Essent .(ESNT) - 2021 Q4 - Annual Report

Part I Item 1. Business Essent Group Ltd. provides private mortgage insurance, reporting $84.2 billion NIW and $207.2 billion IIF in 2021 under extensive regulation Overview Essent, a private MI provider, reported $84.2 billion NIW and $207.2 billion IIF in 2021, with defaults significantly decreasing to 16,963 loans Key Business Metrics (2019-2021) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | New Insurance Written (NIW) | $84.2 billion | $107.9 billion | $63.6 billion | | Insurance in Force (at year-end) | $207.2 billion | - | - | - Essent Re, the company's Bermuda-based subsidiary, increased its quota share reinsurance coverage of Essent Guaranty's NIW from 25% to 35%, effective January 1, 2021[41] - The number of insured loans in default status decreased significantly from 31,469 at the end of 2020 to 16,963 at the end of 2021, representing 2.2% of policies in force, as economic conditions improved and forbearance plans concluded[46] Our Industry The $12.3 trillion U.S. mortgage market saw private MI's share reach 50% in 2021, facing intense competition from six private insurers and government programs - In 2021, total U.S. residential mortgage origination volume was estimated at $3.99 trillion, comprising $1.65 trillion in purchase originations and $2.34 trillion in refinancing originations, driven by historically low interest rates[53] - Private mortgage insurance's share of the total insured market has grown significantly since the 2008 financial crisis, reaching an estimated 50% in 2021[56] - The private mortgage insurance industry consists of six active insurers, including Essent Guaranty, competing on factors like pricing, customer relationships, underwriting guidelines, and financial strength[64] Our Products and Services Essent offers primary and pool mortgage insurance, with primary coverage averaging 25%, and provides reinsurance through Essent Re for new business - The company's primary mortgage insurance risk coverage generally averages 25% of the underlying loan balance but can range from 6% to 35%[68] - Effective March 1, 2020, Essent implemented a new master policy consistent with GSE Rescission Relief Principles, which provides rescission relief for loans that remain current for 36 months or have made 60 payments, with certain exceptions for fraud[76] - Through its Bermuda subsidiary Essent Re, the company increased its quota share reinsurance of Essent Guaranty's new insurance written (NIW) from 25% to 35% effective January 1, 2021[78] Our Mortgage Insurance Portfolio Essent's $207.2 billion IIF as of Dec 2021 is high-quality, with 41.3% from FICO 760+ borrowers, and geographically diversified Insurance in Force (IIF) by Policy Year (as of Dec 31, 2021) | Policy Year | IIF ($ in thousands) | | :--- | :--- | | 2021 | $79,832,367 | | 2020 | $76,550,717 | | 2019 | $20,252,049 | | 2018 | $9,482,084 | | 2017 | $8,509,847 | | 2016 and prior | $12,563,480 | | Total | $207,190,544 | Portfolio by Credit Score (IIF as of Dec 31, 2021) | FICO Score | IIF ($ in thousands) | % of Total | | :--- | :--- | :--- | | >=760 | $85,501,113 | 41.3% | | 740-759 | $35,111,019 | 17.0% | | 720-739 | $31,158,325 | 15.0% | | 700-719 | $26,105,790 | 12.6% | | 680-699 | $16,819,629 | 8.1% | | <=679 | $12,494,668 | 6.0% | | Total | $207,190,544 | 100.0% | - The company's insurance portfolio is geographically diversified. As of December 31, 2021, the top three states by Insurance in Force (IIF) were California (13.1%), Texas (9.9%), and Florida (9.7%)[89][91] Customers, Sales and Marketing Essent serves mortgage originators, with top ten customers generating 41.6% of NIW in 2021, using a relationship-focused, non-commission sales strategy - The top ten customers generated 41.6% of the company's New Insurance Written (NIW) on a flow basis for the year ended December 31, 2021[95] - The company employs a collaborative sales approach that includes regular portfolio reviews, joint product development, and customer training to build deep relationships with lenders[96][97][98][99] - Essent utilizes a non-commission-based compensation structure for its sales force, which includes an equity ownership program to align their efforts with long-term corporate goals like customer service and risk selection[104] Underwriting and Risk Management Essent uses GSE-consistent underwriting (69% delegated), managing risk via a comprehensive framework and third-party reinsurance arrangements - As of December 31, 2021, approximately 69% of the company's insurance in force was originated through its delegated underwriting program, where customers underwrite loans based on Essent's guidelines[116] - The company's risk management framework covers the entire "loan life cycle," which includes three components: customer qualification, policy acquisition (underwriting and pricing), and portfolio management (quality assurance and surveillance)[120] - Essent utilizes third-party reinsurance to manage risk exposure and capital, employing arrangements such as fully collateralized excess of loss reinsurance (via insurance-linked notes) and quota share reinsurance[126][127] Defaults and Claims Essent's default rate fell from 3.93% to 2.16% in 2021, with 16,963 loans in default, influenced by GSE forbearance programs and various claim settlement options Default Status Comparison | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Number of policies in force | 785,119 | 799,893 | | Loans in default | 16,963 | 31,469 | | Percentage of loans in default | 2.16% | 3.93% | - The company believes that GSE forbearance programs for borrowers impacted by COVID-19 could have a favorable effect on the frequency of claims ultimately paid, as these programs provide borrowers more time and resources to cure defaults[135] - Upon a valid claim, the company generally has three settlement options: pay a percentage of the claim amount and let the customer keep the property, pay the actual loss amount after an approved third-party sale, or pay the full claim amount and acquire the property[138] Regulation Essent is subject to extensive U.S. federal and state regulations, including GSE PMIERs and Dodd-Frank Act rules, plus Bermuda Monetary Authority oversight - The company's primary U.S. insurance subsidiary, Essent Guaranty, is subject to the Private Mortgage Insurer Eligibility Requirements (PMIERs) set by the GSEs, which include risk-based financial strength requirements. The company was in compliance with the latest version, PMIERs 2.0, as of December 31, 2021[149] - The Dodd-Frank Act impacts the business through the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules, which affect the size of the mortgage market and the demand for private mortgage insurance[162][167][169] - The company's Bermuda reinsurance subsidiary, Essent Reinsurance Ltd., is registered as a Class 3A insurer and is regulated by the Bermuda Monetary Authority (BMA), which imposes solvency, liquidity, and reporting requirements[192][196] Human Capital Management Essent had 343 employees in 2021, with 95% retention, an ownership culture (90%+ equity), and a workforce 63% women and minorities - The company had 343 employees as of December 31, 2021, and reports a high employee retention rate of approximately 95% over the past 5 years[215][216] - Essent promotes an ownership culture by granting equity to all employees; as of year-end 2021, over 90% of the workforce had received equity share awards[217] - The company's workforce is approximately 63% comprised of women and minorities as of December 31, 2021[220] Item 1A. Risk Factors The company faces significant risks from pandemic impacts, operational challenges, regulatory changes, and tax implications from its Bermuda-based structure Risks Relating to the COVID-19 Pandemic The company faces significant uncertainty from the COVID-19 pandemic, risking higher policy losses, increased delinquencies, and impacts on capital and reinsurance - The company faces risk that policy losses from COVID-19 may be substantially different than the loss reserves established, as reserves are based on estimates subject to significant uncertainty and do not account for future losses from loans not yet delinquent[231] - A deterioration in homeowners' ability to make mortgage payments could increase delinquencies, including those related to forbearance, which would in turn increase the amount of regulatory and PMIERs capital the company is required to hold[232] Risks Relating to the Operation of Our Business Operational risks include intense competition, customer concentration (41.6% NIW from top ten), declining low down payment originations, and investment volatility - The company faces intense competition from the other five active private mortgage insurers, which could lead to price reductions or loosening of underwriting standards to gain market share[240] - The company is reliant on its largest customers, with the top ten generating 41.6% of NIW in 2021. The loss of a significant customer could materially impact new business volume[241] - Loss reserves are established only for loans in default, not based on ultimate loss estimates for the entire portfolio. This means future losses on currently performing loans are not reflected in the financial statements and could materially impact future results as defaults occur[260][261] Risks Relating to Regulation and Litigation Regulatory risks include dependence on GSEs, potential changes to PMIERs, Dodd-Frank Act rules, and broad state/Bermuda insurance regulations, plus litigation - The company's business is highly dependent on the GSEs. Legislative or regulatory actions that change the GSEs' role, charters, or requirements for private mortgage insurance could significantly reduce revenues and profitability[294][297] - Changes to the GSEs' Private Mortgage Insurer Eligibility Requirements (PMIERs) could negatively impact the company's ability to write business, generate expected returns, or participate in the market[303][305] - The Dodd-Frank Act's rules for Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) could adversely affect the demand for private mortgage insurance if they reduce the overall mortgage origination market or create incentives for lenders to use government insurance programs[306][311] Risks Relating to Taxes and Our Corporate Structure The Bermuda holding structure poses tax risks, including potential U.S. federal income tax for non-U.S. subsidiaries and CFC rules for U.S. shareholders - There is a risk that the IRS could successfully contend that Essent Group Ltd. or its non-U.S. subsidiaries are engaged in a U.S. trade or business, which would subject them to U.S. federal income and branch profits taxes[328] - U.S. shareholders owning 10% or more of the company's stock (by vote or value) may be subject to current U.S. income tax on their pro rata share of the company's "subpart F income" under the Controlled Foreign Corporation (CFC) rules[330][332] - Dividend payments from U.S. insurance subsidiaries to the parent holding company are restricted by state insurance laws, which could impact the holding company's liquidity and ability to pay its own dividends or fund operations[347] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - Not applicable[385] Item 2. Properties The company leases office facilities in Pennsylvania, North Carolina, California, and Bermuda, which management deems adequate for current operations - The company leases its office facilities in Pennsylvania, North Carolina, California, and Bermuda and believes its current properties are adequate for its needs[386] Item 3. Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings[387] Item 4. Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[388] Part II Item 5. Market for Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Essent Group Ltd. common shares trade on NYSE (ESNT), with quarterly dividends increasing to $0.19/share in Q4 2021, and $69.6 million in Q4 2021 share repurchases Quarterly Dividends per Share (2021) | Quarter | Dividend per Share | | :--- | :--- | | Q1 2021 | $0.16 | | Q2 2021 | $0.17 | | Q3 2021 | $0.18 | | Q4 2021 | $0.19 | Share Repurchases (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2021 | 422,963 | $46.92 | | Nov 2021 | 442,230 | $46.55 | | Dec 2021 | 654,806 | $43.52 | | Total | 1,519,999 | - | - As of December 31, 2021, $92.2 million remained available for share repurchases under the company's $250 million share repurchase plan announced in May 2021[398] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Essent reported $681.8 million net income in 2021, driven by reduced loss provisions, stable premiums, strong capital ($3.17 billion PMIERs Available Assets), and capital returns Results of Operations Net income rose to $681.8 million in 2021, driven by a sharp reduction in loss provisions, with stable net premiums earned and increased investment income Consolidated Results of Operations (in thousands) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net premiums earned | $872,543 | $862,564 | $777,425 | | Total revenues | $1,028,510 | $955,154 | $867,567 | | Provision for losses and LAE | $31,057 | $301,293 | $32,986 | | Total losses and expenses | $206,196 | $465,058 | $208,506 | | Income before income taxes | $822,314 | $490,096 | $659,061 | | Net income | $681,783 | $413,041 | $555,713 | - The decrease in the provision for losses and LAE in 2021 was primarily due to a decrease in new defaults reported, cure activity for existing defaults, and favorable housing price appreciation[466] - The average net premium rate decreased from 0.46% in 2020 to 0.41% in 2021, driven by an increase in ceded premiums, changes in the mix of insured mortgages, and a decrease in accelerated earnings from canceled single premium policies[459] Liquidity and Capital Resources Essent maintained strong liquidity with $81.5 million cash and $4.9 billion investments, robust operating cash flow, and Essent Guaranty's PMIERs Available Assets at 177% of required Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $709,256 | $727,931 | $589,848 | | Net cash used in investing activities | ($583,167) | ($1,154,417) | ($545,076) | | Net cash (used in) provided by financing activities | ($147,428) | $457,966 | ($38,368) | - As of December 31, 2021, Essent Guaranty's Available Assets under PMIERs 2.0 were $3.17 billion, representing 177% of its Minimum Required Assets of $1.79 billion, indicating a strong capital buffer[502] - The combined statutory risk-to-capital ratio for the U.S. insurance subsidiaries was 10.4 to 1 as of December 31, 2021, well within the regulatory limit of 25.0 to 1[455][499] Critical Accounting Policies Critical accounting policies involve significant estimates for premium revenue, loss reserves (only for defaulted loans), income taxes, and investment valuation - The company establishes loss reserves for its best estimate of ultimate claim costs but only for loans that are already in default (at least two consecutive missed payments). It does not establish reserves for future claims on currently performing loans[526] - Revenue from single premium policies is deferred as unearned premium and recognized over the estimated life of the policy. If a policy is canceled and the premium is non-refundable, the remaining unearned premium is immediately recognized as earned[525] - The company evaluates the realizability of deferred tax assets by considering future taxable income, tax planning strategies, and economic outlooks. As of year-end 2021, management concluded it was more likely than not that deferred tax assets would be realized[529] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is its investment portfolio, sensitive to interest rates, credit quality, and volatility, with a 4.0-year effective duration - The company's main market risks include changes in interest rates, credit quality of investments, concentration risk, and prepayment risk[537][538][539] - As of December 31, 2021, the effective duration of the company's investments available for sale was 4.0 years. This implies a 100 basis point parallel shift in interest rates would change the portfolio's fair value by approximately 4.0%[541] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021, with an unqualified auditor's opinion on both financials and internal controls Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on Essent's 2021 financial statements and internal controls, noting loss reserve valuation as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects and that the company maintained effective internal control over financial reporting[551] - The audit identified the "Valuation of the Reserve for Losses and Loss Adjustment Expenses" as a critical audit matter due to the significant judgment and complexity involved in management's estimates of claim rates and sizes[559][560] Consolidated Financial Statements As of Dec 31, 2021, total assets were $5.72 billion, liabilities $1.49 billion, equity $4.24 billion, with $681.8 million net income and $6.11 diluted EPS Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Investments | $5,133,359 | $4,654,277 | | Total Assets | $5,722,174 | $5,202,724 | | Reserve for losses and LAE | $407,445 | $374,941 | | Total Liabilities | $1,486,060 | $1,340,091 | | Total Stockholders' Equity | $4,236,114 | $3,862,633 | Consolidated Income Statement Data (in thousands) | Account | 2021 | 2020 | | :--- | :--- | :--- | | Net premiums earned | $872,543 | $862,564 | | Total revenues | $1,028,510 | $955,154 | | Provision for losses and LAE | $31,057 | $301,293 | | Net income | $681,783 | $413,041 | | Diluted EPS | $6.11 | $3.88 | Notes to Consolidated Financial Statements Notes detail accounting policies, investments, reinsurance, loss reserves (including COVID-19 impact), stock compensation, and statutory capital requirements - The company utilizes both quota share and excess of loss reinsurance to manage risk. As of Dec 31, 2021, risk in force (RIF) ceded under its third-party quota share agreement was $4.6 billion. It also had multiple excess of loss transactions covering various vintage years[632][633] - The reserve for losses and LAE at Dec 31, 2021, includes $243.0 million for "Early COVID Defaults" (defaults from April-Sept 2020). The company believes these defaults will have a lower claim rate than historical defaults due to forbearance programs[647][650] - The company's U.S. insurance subsidiaries are required to maintain statutory capital. As of Dec 31, 2021, Essent Guaranty's statutory surplus was $1.04 billion, and its contingency reserve was $1.79 billion. The company was in compliance with all statutory and GSE (PMIERs) capital requirements[738][739][740] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting or financial disclosure matters - None[768] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Based on an evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[769] - Management's assessment concluded that the company maintained effective internal control over financial reporting as of December 31, 2021[772] Part III Item 10. Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2022 Annual General Meeting of Shareholders proxy statement - Information is incorporated by reference to the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders[779] Item 11. Executive Compensation Information for this item is incorporated by reference from the company's 2022 Annual General Meeting of Shareholders proxy statement - Information is incorporated by reference to the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders[780] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with 488,775 securities to be issued and 3.2 million available for future issuance under equity plans Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Number of Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 488,775 | N/A | 3,203,705 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 488,775 | — | 3,203,705 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2022 Annual General Meeting of Shareholders proxy statement - Information is incorporated by reference to the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders[785] Item 14. Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2022 Annual General Meeting of Shareholders proxy statement - Information is incorporated by reference to the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders[789] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate governance documents and certifications - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consents and certifications required by the Sarbanes-Oxley Act[791][792][793]