Essent .(ESNT) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited Q1 2021 financial statements detail assets, liabilities, and equity, showing net income impacted by increased COVID-19 related loss reserves Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $5,331,846 | $5,202,724 | | Total Investments | $4,801,869 | $4,654,277 | | Cash | $81,022 | $102,830 | | Total Liabilities | $1,410,909 | $1,340,091 | | Reserve for losses and LAE | $411,123 | $374,941 | | Unearned premium reserve | $235,730 | $250,436 | | Total Stockholders' Equity | $3,920,937 | $3,862,633 | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (Unaudited) | Account | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Net premiums earned | $219,067 | $206,496 | | Total revenues | $244,797 | $228,840 | | Provision for losses and LAE | $32,322 | $8,063 | | Total losses and expenses | $76,612 | $52,142 | | Net income | $135,648 | $149,523 | | Diluted EPS | $1.21 | $1.52 | | Comprehensive income | $76,445 | $139,449 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $187,771 | $163,131 | | Net cash used in investing activities | ($186,259) | ($381,426) | | Net cash (used in) provided by financing activities | ($23,320) | $178,000 | | Net decrease in cash | ($21,808) | ($40,295) | Notes to Condensed Consolidated Financial Statements - Essent Guaranty reinsures a portion of its new insurance written (NIW) to its affiliate, Essent Re, with coverage increasing from 25% to 35% for new business effective January 1, 2021[37] - The company utilizes both quota share and excess of loss reinsurance agreements with third-party reinsurers and special purpose insurers (Radnor Re Transactions) to manage risk and capital[64][68][69] - As of March 31, 2021, insured loans in default totaled 29,080, including 26,874 classified as COVID-19 defaults, with a reserve for losses and LAE of $362.9 million for these defaults[80][83] - For defaults reported between April and September 2020 ("Early COVID Defaults"), the company established a reserve equal to approximately 7% of the risk in force, anticipating a lower claim rate due to forbearance programs, while resuming normal reserve methodology for defaults after September 2020[83] - In May 2021, the Board of Directors declared a quarterly cash dividend of $0.17 per share and approved a new share repurchase plan authorizing up to $250 million of its common shares through the end of 2022[91] - As of March 31, 2021, Essent Guaranty was in compliance with the Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0) set by the GSEs[130] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 performance, highlighting decreased net income due to higher loss provisions from COVID-19 defaults, despite increased net premiums earned and strong capital position Overview and COVID-19 Impact - The company generated new insurance written (NIW) of $19.3 billion for Q1 2021, up from $13.5 billion in Q1 2020, with total insurance in force (IIF) at $197.1 billion as of March 31, 2021[140] - Due to COVID-19, the company experienced a significant increase in new defaults in 2020, with "Early COVID Defaults" from Q2 and Q3 2020 reserved differently due to expected higher cure rates from forbearance programs and government stimulus[142] - For new defaults reported after September 30, 2020, the company reverted to its normal loss reserving methodology as their credit characteristics trended towards pre-pandemic levels[142] Key Performance Indicators Insurance In Force (IIF) Summary (in thousands) | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :--- | :--- | :--- | | IIF, beginning of period | $198,882,352 | $164,005,853 | | NIW - Flow | $19,254,014 | $13,549,299 | | Cancellations | ($21,045,175) | ($11,939,800) | | IIF, end of period | $197,091,191 | $165,615,503 | - The average net premium rate was 0.42% for Q1 2021, down from 0.48% for Q1 2020, due to increased ceded premiums, changes in business mix, and pricing changes[178] - The persistency rate, measuring the percentage of IIF remaining after 12 months, was 56.1% at March 31, 2021[153] - The combined risk-to-capital ratio for U.S. insurance companies was 10.6 to 1 as of March 31, 2021, well below the maximum permitted ratio of 25.0 to 1[179][226] Results of Operations - Net income decreased to $135.6 million in Q1 2021 from $149.5 million in Q1 2020, primarily due to a higher provision for losses and LAE[184] - Net premiums earned increased by 6% to $219.1 million in Q1 2021, driven by a higher average IIF, though the average net premium rate declined[185] - The provision for losses and LAE increased significantly to $32.3 million in Q1 2021 from $8.1 million in Q1 2020, mainly due to an increase in defaults related to COVID-19[191] Default Inventory Summary | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Beginning default inventory | 31,469 | 5,947 | | New defaults | 7,422 | 3,933 | | Cures | (9,737) | (3,914) | | Ending default inventory | 29,080 | 5,841 | - Other underwriting and operating expenses remained stable at $42.2 million in Q1 2021 compared to $41.9 million in Q1 2020[205] Liquidity and Capital Resources - As of March 31, 2021, the company had substantial liquidity, including $81.0 million in cash, $449.3 million in short-term investments, and $300 million available under its revolving credit facility[212] - Net cash and investments at the holding company level were $540.3 million at March 31, 2021[212] - Essent Guaranty's Available Assets under PMIERs 2.0 were $3.00 billion, exceeding the Minimum Required Assets of $1.86 billion as of March 31, 2021[229] - On May 5, 2021, Essent Guaranty paid a $100 million dividend to its parent, Essent US Holdings, Inc., after receiving required GSE approval[216] Quantitative and Qualitative Disclosures About Market Risk The company's investment portfolio faces market risks including interest rate, credit, concentration, and prepayment risks, with an effective duration of 3.9 years as of March 31, 2021 - The primary market risks managed by the company include interest rate changes, credit quality deterioration, concentration risk, and prepayment risk[257][258][259] - As of March 31, 2021, the effective duration of the company's investments available for sale was 3.9 years, implying a 3.9% change in fair value for every 100 basis point change in interest rates[261] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting - 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[262] - No changes occurred in the company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[263] 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[266] Risk Factors No material changes to risk factors have occurred since the 2020 Annual Report on Form 10-K - There have been no material changes in risk factors from those disclosed in the company's 2020 Annual Report on Form 10-K[267] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 70,521 common shares at an average price of $43.39 per share in Q1 2021, primarily for employee tax withholding, not a formal buyback program Repurchases of Securities (Q1 2021) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 1 - Jan 31, 2021 | — | N/A | | Feb 1 - Feb 28, 2021 | — | N/A | | Mar 1 - Mar 31, 2021 | 70,521 | $43.39 | | Total | 70,521 | N/A | - All repurchased shares were tendered by employees to satisfy tax withholding obligations related to the vesting of restricted shares and were not part of a publicly announced buyback program[268] Other Information The 2021 Annual General Meeting of Shareholders saw the election of directors, ratification of auditors, and a non-binding advisory vote on executive compensation that did not pass - The 2021 Annual General Meeting of Shareholders was held on May 5, 2021[270] - Shareholders elected three Class I directors: Jane P. Chwick, Aditya Dutt, and Roy J. Kasmar[272] - The appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for 2021 was ratified[276] - A non-binding, advisory vote on executive compensation did not receive majority approval, with 54.9 million votes against and 46.9 million votes for[276] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements in Inline XBRL format - Exhibits filed with the report include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[275] - The financial statements and notes were also submitted in Inline XBRL format as required[275]