[364] - The company did not repurchase any of its common shares during the fourth quarter of 2019[368] Item 6. Selected Financial Data This section provides a five-year summary of Essent Group Ltd.'s selected financial data, encompassing key operational results, balance sheet figures, and insurance portfolio metrics Summary of Operations (In thousands, except per share amounts) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net premiums written | $760,845 | $685,287 | $570,186 | $441,278 | $370,568 | | Net premiums earned | $777,425 | $649,492 | $530,130 | $422,707 | $326,471 | | Net investment income | $83,542 | $64,091 | $40,226 | $27,890 | $19,885 | | Total revenues | $867,567 | $719,353 | $576,511 | $458,258 | $353,290 | | Provision for losses and LAE | $32,986 | $11,575 | $27,232 | $15,525 | $11,905 | | Total losses and expenses | $208,506 | $172,654 | $177,943 | $146,376 | $124,892 | | Net income | $555,713 | $467,363 | $379,747 | $222,606 | $157,331 | | Basic EPS | $5.68 | $4.80 | $4.07 | $2.45 | $1.74 | | Diluted EPS | $5.66 | $4.77 | $3.99 | $2.41 | $1.72 | | Dividends declared per common share | $0.30 | $— | $— | $— | $— | Balance Sheet Data (In thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total investments | $3,429,620 | $2,791,018 | $2,305,565 | $1,615,102 | $1,276,634 | | Total assets | $3,873,425 | $3,149,971 | $2,674,368 | $1,882,998 | $1,469,099 | | Reserve for losses and LAE | $69,362 | $49,464 | $46,850 | $28,142 | $17,760 | | Unearned premium reserve | $278,887 | $295,467 | $259,672 | $219,616 | $201,045 | | Credit facility borrowings | $224,237 | $223,664 | $248,591 | $100,000 | N/A | | Total stockholders' equity | $2,984,845 | $2,365,717 | $1,940,436 | $1,343,773 | $1,119,241 | Selected Additional Data | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | New insurance written (NIW) | $63,569,183 | $47,508,525 | $43,858,322 | $34,949,319 | $26,193,656 | | Loss ratio | 4.2% | 1.8% | 5.1% | 3.7% | 3.6% | | Expense ratio | 21.3% | 23.2% | 27.5% | 30.9% | 34.6% | | Combined ratio | 25.5% | 25.0% | 32.6% | 34.5% | 38.3% | | Return on average equity | 20.8% | 21.7% | 23.1% | 18.1% | 15.2% | Insurance Portfolio ($ in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Insurance in force | $164,005,853 | $137,720,786 | $110,461,950 | $83,265,522 | $65,242,453 | | Risk in force | $38,947,857 | $33,892,869 | $27,443,985 | $20,627,317 | $16,073,174 | | Policies in force | 702,925 | 608,135 | 496,477 | 375,898 | 297,437 | | Loans in default | 5,947 | 4,024 | 4,783 | 1,757 | 1,028 | | Percentage of loans in default | 0.85% | 0.66% | 0.96% | 0.47% | 0.35% | Insurance Company Capital ($ in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | U.S. Mortgage Insurance Subsidiaries Combined statutory capital | $2,335,828 | $1,886,929 | $1,528,869 | $1,144,279 | $913,182 | | Essent Guaranty, Inc. Risk-to-capital ratio | 13.1:1 | 14.4:1 | 14.7:1 | 15.3:1 | 15.7:1 | | Combined Risk-to-capital ratio | 12.6:1 | 13.9:1 | 14.2:1 | 14.7:1 | 15.2:1 | | Essent Reinsurance Ltd. Stockholder's equity (GAAP basis) | $939,360 | $798,612 | $662,819 | $401,273 | $220,178 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Essent's financial performance, condition, and cash flows, detailing factors influencing revenues, expenses, net income, and key performance indicators, alongside liquidity and capital resources - Net income increased to $555.7 million in 2019 from $467.4 million in 2018, primarily driven by growth in net premiums earned and net investment income, partially offset by increases in the provision for losses and loss adjustment expense (LAE), other underwriting and operating expenses, and income taxes[428][429] - Legislative and regulatory developments significantly impact results, including ongoing GSE reform discussions, compliance with PMIERs 2.0 (Essent Guaranty was compliant as of Dec 31, 2019), and the effects of the Dodd-Frank Act's Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) definitions on market size and demand for private mortgage insurance[383][384][385][387][388][389][390][391] - The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the U.S. corporate tax rate to 21% effective January 1, 2018, resulting in a one-time $85.1 million income tax benefit in 2017. The company is evaluating potential impacts of proposed PFIC regulations[393] Net Premiums Earned and Written (In thousands) | Metric | 2019 | 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net premiums earned | $777,425 | $649,492 | +20% | | Net premiums written | $760,845 | $685,287 | +11% | - The increase in net premiums earned was due to a rise in average Insurance In Force (IIF) from $123.4 billion in 2018 to $152.0 billion in 2019, partially offset by a decrease in the average net premium rate from 0.50% to 0.49% due to increased ceded premiums under third-party reinsurance agreements and pricing changes[430] Net Investment Income (In thousands) | Metric | 2019 | 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Net investment income | $83,542 | $64,091 | +30.3% | | Average cash and investment portfolio balance | ~$3.1 billion | ~$2.6 billion | +19.2% | | Pre-tax investment income yield | 2.8% | 2.6% | +0.2 pp | Loans in Default and Reserves (In thousands) | Metric | 2019 | 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Ending default inventory | 5,947 | 4,024 | +47.8% | | Provision for losses and LAE | $32,986 | $11,575 | +185% | | Average case reserve per default | $10.6 | $11.3 | -6.2% | | Favorable prior years' loss development | $17,576 | $24,863 | -29.3% | - Other underwriting and operating expenses increased to $165.4 million in 2019 from $150.9 million in 2018, driven by higher compensation and benefits (due to stock compensation and overtime) and general business expansion costs. Interest expense remained stable at $10.2 million[444][445][446] Key Performance Indicators (as of December 31) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Insurance In Force (IIF) | $164.0 billion | $137.7 billion | | Persistency Rate | 77.5% | 84.9% | | Average Net Premium Rate | 0.49% | 0.50% | | Combined Risk-to-Capital Ratio (U.S. MI Subsidiaries) | 12.6:1 | 13.9:1 | - The company maintains substantial liquidity with $71.4 million in cash, $315.4 million in short-term investments, and $3.0 billion in fixed maturity investments as of December 31, 2019. Essent Guaranty's Available Assets of $2.34 billion exceeded its PMIERs 2.0 Minimum Required Assets of $1.50 billion[453][472] Consolidated Cash Flows (In thousands) | Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $589,848 | $625,321 | $368,573 | | Net cash used in investing activities | $(545,076) | $(546,905) | $(690,142) | | Net cash (used in) provided by financing activities | $(38,368) | $(56,994) | $337,562 | | Net increase in cash | $6,404 | $21,422 | $15,993 | - Essent Group Ltd. paid its inaugural quarterly cash dividend of $0.15 per common share in September and December 2019. Its U.S. insurance subsidiaries are subject to capital and dividend restrictions, but were in compliance as of December 31, 2019[463][458] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section details Essent's exposure to market risks within its investment portfolio, primarily from interest rate fluctuations, and outlines management strategies through a defined investment policy - Essent's investment portfolio is exposed to market risk, primarily from fluctuations in U.S. markets. Key drivers include changes in the level and term structure of interest rates, market volatility, credit quality of investments, concentration risk, and prepayment risk[503][504][505][506] - Market risk is managed through a defined investment policy, implemented by the treasury function with oversight from the board of directors and senior management. The policy sets limits for asset sectors, single issuers, credit ratings, asset duration, and geographic concentration[127][504] - As of December 31, 2019, the effective duration of investments available for sale was 3.1 years (3.5 years excluding short-term investments), indicating sensitivity to yield curve shifts[508] Item 8. Financial Statements and Supplementary Data This section presents Essent Group Ltd.'s audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes, offering a comprehensive financial overview Consolidated Balance Sheets (In thousands) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total investments | $3,429,620 | $2,791,018 | | Cash | $71,350 | $64,946 | | Total assets | $3,873,425 | $3,149,971 | | Reserve for losses and LAE | $69,362 | $49,464 | | Unearned premium reserve | $278,887 | $295,467 | | Credit facility borrowings | $224,237 | $223,664 | | Total liabilities | $888,580 | $784,254 | | Total stockholders' equity | $2,984,845 | $2,365,717 | Consolidated Statements of Comprehensive Income (In thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net premiums earned | $777,425 | $649,492 | $530,130 | | Net investment income | $83,542 | $64,091 | $40,226 | | Total revenues | $867,567 | $719,353 | $576,511 | | Provision for losses and LAE | $32,986 | $11,575 | $27,232 | | Total losses and expenses | $208,506 | $172,654 | $177,943 | | Net income | $555,713 | $467,363 | $379,747 | | Basic earnings per share | $5.68 | $4.80 | $4.07 | | Diluted earnings per share | $5.66 | $4.77 | $3.99 | Consolidated Statements of Cash Flows (In thousands) | Activity | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $589,848 | $625,321 | $368,573 | | Net cash used in investing activities | $(545,076) | $(546,905) | $(690,142) | | Net cash (used in) provided by financing activities | $(38,368) | $(56,994) | $337,562 | | Net increase in cash | $6,404 | $21,422 | $15,993 | Investments Available for Sale by Asset Class (Fair Value, In thousands) | Asset Class | 2019 | % of Total | 2018 | % of Total | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury securities | $242,206 | 7.2% | $289,892 | 10.5% | | U.S. agency mortgage-backed securities | $848,334 | 25.3% | $637,178 | 23.1% | | Corporate debt securities | $880,301 | 26.3% | $725,201 | 26.3% | | Money market funds | $315,362 | 9.4% | $139,083 | 5.1% | | Total Investments Available for Sale | $3,350,747 | 100.0% | $2,760,066 | 100.0% | Investments Available for Sale by Rating (Fair Value, In thousands) | Rating | 2019 | % of Total | 2018 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Aaa | $1,817,905 | 54.2% | $1,362,781 | 49.4% | | Baa3 | $65,119 | 1.9% | $26,805 | 1.0% | | Below Baa3 | $59,210 | 1.8% | $36,038 | 1.3% | | Total Investments Available for Sale | $3,350,747 | 100.0% | $2,760,066 | 100.0% | Investments Available for Sale by Effective Duration (Fair Value, In thousands) | Effective Duration | 2019 | % of Total | 2018 | % of Total | | :--- | :--- | :--- | :--- | :--- | | < 1 Year | $1,038,782 | 31.0% | $529,545 | 19.2% | | 5 or more Years | $852,580 | 25.5% | $985,889 | 35.7% | | Total Investments Available for Sale | $3,350,747 | 100.0% | $2,760,066 | 100.0% | Reconciliation of Reserve for Losses and LAE (In thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Reserve for losses and LAE at beginning of year | $49,464 | $46,850 | $28,142 | | Net incurred losses and LAE during the current year | $32,986 | $11,575 | $27,232 | | Net loss and LAE payments during the current year | $13,159 | $8,961 | $8,524 | | Reserve for losses and LAE at end of year | $69,362 | $49,464 | $46,850 | Quarterly Financial Data (Unaudited, In thousands, except per share amounts) | Metric | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net premiums earned | $207,671 | $203,473 | $188,490 | $177,791 | | Net income | $146,958 | $144,630 | $136,405 | $127,720 | | Basic earnings per common share | $1.50 | $1.48 | $1.39 | $1.31 | | Diluted earnings per common share | $1.49 | $1.47 | $1.39 | $1.30 | Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure matters Item 9A. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[735] - Management assessed and determined that the company maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in the Internal Control - Integrated Framework (2013) issued by COSO[738] - There have been no changes in the company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[740] Item 9B. Other Information This item indicates that there is no other information to report Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance is incorporated by reference from its definitive proxy statement for the 2020 Annual General Meeting of Shareholders Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the company's definitive proxy statement for the 2020 Annual General Meeting of Shareholders Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership information from the proxy statement and details securities authorized for issuance under equity compensation plans as of December 31, 2019 Securities Authorized for Issuance Under Equity Compensation Plans (as of December 31, 2019) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 355,675 | (2) Not applicable | 4,232,379 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 355,675 | — | 4,232,379 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, as well as director independence, is incorporated by reference from the company's definitive proxy statement for the 2020 Annual General Meeting of Shareholders Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement for the 2020 Annual General Meeting of Shareholders Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Annual Report, including the financial statements, financial statement schedules, and a comprehensive list of exhibits - The Annual Report includes financial statements and financial statement schedules as listed in Item 8[757][758] - Exhibits filed include the Memorandum of Association, Amended and Restated Bye-laws, Registration Rights Agreement, Asset Purchase Agreement, various incentive plans and restricted share agreements, employment agreements, indemnification agreements, the Amended and Restated Credit Agreement, List of Subsidiaries, Consents, and Certifications (CEO, CFO, Sarbanes-Oxley Act)[759][760] Item 16. Form 10-K Summary This item states that no Form 10-K Summary is provided in this Annual Report Signatures This section contains the required signatures of the registrant's authorized persons, including the Chairman of the Board of Directors, Chief Executive Officer and President, Senior Vice President, Chief Financial Officer, Vice President, Chief Accounting Officer, and other directors, certifying the report as of February 14, 2020 - The report was signed on behalf of Essent Group Ltd. by Mark A. Casale (Chairman of the Board of Directors, Chief Executive Officer and President), Lawrence E. McAlee (Senior Vice President, Chief Financial Officer), David B. Weinstock (Vice President, Chief Accounting Officer), and other directors[764][766] - The report was signed on February 14, 2020[763][766]