Essent Group Ltd. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement. Unless noted otherwise, amounts are U.S. dollars.
Business context
Essent is a Bermuda-domiciled holding company whose main business is U.S. private mortgage insurance, primarily for low-down-payment loans sold to Fannie Mae and Freddie Mac. Its subsidiaries also provide reinsurance, including quota-share coverage and risk-share transactions. Essent reported $227.1 billion of insurance in force (IIF) at year-end and wrote $63.1 billion of new insurance (NIW) during 2022.
Financial and operating highlights
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $1,000.8 million | $1,028.5 million |
| Net premiums earned | $842.5 million | $872.5 million |
| Net investment income | $124.4 million | $88.8 million |
| Provision for losses and LAE | Benefit of $174.7 million | Expense of $31.1 million |
| Income before taxes | $988.2 million | $822.3 million |
| Net income | $831.4 million | $681.8 million |
| Diluted EPS | $7.72 | $6.11 |
| Operating cash flow | $588.8 million | $709.3 million |
- Revenue declined about 2.7%, while net income increased about 21.9%. Earnings benefited materially from favorable prior-year loss development and higher investment income; the loss reserve benefit should not be treated as a recurring operating run rate.
- Net premiums written rose 2% to $820.0 million, but earned premiums fell about 3.4%. Average IIF increased to $215.5 billion from $202.9 billion, while the average net premium rate decreased to 0.37% from 0.41%.
- NIW fell to $63.1 billion from $84.2 billion, reflecting a weaker mortgage origination market amid higher interest rates. Year-end IIF nevertheless grew to $227.1 billion from $207.2 billion; ending risk in force was $49.9 billion.
- Net investment income rose about 40%, as the average portfolio yield increased to 2.6% from 2.0% and the average invested balance increased. Realized investment losses were $13.2 million, compared with a $0.4 million gain in 2021.
- Cash provided by operations decreased about 17% to $588.8 million. Cash was $81.2 million; total investments were $5.0 billion, including $4.7 billion of investments available for sale. Stockholders’ equity was $4.46 billion, up from $4.24 billion.
- Available-for-sale investments had $447.5 million of gross unrealized losses at year-end, primarily attributed by management to higher interest rates. The filing reports $12.7 million of investment impairment losses in 2022.
- Debt included $425 million of term borrowings under the credit facility, with a 6.02% year-end weighted-average interest rate and maturity in December 2026. The $400 million revolving component was undrawn and available; interest expense increased to $15.6 million from $8.3 million.
- Combined U.S. insurer statutory capital was $3.18 billion, with a 10.2:1 risk-to-capital ratio. Essent Guaranty reported PMIERs available assets of $3.19 billion, or 174% of its $1.83 billion minimum required assets, and was compliant at year-end.
- The company paid $0.86 per share in dividends during 2022. The May 2021 repurchase authorization was completed; a new $250 million authorization approved in May 2022 remained unused at year-end.
Material changes and unusual items
- The 2022 loss provision included $274.1 million of favorable prior-year development, versus $66.2 million in 2021. A $164.1 million benefit resulted from reducing the estimated ultimate loss on Early COVID Defaults; about 99% of those defaults had cured by year-end.
- Total defaults declined to 13,433, or 1.66% of policies in force, from 16,963, or 2.16%, at year-end 2021. However, defaults with 12 or more missed payments remained above pre-pandemic levels, and management noted that transition to foreclosure or claim had not returned to pre-pandemic patterns.
- Other invested asset income declined to $28.7 million from $56.4 million, mainly due to lower fair-value adjustments. The investment portfolio’s year-end fair value declined from $5.13 billion to $5.00 billion, with interest-rate-driven unrealized losses contributing to a $433.5 million reduction in other comprehensive income.
- Annual persistency rose to 82.1% from 65.4%, while cancellations fell to $43.2 billion from $75.9 billion. The net premium rate decline and lower refinancing-related single-premium cancellation income partly offset growth in average IIF.
Outlook, commentary and risks
- The filing provides no formal quantified earnings or revenue guidance. Management said it expects a comparable regular quarterly dividend and stated that liquidity is sufficient for operating needs and obligations over the next 12 months.
- Management expects claims and loss provisions to rise as the portfolio seasons: 84% of IIF was written since January 1, 2020, and mortgage insurance claims historically peak three to six years after origination. Actual outcomes depend on economic conditions, home prices, employment, interest rates and loan performance.
- Management warned that inflation and higher mortgage rates may reduce home-sale activity and limit options for delinquent borrowers. Future defaults could increase loss provisions, reduce reinsurance profit commissions and raise PMIERs minimum required assets.
- Key business risks include dependence on the GSEs and largest lending customers, competition from other private insurers and government programs, reduced low-down-payment mortgage originations, changing regulation or GSE eligibility standards, reserve-estimation uncertainty, investment-market risk, reinsurance counterparty and availability risk, and cyber and operational risks. One customer exceeded 10% of consolidated revenue; the top ten represented 39.9% of NIW.
- Hurricane Ian had not materially affected reserves at December 31, 2022, though later effects depend on reported delinquencies and ultimate losses. The company reported no material legal proceedings.
- In February 2023, Essent announced a $100 million agreement to acquire title insurance operations, subject to regulatory approval, with closing expected in the third quarter of 2023. This is a post-period event, not a completed 2022 transaction.
- Management and the independent auditor concluded internal control over financial reporting was effective. The auditor identified reserve valuation as a critical audit matter because it requires significant judgment about claim rates, severity and economic assumptions.
Important facts for investors to verify
- How much of 2022 earnings reflected the $164.1 million Early COVID Default reserve benefit and other favorable prior-year development, and how reserve assumptions change as defaults season.
- Whether claim frequency and severity rise as the large 2020–2022 loan vintages reach historically higher-claim years, particularly for long-duration defaults.
- How lower NIW, the reduced net premium rate and higher persistency affect future premium revenue and earnings.
- Whether investment fair values recover or further decline, and the implications for liquidity, realized losses and statutory or PMIERs capital.
- Whether GSE and state dividend restrictions, reinsurance terms and the proposed title-insurance acquisition affect capital availability, holding-company liquidity or shareholder distributions.