Essent Group Ltd. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with fiscal 2020. Essent is a Bermuda-domiciled holding company whose principal business is U.S. private mortgage insurance, supplemented by reinsurance and limited contract underwriting services.
Business context and results
Essent insures low-down-payment residential mortgages, primarily for loans sold to Fannie Mae and Freddie Mac. Insurance in force (IIF) reached $207.2 billion at year-end, up from $198.9 billion. New insurance written (NIW) was $84.2 billion, down from $107.9 billion in 2020. The top ten customers generated 41.6% of 2021 flow NIW; no customer accounted for more than 10% of consolidated revenue.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $1,028.5 million | $955.2 million |
| Net premiums earned | $872.5 million | $862.6 million |
| Net investment income | $88.8 million | $80.1 million |
| Provision for losses and loss adjustment expenses (LAE) | $31.1 million | $301.3 million |
| Income before taxes | $822.3 million | $490.1 million |
| Net income | $681.8 million | $413.0 million |
| Diluted earnings per share | $6.11 | $3.88 |
| Net cash provided by operating activities | $709.3 million | $727.9 million |
| Stockholders’ equity at year-end | $4.24 billion | $3.86 billion |
- Total revenue rose about 8% and net income rose about 65%. The earnings increase primarily reflected much lower loss provisions and higher income from other invested assets and premiums earned.
- The $56.4 million of income from other invested assets included $51.5 million of net unrealized gains. Management changed the presentation of unrealized gains and losses on these investments from other comprehensive income to earnings after June 30, 2021.
- Net premiums earned increased about 1% as average IIF grew to $202.9 billion from $178.3 billion. The average net premium rate declined to 0.41% from 0.46%, partly due to reinsurance, portfolio mix, pricing and fewer cancellation-related single-premium earnings.
- Operating cash flow decreased about 3%, primarily due to higher income tax payments, purchases of tax-and-loss bonds and ceded reinsurance premiums. Comprehensive income was $594.2 million, down from $495.1 million? Correction: it increased from $495.1 million in 2020 despite an $87.6 million after-tax investment-related OCI loss in 2021.
Financial position, capital and shareholder returns
- At December 31, 2021, cash was $81.5 million, short-term investments $313.1 million, and total investments $5.13 billion. Management said liquidity was sufficient for operating needs and obligations over the next 12 months.
- Credit facility borrowings were $425 million, with $400 million of revolving capacity available. The facility matures December 10, 2026; the company reported compliance with its covenants.
- Essent Guaranty’s PMIERs available assets were $3.17 billion, or 177% of the $1.79 billion minimum required assets. Its U.S. insurance subsidiaries’ combined risk-to-capital ratio was 10.4:1, against a generally applicable maximum of 25:1.
- Essent Guaranty paid $247.2 million in dividends to its parent during 2021. Insurance-company dividend capacity and other regulatory restrictions can constrain upstream payments.
- The company repurchased 3.47 million shares for $157.8 million during 2021 under a $250 million authorization; $92.2 million remained at year-end. Quarterly dividends rose from $0.16 per share in early 2021 to $0.19 in the fourth quarter. In February 2022, the board declared a $0.20 quarterly dividend.
Material changes, outlook and risks
- Defaults and reserves: Loans in default fell to 16,963 (2.16% of policies in force) from 31,469 (3.93%). The 2021 loss provision was $31.1 million, including $66.2 million of favorable prior-year development. Year-end loss and LAE reserves were $407.4 million, including $243.0 million for defaults reported in April–September 2020 (“Early COVID Defaults”). A 100-basis-point change in the reserve rate applied to those defaults would change reserves by approximately $35 million.
- Management believes forbearance, loan modifications and other relief may result in lower claims from Early COVID Defaults than historical default-to-claim experience. These estimates remain uncertain; management noted that outcomes could change as forbearance periods end. The company expects claims to increase as its relatively young portfolio seasons, with 85% of IIF from business written since January 1, 2019.
- Business volume and pricing: NIW fell from the unusually high 2020 level, while IIF grew. Persistency was 65.4% in 2021 versus 60.1% in 2020; management noted that persistency, refinancing, cancellation rates, pricing and reinsurance affect premium income. The filing provides no quantified earnings or revenue guidance.
- Reinsurance: Essent Re’s quota share of new business increased from 25% to 35% effective January 1, 2021; previously ceded business remains at 25%. Third-party reinsurance reduces retained risk and supports capital, but introduces counterparty, pricing and availability risks. Certain insurance-linked-note transactions had triggered limits on coverage amortization; Radnor Re 2019-2 ceased to be subject to a trigger event on November 26, 2021.
- Market and regulatory exposure: Results depend substantially on the GSEs and demand for low-down-payment mortgages. Risks include economic deterioration, unemployment and home-price declines; competition from government programs and other credit-risk alternatives; changes in GSE eligibility or housing-finance policy; regulatory capital changes; and potential effects of Basel IV and mortgage rules.
- Investments and unusual items: Investment assets were 91.1% of total assets. Falling bond values from interest-rate or credit-spread changes may affect equity and liquidity; the portfolio had $33.5 million of gross unrealized investment losses at year-end, which management attributed principally to market movements and not credit impairment. There were no investment impairments recorded in 2021.
- Other material uncertainties include cyber and operational risks, reserve-estimation uncertainty, reinsurance recoverability, tax treatment related to the Bermuda structure, and restrictions on dividends from regulated subsidiaries. The company reported no material legal proceedings. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Track Early COVID Default cures, claims and reserve adequacy, particularly the $243.0 million reserve and disclosed sensitivity.
- Assess how portfolio seasoning, persistency, refinancing and the decline in NIW affect premiums, claims and future profitability.
- Confirm continued PMIERs compliance and the level and accessibility of capital and liquidity at the holding company and insurance subsidiaries.
- Review the earnings contribution and volatility of other invested assets, including the $51.5 million of unrealized gains recognized in 2021.
- Monitor reinsurance recoverability, coverage triggers, costs and the consequences of the higher Essent Re quota share.
- Check subsequent filings for changes in GSE policy, regulation, interest rates, housing conditions, dividend capacity and share repurchases.