Essent .(ESNT) - 2022 Q4 - Annual Report

Part I Item 1. Business Essent Group Ltd. is a private mortgage insurance company providing credit protection to lenders, with $63.1 billion in New Insurance Written and $227.1 billion in Insurance in Force for 2022 - Essent Guaranty, the primary U.S. mortgage insurance subsidiary, holds strong financial strength ratings: A3 (Stable) from Moody's, BBB+ (Stable) from S&P, and A (Excellent) from A.M. Best[27] - The company also operates Essent Reinsurance Ltd. in Bermuda, which provides reinsurance for GSE risk-sharing transactions and reinsures a portion of Essent Guaranty's NIW, with quota share reinsurance coverage increasing from 25% to 35% for NIW effective January 1, 2021[28][58] - As of December 31, 2022, the default rate on insured loans was 1.66% (13,433 loans), a decrease from 2.16% (16,963 loans) at the end of 2021, showing improvement as pandemic-related forbearances resolve[31][106] Key Business Metrics (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | New Insurance Written (NIW) | $63.1 billion | $84.2 billion | $107.9 billion | | Insurance in Force (IIF) at Year-End | $227.1 billion | $207.2 billion | $198.9 billion | | NIW from Top 10 Customers | 39.9% | 41.6% | 35.8% | Our Industry and Competition The U.S. residential mortgage market, driven by GSEs, relies on private mortgage insurance for low down payment loans, with the industry's market share growing to an estimated 48% in 2022 amidst intense competition from six private insurers and government programs - The private mortgage insurance industry's share of the total insured market has more than doubled since 2009, reaching an estimated 48% in 2022[39] - The industry consists of six active private mortgage insurers: Essent Guaranty, Arch Mortgage Insurance, Enact Holdings, MGIC, National Mortgage Insurance, and Radian Guaranty[43] - Competition also comes from government agencies (FHA, VA), state-sponsored funds, and alternative products like 'piggyback loans' that eliminate the need for PMI[44][45] Our Products and Services Essent primarily offers loan-by-loan primary mortgage insurance, with premiums paid monthly or upfront, and its Bermuda subsidiary, Essent Re, increased its quota share reinsurance of Essent Guaranty's New Insurance Written to 35% - The majority of policies are primary mortgage insurance, with risk coverage typically ranging from 6% to 35% of the underlying loan balance[47][48] - Premium payments are primarily structured as monthly or single premium policies, with substantially all policies being of these types as of December 31, 2022[50][54] - Essent Re, the Bermuda subsidiary, increased its quota share reinsurance of Essent Guaranty's NIW from 25% to 35% effective January 1, 2021[58] Our Mortgage Insurance Portfolio As of December 31, 2022, Essent's $227.1 billion insurance in force demonstrates high credit quality, with 84.3% originated in the last three years, 41.1% from borrowers with FICO scores >=760, and a geographically diverse concentration Insurance in Force (IIF) by Policy Year (as of Dec 31, 2022) | Year | IIF ($ thousands) | % of Total | | :--- | :--- | :--- | | 2022 | $60,609,538 | 26.7% | | 2021 | $71,533,600 | 31.5% | | 2020 | $59,228,334 | 26.1% | | 2019 | $14,742,465 | 6.5% | | 2018 | $6,714,277 | 3.0% | | 2017 and prior | $14,233,841 | 6.2% | | Total | $227,062,055 | 100.0% | Portfolio by FICO Score (IIF as of Dec 31, 2022) | FICO Score | IIF ($ thousands) | % of Total | | :--- | :--- | :--- | | >=760 | $93,389,066 | 41.1% | | 740-759 | $38,842,311 | 17.2% | | 720-739 | $34,981,632 | 15.4% | | 700-719 | $29,146,543 | 12.8% | | 680-699 | $18,859,824 | 8.3% | | <=679 | $11,842,679 | 5.2% | Portfolio by LTV (IIF as of Dec 31, 2022) | LTV | IIF ($ thousands) | % of Total | | :--- | :--- | :--- | | 85.00% and below | $24,454,468 | 10.8% | | 85.01% to 90.00% | $63,436,445 | 27.8% | | 90.01% to 95.00% | $107,932,064 | 47.6% | | 95.01% and above | $31,239,078 | 13.8% | - The portfolio is geographically diverse, with the top three states (California, Texas, Florida) accounting for 33.8% of total IIF as of December 31, 2022[70][72] Underwriting and Risk Management Essent employs a balanced underwriting approach, with 71% of its insurance in force originated through its delegated program, and manages risk through a comprehensive loan life cycle framework supported by third-party reinsurance - As of December 31, 2022, approximately 71% of insurance in force was originated through the Delegated Underwriting program, up from 66% in the prior year[93] - The risk management process is structured around the "loan life cycle," encompassing customer qualification, policy acquisition (underwriting and pricing), and portfolio management (quality assurance and surveillance)[97] - The company uses various third-party reinsurance arrangements, including fully collateralized excess of loss coverage and quota share agreements, to hedge against adverse losses, provide capital relief, and diversify capital sources[102] Regulation Essent is subject to extensive federal and state regulation, including GSEs' PMIERs, state insurance laws governing capital and rates, and federal laws like the Dodd-Frank Act, while its Bermuda subsidiary operates under a less restrictive framework - Essent Guaranty is in compliance with the GSEs' Private Mortgage Insurer Eligibility Requirements (PMIERs), which are critical for its ability to insure loans sold to Fannie Mae and Freddie Mac[123] - State insurance regulations, particularly in its domicile of Pennsylvania, govern capital levels, dividend payments, and transactions with affiliates, with control presumed if a person acquires 10% or more of voting securities, requiring prior regulatory approval[124][127] - Federal regulations such as the Dodd-Frank Act's QM and QRM rules directly impact the size of the residential mortgage market and the demand for private mortgage insurance[135][139][141] - The Bermuda-based subsidiary, Essent Reinsurance Ltd., is registered as a Class 3A insurer and is subject to the Bermuda Insurance Act, which imposes solvency, liquidity, and reporting standards supervised by the BMA[158][162] Item 1A. Risk Factors The company faces significant risks related to intense industry competition, reliance on key customers, potential economic downturns, evolving regulatory requirements, and the tax implications of its corporate structure Risks Relating to the Operation of Our Business Operational risks include intense competition, significant customer concentration with the top ten customers accounting for 39.9% of NIW in 2022, and potential impacts from economic downturns or declining home values that could increase defaults and losses - Intense competition could negatively impact NIW if competitors reduce pricing or loosen underwriting guidelines[190] - The top ten customers accounted for 39.9% of NIW in 2022, and one customer represented more than 10% of consolidated revenues, highlighting significant customer concentration risk[191] - A downturn in the U.S. economy or a decline in home values could lead to more defaults and increase losses, as could catastrophic events[209] - Loss reserves are established only for loans in default, not based on ultimate loss estimates for the entire portfolio, which could lead to disproportionate adverse effects on earnings in certain periods[208] Risks Relating to Regulation and Litigation The company's business is highly dependent on GSEs, making it vulnerable to legislative or regulatory changes to their role, evolving PMIERs, and the impact of federal rules like QM/QRM and Basel IV capital rules - The business is highly dependent on the GSEs; legislative or regulatory actions changing their role or credit enhancement requirements could significantly reduce revenues[233][235] - Changes to the GSEs' PMIERs could negatively impact the company's ability to write mortgage insurance at current levels or generate anticipated returns[239] - The CFPB's QM rule and the multi-agency QRM rule could reduce the size of the mortgage origination market or create incentives for lenders to use government insurance programs over PMI[240][245] - The implementation of Basel IV rules for banking organizations could decrease the demand for mortgage insurance if it no longer provides a capital benefit for lenders[246][248] Risks Relating to Taxes and Our Corporate Structure Essent's Bermuda domicile poses tax risks, including potential U.S. federal income taxation, Controlled Foreign Corporation (CFC) rules for shareholders, Passive Foreign Investment Company (PFIC) classification, and limitations on dividend payments from regulated subsidiaries - The company's Bermuda-domiciled entities (Essent Group Ltd. and Essent Re) risk being subject to U.S. federal income tax if the IRS successfully contends they are engaged in a U.S. trade or business[256][257] - Due to attribution rules, Essent Reinsurance Ltd. is deemed a Controlled Foreign Corporation (CFC), subjecting any 10% U.S. Shareholder to current taxation on their pro rata share of "subpart F income"[259] - While management believes Essent Group Ltd. is not a Passive Foreign Investment Company (PFIC), changes in business circumstances or tax law could alter this status, leading to adverse tax consequences for U.S. investors[265][266] - As a holding company, Essent Group Ltd.'s ability to pay dividends is dependent on receiving dividends from its insurance subsidiaries, which are restricted by state insurance laws; for example, Essent Guaranty's 2022 dividends to its parent were $315.0 million[275][276] 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 quarterly dividends totaling $0.86 per share in 2022, and an authorized $250 million share repurchase plan that remained unutilized as of year-end 2022 - The company's common shares are traded on the New York Stock Exchange under the symbol "ESNT"[315] - As of December 31, 2022, the company was authorized to purchase up to $250 million of its common shares under a plan announced in May 2022, with the full amount remaining available[322] Quarterly Dividends per Share (2022) | Quarter | Dividend per Share | | :--- | :--- | | Q1 2022 | $0.20 | | Q2 2022 | $0.21 | | Q3 2022 | $0.22 | | Q4 2022 | $0.23 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For 2022, Essent reported $831.4 million net income, driven by a $174.7 million net benefit for losses due to favorable COVID-19 default development, despite a 3% decrease in net premiums earned, while maintaining a strong capital position with 174% of PMIERs Minimum Required Assets - The significant increase in net income for 2022 was primarily due to a $174.7 million benefit for losses, driven by a $164.1 million favorable revision to the estimated ultimate loss for early COVID-19 defaults[380][390] - The average net premium rate decreased from 0.41% in 2021 to 0.37% in 2022, primarily due to changes in the mix of mortgages insured, pricing changes, and fewer cancellations of non-refundable single premium policies[377][381] - As of December 31, 2022, Essent Guaranty's Available Assets under PMIERs were $3.19 billion, which is 174% of its Minimum Required Assets of $1.83 billion, indicating a strong capital buffer[422] Summary of Operations (2021 vs 2022) | Metric (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net premiums earned | $842,527 | $872,543 | | Total revenues | $1,000,824 | $1,028,510 | | (Benefit) provision for losses and LAE | $(174,704) | $31,057 | | Total losses and expenses | $12,637 | $206,196 | | Net income | $831,353 | $681,783 | Results of Operations Net income rose to $831.4 million in 2022 from $681.8 million in 2021, primarily due to a $174.7 million net benefit for losses, despite a 3% decrease in net premiums earned, while net investment income increased 40% - Net premiums earned decreased by 3% in 2022 due to a lower average net premium rate (0.37% vs 0.41% in 2021), partially offset by a 6% increase in average insurance in force[381] - The provision for losses and LAE was a benefit of $174.7 million in 2022, a significant reversal from the $31.1 million expense in 2021, primarily due to a decrease in the estimated ultimate loss for Early COVID Defaults and strong cure activity[388][395] - Net investment income increased 40% to $124.4 million in 2022, driven by a higher average investment portfolio balance ($5.1 billion vs. $4.7 billion) and an increased pre-tax yield (2.6% vs. 2.0%)[384] - The ending default inventory decreased to 13,433 loans at year-end 2022 from 16,963 loans at year-end 2021, with the default rate falling to 1.66% from 2.16%[389] Liquidity and Capital Resources As of December 31, 2022, Essent maintained substantial liquidity with $81.2 million in cash and $5.0 billion in investments, and its U.S. insurance subsidiaries were well-capitalized with a combined risk-to-capital ratio of 10.2 to 1 - The company has substantial liquidity, with $81.2 million in cash and $5.0 billion in total investments as of December 31, 2022[403][425] - Net cash from operating activities was $588.8 million in 2022, a decrease from $709.3 million in 2021, primarily due to changes in working capital and higher tax payments[408][409] - Essent Guaranty is in compliance with PMIERs, with Available Assets of $3.19 billion exceeding Minimum Required Assets of $1.83 billion as of December 31, 2022[421][422] U.S. Insurance Subsidiaries' Combined Statutory Capital (as of Dec 31, 2022) | Metric (in thousands) | Amount | | :--- | :--- | | Policyholders' surplus | $1,072,667 | | Contingency reserves | $2,105,484 | | Combined statutory capital | $3,178,151 | | Combined net risk in force | $32,265,701 | | Combined risk-to-capital ratio | 10.2:1 | Financial Condition As of December 31, 2022, stockholders' equity increased to $4.5 billion, supported by $5.0 billion in high-quality, primarily investment-grade fixed-income investments with an effective duration of 4.0 years - Stockholders' equity grew to $4.5 billion at year-end 2022 from $4.2 billion at year-end 2021, primarily due to $831.4 million in net income[424][379] - The effective duration of the investments available for sale portfolio was 4.0 years as of December 31, 2022, indicating that a 100 basis point parallel shift in the yield curve would change the portfolio's fair value by approximately 4.0%[465] Investments Available for Sale by Rating (as of Dec 31, 2022) | Rating | Fair Value ($ thousands) | Percent | | :--- | :--- | :--- | | Aaa to Aa3 | $2,901,029 | 61.1% | | A1 to A3 | $1,102,350 | 23.3% | | Baa1 to Baa3 | $645,218 | 13.6% | | Below Baa3 | $93,028 | 2.0% | | Total | $4,741,625 | 100.0% | Item 8. Financial Statements and Supplementary Data This section presents Essent Group Ltd.'s audited consolidated financial statements for 2022, including balance sheets and income statements, with PricewaterhouseCoopers LLP issuing an unqualified opinion and highlighting the valuation of loss reserves as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[472] - The auditor identified the valuation of the Reserve for Losses and Loss Adjustment Expenses as a Critical Audit Matter due to the significant management judgment involved in estimating claim rates and sizes, which required a high degree of auditor subjectivity and effort[478][480] Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Investments | $4,999,566 | $5,133,359 | | Total Assets | $5,723,797 | $5,722,174 | | Reserve for losses and LAE | $216,464 | $407,445 | | Total Liabilities | $1,261,488 | $1,486,060 | | Total Stockholders' Equity | $4,462,309 | $4,236,114 | Item 9A. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion confirmed by the independent auditor - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[673] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2022[676] - No material changes to the company's internal control over financial reporting occurred during the most recent fiscal quarter[678] Part III Items 10-14 Information for Items 10 through 14, covering governance, compensation, ownership, related transactions, and accounting fees, is incorporated by reference from the company's forthcoming 2023 proxy statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accounting fees and services is incorporated by reference from the forthcoming 2023 proxy statement[682][683][684] Part IV Item 15. Exhibits, Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents and required certifications - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[689]