ESSENT GROUP LTD. The following discussion should be read together with the "Selected Financial Data" and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year endedDecember 31, 2019 as filed with theSecurities and Exchange Commission and referred to herein as the "Annual Report," and our condensed consolidated financial statements and related notes as of and for the three and six months endedJune 30, 2020 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we refer to as the "Quarterly Report." In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Special Note Regarding Forward-Looking Statements" in this Quarterly Report and Part I, Item 1A "Risk Factors" in our Annual Report. We are not undertaking any obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.
Overview
We are an established and growing private mortgage insurance company.Essent Guaranty, Inc. , our wholly-owned insurance subsidiary which we refer to as "Essent Guaranty ," is licensed to write coverage in all 50 states and theDistrict of Columbia . The financial strength ratings ofEssent Guaranty are A3 with a stable outlook by Moody's Investors Service ("Moody's"), BBB+ with a negative outlook by S&P Global Ratings ("S&P") and A (Excellent) with a stable outlook byA.M. Best .Essent Guaranty's financial strength rating was reaffirmed byA.M. Best onJune 4, 2020 and by Moody's onJuly 21, 2020 . Our holding company is domiciled inBermuda and ourU.S. insurance business is headquartered inRadnor, Pennsylvania . We operate additional underwriting and service centers inWinston-Salem, North Carolina andIrvine, California . We have a highly experienced, talented team with 389 employees as ofJune 30, 2020 . We generated new insurance written, or NIW, of approximately$28.2 billion and$41.7 billion for the three and six months endedJune 30, 2020 , respectively, compared to approximately$18.0 billion and$29.0 billion for the three and six months endedJune 30, 2019 , respectively. As ofJune 30, 2020 , we had approximately$174.6 billion of insurance in force. We also offer mortgage-related insurance and reinsurance through our wholly-ownedBermuda -based subsidiary,Essent Reinsurance Ltd. , which we refer to as "Essent Re." As ofJune 30, 2020 , Essent Re provided insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately$1.0 billion of risk. Essent Re also reinsures 25% ofEssent Guaranty's NIW under a quota share reinsurance agreement. The insurer financial strength rating of Essent Re is BBB+ with a negative outlook by S&P and A (Excellent) with a stable outlook byA.M. Best . OnJune 4, 2020 A.M. Best reaffirmed its rating of Essent Re.
COVID-19
The novel coronavirus disease 2019 ("COVID-19") was first identified in December
2019 in Wuhan China . On March 11, 2020 the outbreak had spread to be declared a
pandemic by the World Health Organization ("WHO"). Within a week of the WHO 's
declaration, most major economies had announced significant and increasing
restrictions on the movement and interaction of people. By the end of March
2020 , it was estimated that a quarter of the world's population was under some
form of lockdown or stay-at-home order. Most state governments in the United
States implemented some form of travel and/or business restrictions to slow the
spread of COVID-19. Business restrictions, stay-at-home orders and travel
restrictions have resulted in a significant increase in unemployment in the
United States , which has increased the number of delinquencies and has the
potential to increase claim frequencies on the mortgages we insure.
In response to the impact of COVID-19, the federal government has implemented
unprecedented measures to assist borrowers in avoiding foreclosures and allow
families to remain in their homes. Most notably, under the Coronavirus Aid,
Relief, and Economic Security Act ("CARES Act"), consumers with federally backed
mortgages were granted two financial protections: (1) a temporary moratorium on
foreclosures, and (2) mortgage forbearance, either in the form of a lower
monthly payment or temporarily suspending payments. Under the new law, borrowers
have the right to request forbearance for up to 360 days due to hardship caused
by COVID-19. We believe that these measures will likely increase the overall
duration of the default resolution process and reduce the number of defaults
that result in claims compared to our historical default-to-claim experience.
However, the increase in the default resolution process may result in increases
in claim severities for loans that proceed to claim.
27--------------------------------------------------------------------------------
Table of Contents
Over 95% of loans insured byEssent are federally backed by Fannie Mae or Freddie Mac. As a mortgage loan in forbearance is considered delinquent, we will provide loss reserves as loans in forbearance are reported to us as delinquent once the borrower has missed two consecutive payments. However, we believe providing borrowers time to recover from the adverse financial impact of the COVID-19 event may allow some families to be able to remain in their homes and avoid foreclosure. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status.Essent has had a Pandemic Plan in place as part of its comprehensive Business Continuity Program for a number of years and invoked the Pandemic Plan in light of the COVID-19 event. Our workforce has been working in "full remote" mode sinceMarch 16, 2020 . Through the use of technology, our national and regional account managers and customer service team have been in contact with our policyholders and their servicers, and we have made several COVID-19-related announcements which have been posted on our mortgage insurance website. As ofMarch 31, 2020 , COVID-19 had not had a significant impact on our financial position or results of operations. During the three months endedJune 30, 2020 , the number and percentage of mortgage loans we insure that were reported to have missed at least two consecutive payments of principal and interest had increased as a result of COVID-19, which has resulted in an increase in our provision for losses in the three and six months endedJune 30, 2020 . The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers and our expectations for the amount of ultimate losses on these delinquencies. As noted in "- Liquidity and Capital Resources,"Essent had substantial liquidity and had Available Assets in excess of Minimum Required Assets under PMIERs 2.0 as ofJune 30, 2020 . In order to maintain continuous MI coverage, mortgage servicers are required to advance MI premiums to us even if borrowers are in a forbearance plan. Future increases in defaults may result in an increase in our provisions for loss and loss adjustment expenses compared to prior periods, reduced profit commission under our quota share reinsurance agreement with a panel of third-party reinsurers ("the QSR Agreement") and an increase in our Minimum Required Assets.
Legislative and Regulatory Developments
Our results are significantly impacted by, and our future success may be affected by, legislative and regulatory developments affecting the housing finance industry. See Part I, Item 1 "Business-Regulation" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Legislative and Regulatory Developments" in our Annual Report for a discussion of the laws and regulations to which we are subject as well as legislative and regulatory developments affecting the housing finance industry.The U.S. Internal Revenue Service and Department of the Treasury issued proposed regulations onJuly 10, 2019 relating to the tax treatment of passive foreign investment companies ("PFICs"). The proposed regulations provide guidance on various PFIC rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. The Company is evaluating the potential impact of these proposed regulations to its shareholders and business operations.
Factors Affecting Our Results of Operations
Net Premiums Written and Earned
Premiums associated with ourU.S. mortgage insurance business are based on insurance in force ("IIF") during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average net premium rates in effect during a given period will also cause premiums to differ when compared to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus NIW less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by:
• NIW, which is the aggregate principal amount of the new mortgages that are
insured during a period. Many factors affect NIW, including, among others,
the volume of low down payment home mortgage originations, the competition
to provide credit enhancement on those mortgages, the number of customers
from certain customers;
• Cancellations of our insurance policies, which are impacted by payments on
mortgages, home price appreciation, or refinancings, which in turn are
affected by mortgage interest rates. Cancellations are also impacted by
the levels of claim payments and rescissions;
28--------------------------------------------------------------------------------
Table of Contents
• Premium rates, which represent the amount of the premium due as a
percentage of IIF. Premium rates are based on the risk characteristics of
the loans insured, the percentage of coverage on the loans, competition
from other mortgage insurers and general industry conditions; and
• Premiums ceded or assumed under reinsurance arrangements. See Note 4 to
our condensed consolidated financial statements.
Premiums are paid either on a monthly installment basis ("monthly premiums"), in
a single payment at origination ("single premiums"), or in some cases as an
annual premium. For monthly premiums, we receive a monthly premium payment which
is recorded as net premiums earned in the month the coverage is provided.
Monthly premium payments are based on the original mortgage amount rather than
the amortized loan balance. Net premiums written may be in excess of net
premiums earned due to single premium policies. For single premiums, we receive
a single premium payment at origination, which is recorded as "unearned premium"
and earned over the estimated life of the policy, which ranges from 36 to
156 months depending on the term of the underlying mortgage and loan-to-value
ratio at date of origination. If single premium policies are cancelled due to
repayment of the underlying loan and the premium is non-refundable, the
remaining unearned premium balance is immediately recognized as earned premium
revenue. Substantially all of our single premium policies in force as of
June 30, 2020 were non-refundable. Premiums collected on annual policies are
recognized as net premiums earned on a straight-line basis over the year of
coverage. For the six months ended June 30, 2020 and 2019, monthly premium
policies comprised 90% and 88% of our NIW, respectively.
Premiums associated with our GSE and other risk share transactions are based on the level of risk in force and premium rates on the transactions.
Persistency and Business Mix
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 67.9% atJune 30, 2020 . Generally, higher prepayment speeds lead to lower persistency. Prepayment speeds and the relative mix of business between single premium policies and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages. Because premiums are paid at origination on single premium policies, assuming all other factors remain constant, if loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, our premium earned with respect to those loans and therefore our profitability declines. Currently, the expected return on single premium policies is less than the expected return on monthly policies.
Net Investment Income
Our investment portfolio was predominantly comprised of investment-grade fixed income securities and money market funds as ofJune 30, 2020 . The principal factors that influence investment income are the size of the investment portfolio and the yield on individual securities. As measured by amortized cost (which excludes changes in fair market value, such as from changes in interest rates), the size of our investment portfolio is mainly a function of increases in capital and cash generated from or used in operations which is impacted by net premiums received, investment earnings, net claim payments and expenses. Realized gains and losses are a function of the difference between the amount received on the sale of a security and the security's amortized cost, as well as any provision for credit losses or impairments recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale. Other Income Other income includes revenues associated with contract underwriting services and underwriting consulting services to third-party reinsurers. The level of contract underwriting revenue is dependent upon the number of customerswho have engaged us for this service and the number of loans underwritten for these customers. Revenue from underwriting consulting services to third-party reinsurers is dependent upon the number of customerswho have engaged us for this service and the level of premiums associated with the transactions underwritten for these customers. 29
--------------------------------------------------------------------------------
Table of Contents
In connection with the acquisition of our mortgage insurance platform, we entered into a services agreement with Triad Guaranty Inc. and its wholly-owned subsidiary,Triad Guaranty Insurance Corporation , which we refer to collectively as "Triad," to provide certain information technology maintenance and development and customer support-related services. In return for these services, we receive a fee which is recorded in other income. Prior toDecember 1, 2019 , this fee was adjusted monthly based on the number of Triad's mortgage insurance policies in force and, accordingly, decreased over time as Triad's existing policies were cancelled. EffectiveDecember 1, 2019 , the services agreement was amended providing for a flat monthly fee throughNovember 30, 2021 . The services agreement provides for two subsequent one-year renewals at Triad's option.
As more fully described in Note 4 to our condensed consolidated financial statements, the premiums ceded under certain reinsurance contracts with unaffiliated third parties vary based on changes in market interest rates. Under GAAP, these contracts contain embedded derivatives that are accounted for separately as freestanding derivatives. The change in the fair value of the embedded derivatives is reported in earnings and included in other income.
Provision for Losses and Loss Adjustment Expenses
The provision for losses and loss adjustment expenses reflects the current expense that is recorded within a particular period to reflect actual and estimated loss payments that we believe will ultimately be made as a result of insured loans that are in default.
Losses incurred are generally affected by:
• the overall state of the economy, which broadly affects the likelihood
that borrowers may default on their loans and have the ability to cure
such defaults;
• changes in housing values, which affect our ability to mitigate our losses
through the sale of properties with loans in default as well as borrower
willingness to continue to make mortgage payments when the value of the
home is below or perceived to be below the mortgage balance;
• the product mix of IIF, with loans having higher risk characteristics
generally resulting in higher defaults and claims;
• the size of loans insured, with higher average loan amounts tending to
increase losses incurred;
• the loan-to-value ratio, with higher average loan-to-value ratios tending
to increase losses incurred;
• the percentage of coverage on insured loans, with deeper average coverage
tending to increase losses incurred;
• credit quality of borrowers, including higher debt-to-income ratios and
lower FICO scores, which tend to increase incurred losses;
• the level and amount of reinsurance coverage maintained with third parties;
• the rate at which we rescind policies. Because of tighter underwriting
standards generally in the mortgage lending industry and terms set forth
in our master policy, we expect that our level of rescission activity will
be lower than rescission activity seen in the mortgage insurance industry
for vintages originated prior to the financial crisis; and
• the distribution of claims over the life of a book. As of June 30, 2020 ,
68% of our IIF relates to business written since January 1, 2018 and was
less than three years old. As a result, based on historical industryperformance, we expect the number of defaults and claims we experience, as
well as our provision for losses and loss adjustment expenses ("LAE"), to
increase as our portfolio seasons. See "- Mortgage Insurance Earnings and
Cash Flow Cycle" below.
We establish loss reserves for delinquent loans when we are notified that a
borrower has missed at least two consecutive monthly payments ("Case Reserves"),
as well as estimated reserves for defaults that may have occurred but not yet
been reported to us ("IBNR Reserves"). We also establish reserves for the
associated loss adjustment expenses, consisting of the estimated cost of the
claims administration process, including legal and other fees. Using both
internal and external information, we establish our reserves based on the
likelihood that a default will reach claim status and estimated claim severity.
See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Critical Accounting Policies" included in our Annual
Report for further information.
30--------------------------------------------------------------------------------
Table of Contents
We believe, based upon our experience and industry data, that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As ofJune 30, 2020 , 68% of our IIF relates to business written sinceJanuary 1, 2018 and was less than three years old. Although the claims experience on new insurance written by us to date has been favorable, we expect incurred losses and claims to increase as a greater amount of this book of insurance reaches its anticipated period of highest claim frequency. The actual default rate and the average reserve per default that we experience as our portfolio matures is difficult to predict and is dependent on the specific characteristics of our current in-force book (including the credit score of the borrower, the loan-to-value ratio of the mortgage, geographic concentrations, etc.), as well as the profile of new business we write in the future. In addition, the default rate and the average reserve per default will be affected by future macroeconomic factors such as housing prices, interest rates and employment. Due to business restrictions, stay-at-home orders and travel restrictions implemented inMarch 2020 as a result of COVID-19, unemployment inthe United States has increased significantly. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment has increased the number of delinquencies on the mortgages we insure, and has the potential to increase claim frequencies on defaults. As ofJune 30, 2020 , insured loans in default totaled 38,068 and included 34,352 defaults classified as COVID-19 defaults compared to 5,841 total defaults and no COVID-19 defaults as ofMarch 31, 2020 . For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status. We believe that the forbearance process could have a favorable effect on the frequency of claims that we ultimately pay. Based on the forbearance programs in place and the credit characteristics of the COVID-19 defaulted loans, we expect the ultimate number of COVID-19-related defaults that result in claims will be less than our historical default-to-claim experience. Accordingly, we applied a lower reserve rate to COVID-19 default notices received in the three months endedJune 30, 2020 than the rate used for defaults that had missed three payments or less as ofJune 30, 2019 . It is reasonably possible that our estimate of the losses for the COVID-19 defaults could change in the near term as a result of the continued impact of the pandemic on the economic environment, the results of existing and future governmental programs designed to assist individuals and businesses impacted by the virus and the performance of the COVID-19 defaults in the forbearance programs. As more fully described in Note 4 to our condensed consolidated financial statements, atJune 30, 2020 , we had approximately$1.6 billion of excess of loss reinsurance covering NIW fromJanuary 1, 2015 toAugust 31, 2019 and a quota share reinsurance transaction on a portion of our NIW effectiveSeptember 1, 2019 and continuing throughDecember 31, 2020 . The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers, the performance of COVID-19 defaults and our expectations for the amount of ultimate losses on these delinquencies.
Third-Party Reinsurance
We use third-party reinsurance to provide protection against adverse loss
experience and to expand our capital sources. When we enter into a reinsurance
agreement, the reinsurer receives a premium and, in exchange, agrees to insure
an agreed upon portion of incurred losses. These arrangements have the impact of
reducing our earned premiums, but also reduce our risk in force ("RIF"), which
provides capital relief, and may include capital relief under the PMIERs
financial strength requirements. Our incurred losses are reduced by any incurred
losses ceded in accordance with the reinsurance agreement. For additional
information regarding reinsurance, see Note 4 to our condensed consolidated
financial statements.
Other Underwriting and Operating Expenses
Our other underwriting and operating expenses include components that are substantially fixed, as well as expenses that generally increase or decrease in line with the level of NIW.
Our most significant expense is compensation and benefits for our employees, which represented 62% and 61% of other underwriting and operating expenses for the three and six months endedJune 30, 2020 , respectively, compared to 56% of other underwriting and operating expenses for each of the three and six months endedJune 30, 2019 . Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes. Underwriting and other expenses include legal, consulting, other professional fees, premium taxes, travel, entertainment, marketing, licensing, supplies, hardware, software, rent, utilities, depreciation and amortization and other expenses. We anticipate that as we continue to add new customers and increase our IIF, our expenses will also continue to increase. 31
--------------------------------------------------------------------------------
Table of Contents
Interest Expense
Interest expense is incurred as a result of borrowings under our secured credit facility (the "Credit Facility"). Borrowings under the Credit Facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions toEssent's insurance and reinsurance subsidiaries. Borrowings accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company's option, plus an applicable margin. Income Taxes Income taxes are incurred based on the amount of earnings or losses generated in the jurisdictions in which we operate and the applicable tax rates and regulations in those jurisdictions. OurU.S. insurance subsidiaries are generally not subject to income taxes in the states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating expenses.Essent Group Ltd. ("Essent Group ") and its wholly-owned subsidiary, Essent Re, are domiciled inBermuda , which does not have a corporate income tax. Essent Re reinsures 25% ofEssent Guaranty's NIW under a quota share reinsurance agreement. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae.
The amount of income tax expense or benefit recorded in future periods will be dependent on the jurisdictions in which we operate and the tax laws and regulations in effect.
Mortgage Insurance Earnings and Cash Flow Cycle
In general, the majority of any underwriting profit (premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year. Subsequent years of a book generally result in modest underwriting profit or underwriting losses. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.
Key Performance Indicators
Insurance In Force
As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. The following table includes a summary of the change in our IIF for the three and six months endedJune 30, 2020 and 2019 for ourU.S. mortgage insurance portfolio. In addition, this table includes RIF at the end of each period. Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 2020 2019 IIF, beginning of period$ 165,615,503 $ 143,181,641 $
164,005,853$ 137,720,786 NIW - Flow 28,163,212 17,973,505 41,712,511 28,918,812 NIW - Bulk - 29,524 151 84,526 Cancellations (19,132,442 ) (7,867,513 ) (31,072,242 ) (13,406,967 ) IIF, end of period$ 174,646,273 $ 153,317,157 $ 174,646,273 $ 153,317,157 Average IIF during the period$ 168,635,275 $ 148,188,377 $ 166,865,006 $ 144,302,864 RIF, end of period$ 39,113,879 $ 37,034,687 $ 39,113,879 $ 37,034,687 32
--------------------------------------------------------------------------------
Table of Contents
The following is a summary of our IIF at
($ in thousands) $ % 2020 (through June 30)$ 41,196,840 23.6 % 2019 51,138,928 29.3 2018 26,920,663 15.4 2017 23,247,877 13.3 2016 15,675,316 9.0 2015 and prior 16,466,649 9.4$ 174,646,273 100.0 %
Average Net Premium Rate
Our average net premium rate is dependent on a number of factors, including: (1) the risk characteristics and average coverage on the mortgages we insure; (2) the mix of monthly premiums compared to single premiums in our portfolio; (3) cancellations of non-refundable single premiums during the period; (4) changes to our pricing for NIW; and (5) premiums ceded under third-party reinsurance agreements. For each of the three and six months endedJune 30, 2020 , our average net premium rate was 0.48%, as compared to 0.49% and 0.48% for the three and six months endedJune 30, 2019 , respectively. In 2019 and 2020,Essent Guaranty entered into third-party reinsurance agreements. We anticipate that the continued use of third-party reinsurance will reduce our average net premium rate in future periods.
Persistency Rate
The measure for assessing the impact of policy cancellations on IIF is our persistency rate, defined as the percentage of IIF that remains on our books after any twelve-month period. See additional discussion regarding the impact of the persistency rate on our performance in "- Factors Affecting Our Results of Operations - Persistency and Business Mix."
The risk-to-capital ratio has historically been used as a measure of capital adequacy in theU.S. mortgage insurance industry and is calculated as a ratio of net risk in force to statutory capital. Net risk in force represents total risk in force net of reinsurance ceded and net of exposures on policies for which loss reserves have been established. Statutory capital for ourU.S. insurance companies is computed based on accounting practices prescribed or permitted by thePennsylvania Insurance Department . See additional discussion in "- Liquidity and Capital Resources -Insurance Company Capital ." As ofJune 30, 2020 , our combined net risk in force for ourU.S. insurance companies was$28.8 billion and our combined statutory capital was$2.5 billion , resulting in a risk-to-capital ratio of 11.7 to 1. The amount of capital required varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk-to-capital ratio is 25.0 to 1. State insurance regulators are currently examining their respective capital rules to determine whether, in light of the financial crisis, changes are needed to more accurately assess mortgage insurers' ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business. 33
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
The following table sets forth our results of operations for the periods indicated:
Summary of Operations Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2020 2019 2020 2019 Revenues: Net premiums written$ 205,904 $ 188,404 $ 397,647 $ 366,048 Decrease in unearned premiums 5,567 86 20,320 233 Net premiums earned 211,471 188,490 417,967 366,281 Net investment income 19,866 20,581 40,499 40,461 Realized investment gains (losses), net (1,269 ) 583 1,866 1,243 Other income 6,009 2,238 4,585 4,433 Total revenues 236,077 211,892 464,917 412,418 Losses and expenses: Provision for losses and LAE 175,877 4,960 183,940 12,067 Other underwriting and operating expenses 38,819 41,520 80,766 82,550 Interest expense 2,566 2,679 4,698 5,349 Total losses and expenses 217,262 49,159 269,404 99,966 Income before income taxes 18,815 162,733 195,513 312,452 Income tax expense 3,435 26,328 30,610 48,327 Net income$ 15,380 $ 136,405 $ 164,903 $ 264,125
Three and Six Months Ended
For the three months endedJune 30, 2020 , we reported net income of$15.4 million , compared to net income of$136.4 million for the three months endedJune 30, 2019 . For the six months endedJune 30, 2020 , we reported net income of$164.9 million , compared to net income of$264.1 million for the six months endedJune 30, 2019 . The decreases in our operating results in 2020 over the same periods in 2019 was primarily due to increases in the provision for losses and LAE, partially offset by increases in net premiums earned and other income and decreases in other underwriting and operating expenses and income tax expense.
Net Premiums Written and Earned
Net premiums earned increased in the three months endedJune 30, 2020 by 12%, compared to the three months endedJune 30, 2019 primarily due to the increase in our average IIF from$148.2 billion atJune 30, 2019 to$168.6 billion atJune 30, 2020 . The average net premium rate was 0.48% and 0.49% for the three months endedJune 30, 2020 and 2019, respectively, as an increase in ceded premiums, changes in the mix of mortgages we insure and changes in our pricing were largely offset by an increase in premiums earned on the cancellation of non-refundable single premium policies. Net premiums earned increased in the six months endedJune 30, 2020 by 14% compared to the six months endedJune 30, 2019 due to the increase in our average IIF from$144.3 billion atJune 30, 2019 to$166.9 billion atJune 30, 2020 . The average net premium rate was 0.48% in each of the six months endedJune 30, 2020 and 2019 as an increase in ceded premiums was offset by an increase in premiums earned on the cancellation of non-refundable single premium policies. In the three and six months endedJune 30, 2020 , ceded premiums increased to$22.1 million and$36.4 million , respectively, from$8.4 million and$14.5 million in the three and six months endedJune 30, 2019 , respectively, due to reduced profit commission under our QSR Agreement as a result of higher ceded losses, new third-party reinsurance agreements entered in 2020 and a full three and six months of premiums ceded under third-party reinsurance agreements entered in 2019. In the three and six months endedJune 30, 2020 , premiums earned on the cancellation of non-refundable single premium policies increased to$26.7 million and$41.3 million , respectively, from$8.8 million and$13.1 million in the three and six months endedJune 30, 2019 , respectively, as a result of an increase in existing borrowers refinancing their mortgages due to favorable mortgage interest rates. Net premiums written increased by 9% in the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 primarily due to an increase in average IIF in the respective periods, partially offset by an increase 34
--------------------------------------------------------------------------------
Table of Contents
in premiums ceded under third-party reinsurance agreements, a decrease in new single premium policies written, changes in the mix of mortgages we insure and changes in our pricing. In the three months endedJune 30, 2020 and 2019, unearned premiums decreased by$5.6 million and$0.1 million , respectively. The change in unearned premiums was a result of net premiums written on single premium policies of$36.8 million and$26.5 million , respectively, which was offset by$42.4 million and$26.6 million , respectively, of unearned premium that was recognized in earnings during the periods. In the six months endedJune 30, 2020 and 2019, unearned premiums decreased by$20.3 million and$0.2 million , respectively. This was a result of net premiums written on single premium policies of$52.9 million and$46.5 million , respectively, which was offset by$73.2 million and$46.7 million , respectively, of unearned premium that was recognized in earnings during the periods.
Net Investment Income
Our net investment income was derived from the following sources for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Fixed maturities $ 20,569 $ 20,180 $ 41,183 $ 39,923
Short-term investments 358 1,310 1,480 2,368
Gross investment income 20,927 21,490 42,663 42,291
Investment expenses (1,061 ) (909 ) (2,164 ) (1,830 )
Net investment income $ 19,866 $ 20,581 $ 40,499 $ 40,461
The changes in net investment income for the three and six months ended June 30,
2020 as compared to the same periods in 2019 was due to a decrease in the
pre-tax investment income yield partially offset by the increase in the weighted
average balance of our investment portfolio. The average cash and investment
portfolio balance increased to $3.9 billion for the three months ended June 30,
2020 from $3.0 billion for the three months ended June 30, 2019 . The average
cash and investment portfolio balance increased to $3.7 billion for the six
months ended June 30, 2020 from $3.0 billion for the six months ended June 30,
2019 . The increase in the average cash and investment portfolio was primarily
due to investing cash flows from operations, proceeds from the public offering
of common shares completed in June 2020 and increased borrowings under the
Credit Facility. The pre-tax investment income yield decreased from 2.8% in each
of the three and six months ended June 30, 2019 to 2.2% and 2.3% in the three
and six months ended June 30, 2020 , respectively, primarily due to an increase
in the share of our investments allocated to cash, a general decline in
investment yields due to declining interest rates and an increase in premium
amortization on mortgage-backed and asset-backed securities. The pre-tax
investment income yields are calculated based on amortized cost and exclude
investment expenses. See "- Liquidity and Capital Resources" for further details
of our investment portfolio.
Other Income
Other income for the three months ended June 30, 2020 was $6.0 million as
compared to $2.2 million for the three months ended June 30, 2019 . The increase
in other income for the three months ended June 30, 2020 as compared to the same
period in 2019 was primarily due to a favorable increase in fair value of
embedded derivatives contained in certain of our reinsurance agreements and an
increase in fees earned for information technology and customer support services
provided to Triad. Other income for the six months ended June 30, 2020 was $4.6
million compared to $4.4 million for the six months ended June 30, 2019 . The
increase in other income for the six months ended June 30, 2020 as compared to
the same period in 2019 was primarily due to an increase in Triad service fees
partially offset by a net unfavorable decrease in the fair value of the embedded
derivatives. In the three and six months ended June 30, 2020 we earned Triad
service fees of $1.6 million and $3.2 million , respectively, compared to $0.2
million and $0.4 million for the three and six months ended June 30, 2019 ,
respectively. Effective December 1, 2019 , the Triad services agreement was
amended providing for a flat monthly fee through November 30, 2021 . In the three
months ended June 30, 2020 , we recorded a favorable increase in the fair value
of these embedded derivatives of $2.5 million compared to a favorable increase
in the fair value of the embedded derivatives of $1.2 million in the three
months ended June 30, 2019 . In the six months ended June 30, 2020 we recorded a
net unfavorable decrease in the fair value of the embedded derivatives of $1.7
million compared to a favorable increase of $2.6 million the six months ended
June 30, 2019 . Other income also includes contract underwriting revenues and
underwriting consulting services to third-party reinsurers.
35--------------------------------------------------------------------------------
Table of Contents
Provision for Losses and Loss Adjustment Expenses
The increase in the provision for losses and LAE in the three and six months endedJune 30, 2020 as compared to the same periods in 2019 was primarily due to an increase in defaults related to COVID-19.
The following table presents a rollforward of insured loans in default for our
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Beginning default inventory 5,841 4,096 5,947 4,024
Plus: new defaults 37,357 2,849 41,290 5,767
Less: cures (4,983 ) (2,433 ) (8,897 ) (5,182 )
Less: claims paid (144 ) (106 ) (262 ) (194 )
Less: rescissions and denials, net (3 ) (1 ) (10 ) (10 )
Ending default inventory 38,068 4,405 38,068 4,405
As of
The following table includes additional information about our loans in default
as of the dates indicated for our
As of June 30,
2020 2019
Case reserves (in thousands) (1)$ 227,786 $
50,576
Total reserves (in thousands) (1)$ 250,862 $
55,138
Ending default inventory 38,068
4,405
Average case reserve per default (in thousands)$ 6.0 $ 11.5 Average total reserve per default (in thousands)$ 6.6 $ 12.5 Default rate 5.19 %
0.66 % Claims received included in ending default inventory 77 82
(1) The
other risk share risk in force at Essent Re of
2020.
The decrease in the average total reserve per default was primarily due to a
lower total reserve per COVID-19 default. Based on the forbearance programs in
place and the credit characteristics of the COVID-19 defaulted loans, we expect
the ultimate number of COVID-19-related defaults that result in claims will be
less than our historical default-to-claim experience. Accordingly, we recorded a
reserve equal to approximately 7% of the risk in force for the COVID-19 default
notices received in the three months ended June 30, 2020 , compared to
approximately a 9% reserve estimate for defaults that had missed three payments
or less as of June 30, 2019 . The reserve for losses and LAE on COVID-19 defaults
was $189.0 million at June 30, 2020 .
36--------------------------------------------------------------------------------
Table of Contents
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2020 2019 2020 2019
Reserve for losses and LAE at
beginning of period $ 73,341 $ 53,484 $ 69,362 $ 49,464
Less: Reinsurance recoverables 98 - 71 -
Net reserve for losses and LAE at
beginning of period 73,243 53,484 69,291 49,464
Add provision for losses and LAE
occurring in:
Current period 181,776 11,354 197,195 23,182
Prior years (5,899 ) (6,394 ) (13,255 ) (11,115 )
Incurred losses and LAE during
the current period 175,877 4,960 183,940 12,067
Deduct payments for losses and
LAE occurring in:
Current period 288 230 289 245
Prior years 5,703 3,076 9,813 6,148
Loss and LAE payments during the
current period 5,991 3,306 10,102 6,393
Net reserve for losses and LAE at
end of period 243,129 55,138 243,129 55,138
Plus: Reinsurance recoverables 7,761 - 7,761 -
Reserve for losses and LAE at end
of period $ 250,890 $ 55,138 $ 250,890 $ 55,138
The following tables provide a detail of reserves and defaulted RIF by the
number of missed payments and pending claims for our U.S. mortgage insurance
portfolio:
As of June 30, 2020
Number of Percentage of Reserves as a
Policies in Policies in Amount of Percentage of Defaulted Percentage of
($ in thousands) Default Default Reserves Reserves RIF Defaulted RIF
Missed payments:
Three payments or less 33,514 88 % $ 166,897 73 % $ 2,233,678 7 %
Four to eleven payments 3,813 10 39,028 17 234,152 17
Twelve or more payments 664 2 18,590 8 36,694 51
Pending claims 77 - 3,271 2 3,846 85
Total case reserves (1) 38,068 100 % 227,786 100 % $ 2,508,370 9
IBNR 17,084
LAE 5,992
Total reserves for losses and
LAE (1) $ 250,862 (1) The
other risk share risk in force at Essent Re of $28 thousand as of June 30,
2020 .
As of June 30, 2019
Number of Percentage of Reserves as a
Policies in Policies in Amount of Percentage of Defaulted Percentage of
($ in thousands) Default Default Reserves Reserves RIF Defaulted RIF
Missed payments:
Three payments or less 2,511 57 % $ 12,646 25 % $ 133,536 9 %
Four to eleven payments 1,443 33 22,292 44 78,047 29
Twelve or more payments 369 8 11,583 23 22,093 52
Pending claims 82 2 4,055 8 4,657 87
Total case reserves 4,405 100 % 50,576 100 % $ 238,333 21
IBNR 3,792
LAE 770
Total reserves for losses and LAE $ 55,138
37--------------------------------------------------------------------------------
Table of Contents
During the three months endedJune 30, 2020 , the provision for losses and LAE was$175.9 million , comprised of$181.8 million of current year losses partially offset by$5.9 million of favorable prior years' loss development. During the three months endedJune 30, 2019 , the provision for losses and LAE was$5.0 million , comprised of$11.4 million of current year losses partially offset by$6.4 million of favorable prior years' loss development. In both periods, the prior years' loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults that cured. During the six months endedJune 30, 2020 , the provision for losses and LAE was$183.9 million , comprised of$197.2 million of current year losses partially offset by$13.3 million of favorable prior years' loss development. During the six months endedJune 30, 2019 , the provision for losses and LAE was$12.1 million , comprised of$23.2 million of current year losses partially offset by$11.1 million of favorable prior years' loss development. In both periods, the prior years' loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults that cured.
The following table includes additional information about our claims paid and claim severity for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2020 2019 2020 2019
Number of claims paid 144 106 262 194
Amount of claims paid $ 5,718 $ 3,208 $ 9,875 $ 6,107
Claim severity 78 % 69 % 78 % 74 %
Other Underwriting and Operating Expenses
Following are the components of our other underwriting and operating expenses for the periods indicated:
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
($ in thousands) $ % $ % $ % $ %
Compensation and benefits $ 24,174 62 % $ 23,167 56 % $ 49,040 61 % $ 46,516 56 %
Premium taxes 4,963 13 4,291 10 9,396 12 8,369 10
Other 9,682 25 14,062 34 22,330 28 27,665 34
Total other underwriting
and operating expenses $ 38,819 100 % $ 41,520 100 % $ 80,766 100 % $ 82,550 100 %
Number of employees at
end of period 389 383
The significant factors contributing to the change in other underwriting and operating expenses are:
• Compensation and benefits increased in the three and six months ended
June 30, 2020 as compared to the three and six months ended June 30, 2019
primarily due to increased stock compensation expense associated with
shares granted in 2019 and 2020 and increased salaries and overtimeassociated with our increased NIW. Compensation and benefits includes
salaries, wages and bonus, stock compensation expense, benefits and
payroll taxes.
• Premium taxes increased primarily due to an increase in premiums written.
• Other expenses decreased primarily as a result of ceding commission earned
under the QSR Agreement and lower travel expenses. Other expenses include
professional fees, travel, marketing, hardware, software, rent,
depreciation and amortization and other facilities expenses.
Interest Expense
For the three and six months endedJune 30, 2020 , we incurred interest expense of$2.6 million and$4.7 million , respectively, as compared to$2.7 million and$5.3 million for the three and six months endedJune 30, 2019 , respectively. The decreases were primarily due to a decrease in the weighted average interest rate for borrowings outstanding, partially offset by 38
--------------------------------------------------------------------------------
Table of Contents
an increase in the average amounts outstanding under the Credit Facility. For the three and six months endedJune 30, 2020 , the average amount outstanding under the Credit Facility was$425.0 million and$330.5 million , respectively, as compared to$225.0 million for each of the three and six months endedJune 30, 2019 . For the three and six months endedJune 30, 2020 , the borrowings under the Credit Facility had a weighted average interest rate of 2.30% and 2.61%, respectively, as compared to 4.56% and 4.53% for the three and six months endedJune 30, 2019 , respectively.
Income Taxes
Our subsidiaries inthe United States file a consolidatedU.S. Federal income tax return. Our income tax expense was$3.4 million and$26.3 million for the three months endedJune 30, 2020 and 2019, respectively, and$30.6 million and$48.3 million for the six months endedJune 30, 2020 and 2019, respectively. For the six months endedJune 30, 2020 , our provision for income taxes was not based on an estimated annual effective rate due to uncertainty regarding the potential impacts of COVID-19 on our results of operations. Accordingly, we were unable to make a reliable estimate of pretax income and the annual effective tax rate for the full year 2020, and the provision for income taxes for the six months endedJune 30, 2020 was based on the actual effective tax rate of 15.7% for the year to date period. For the six months endedJune 30, 2019 , our income tax expense was calculated using an estimated annual effective tax rate of 16.1%. For the six months endedJune 30, 2020 and 2019, income tax expense was reduced by excess tax benefits associated with the vesting of common shares and common share units of$0.6 million and$2.0 million , respectively. The tax effects associated with the vesting of common shares and common share units are treated as discrete items in the reporting period in which they occur and are not considered in the 2019 estimated annual effective tax rate above.
Liquidity and Capital Resources
Overview
Our sources of funds consist primarily of:
• our investment portfolio and interest income on the portfolio;
• net premiums that we will receive from our existing IIF as well as
policies that we write in the future;
• borrowings under our Credit Facility; and
• issuance of capital shares.
Our obligations consist primarily of:
• claim payments under our policies;
• interest payments and repayment of borrowings under our Credit Facility;
• the other costs and operating expenses of our business; and
• the payment of dividends on our common shares.
As ofJune 30, 2020 , we had substantial liquidity with cash of$72.8 million , short-term investments of$1.1 billion and fixed maturity investments of$3.2 billion . We also had$75 million available capacity under the revolving credit component of our Credit Facility, with$425 million of borrowings outstanding under our Credit Facility. Borrowings under the Credit Facility contractually mature onMay 17, 2021 . InJune 2020 , we completed a public offering of 13.8 million common shares to strengthen our capital resources and provide financial flexibility. Net proceeds from this offering were approximately$440 million . AtJune 30, 2020 , net cash and investments at the holding company were$702.2 million . In addition,Essent Guaranty is a member of theFederal Home Loan Bank of Pittsburgh (the "FHLBank") and has access to secured borrowing capacity with the FHLBank to provideEssent Guaranty with supplemental liquidity.Essent Guaranty had no outstanding borrowings with the FHLBank atJune 30, 2020 . Management believes that the Company has sufficient liquidity available both at the holding company and in its insurance and other operating subsidiaries to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months. 39
--------------------------------------------------------------------------------
Table of Contents
While the Company and all of its subsidiaries are expected to have sufficient liquidity to meet all their expected obligations, additional capital may be required to meet any new capital requirements that are adopted by regulatory authorities or the GSEs, or to respond to changes in the business or economic environment related to COVID-19, or to provide additional capital related to the growth of our risk in force in our mortgage insurance portfolio, or to fund new business initiatives including the insurance activities of Essent Re. We continually evaluate opportunities based upon market conditions to further increase our financial flexibility through the issuance of equity or debt, or other options including reinsurance or credit risk transfer transactions. There can be no guarantee that any such opportunities will be available on acceptable terms or at all.
At the operating subsidiary level, liquidity could be impacted by any one of the following factors:
• significant decline in the value of our investments;
• inability to sell investment assets to provide cash to fund operating needs;
• decline in expected revenues generated from operations;
• increase in expected claim payments related to our IIF; or
• increase in operating expenses.
OurU.S. insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. Under the insurance laws of theCommonwealth of Pennsylvania , the insurance subsidiaries may pay dividends during any twelve-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. ThePennsylvania statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. AtJune 30, 2020 ,Essent Guaranty had unassigned surplus of approximately$298.5 million .Essent Guaranty ofPA, Inc. ("Essent PA") had unassigned surplus of approximately$14.4 million as ofJune 30, 2020 . As a result of PMIERs guidance issued by the GSEs, effectiveJune 30, 2020 throughMarch 31, 2021 ,Essent Guaranty is required to obtain GSE written approval before paying a dividend. Essent Re is subject to certain dividend restrictions as prescribed by theBermuda Monetary Authority and under certain agreements with counterparties. In connection with a quota share reinsurance agreement withEssent Guaranty , Essent Re has agreed to maintain a minimum total equity of$100 million . As ofJune 30, 2020 , Essent Re had total equity of$1.0 billion . In connection with its insurance and reinsurance activities, Essent Re is required to maintain assets in trusts for the benefit of its contractual counterparties. See Note 3 to our condensed consolidated financial statements. AtJune 30, 2020 , our insurance subsidiaries were in compliance with these rules, regulations and agreements. Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Six Months Ended June 30 ,
(In thousands) 2020 2019
Net cash provided by operating activities$ 345,785 $
265,484
Net cash used in investing activities (944,893 ) (296,935 ) Net cash provided by (used in) financing activities 600,545 (8,240 ) Net increase (decrease) in cash$ 1,437 $ (39,691 ) Operating Activities Cash flow provided by operating activities totaled$345.8 million for the six months endedJune 30, 2020 , as compared to$265.5 million for the six months endedJune 30, 2019 . The increase in cash flow provided by operating activities of$80.3 million was primarily due to an increase in premiums collected, lower income tax payments and lower T&L Bond purchases during 2020.
Investing Activities
Cash flow used in investing activities totaled$944.9 million and$296.9 million for the six months endedJune 30, 2020 and 2019, respectively. In both periods, cash flow used in investing activities related to investing cash flows from 40
--------------------------------------------------------------------------------
Table of Contents
operations. Additionally, in 2020 cash flow used in investing activities included investing$440 million of net proceeds from the completion of a public offering of common shares in June and$200 million of increased borrowings under the Credit Facility. Financing Activities Cash flow provided by financing activities totaled$600.5 million for the six months endedJune 30, 2020 , primarily related to$440 million of net proceeds from the completion of a public offering of common shares in June and$200 million of increased borrowings under the Credit Facility partially offset by the quarterly cash dividends paid in March and June and treasury stock acquired from employees to satisfy tax withholding obligations. Cash flow used in financing activities totaled$8.2 million for the six months endedJune 30, 2019 primarily related to treasury stock acquired from employees to satisfy tax withholding obligations.
We compute a risk-to-capital ratio for ourU.S. insurance companies on a separate company statutory basis, as well as for our combined insurance operations. The risk-to-capital ratio is our net risk in force divided by our statutory capital. Our net risk in force represents risk in force net of reinsurance ceded, if any, and net of exposures on policies for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders' surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual contributions to the contingency reserve of 50% of net premiums earned. These contributions must generally be maintained for a period of ten years. However, with regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.
During the six months ended
Essent Guaranty has entered into reinsurance agreements that provide excess of loss reinsurance coverage for new defaults on portfolios of mortgage insurance policies issued in 2015 through 2019. The aggregate excess of loss reinsurance coverages decrease over a ten-year period as the underlying covered mortgages amortize. Based on the level of delinquencies reported to us, the insurance-linked note transactions thatEssent Guaranty has entered into to date (the "ILNs") became subject to a "trigger event" as ofJune 25, 2020 . The aggregate excess of loss reinsurance coverage will not amortize during the continuation of a trigger event. EffectiveSeptember 1, 2019 ,Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers (the "QSR Agreement"). Under the QSR Agreement,Essent Guaranty will cede premiums earned related to 40% of risk on eligible single premium policies and 20% of risk on all other eligible policies writtenSeptember 1, 2019 throughDecember 31, 2020 , in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. These reinsurance coverages also reduces net risk in force and PMIERs Minimum Required Assets. See Note 4 to our condensed consolidated financial statements.
Our combined risk-to-capital calculation for our
Combined statutory capital: ($ in thousands) Policyholders' surplus$ 1,057,420 Contingency reserves 1,399,948 Combined statutory capital$ 2,457,368 Combined net risk in force$ 28,787,600 Combined risk-to-capital ratio 11.7:1 For additional information regarding regulatory capital, see Note 15 to our condensed consolidated financial statements. Our combined statutory capital equals the sum of statutory capital ofEssent Guaranty plus Essent PA, after eliminating the impact of intercompany transactions. The combined risk-to-capital ratio equals the sum of the net risk in force ofEssent Guaranty and Essent PA divided by combined statutory capital. The information above has been derived from the annual and quarterly statements of our insurance subsidiaries, which have been prepared in conformity with accounting practices prescribed or permitted by thePennsylvania Insurance Department and theNational Association of Insurance 41
--------------------------------------------------------------------------------
Table of Contents
Commissioners Accounting Practices and Procedures Manual. Such practices vary
from accounting principles generally accepted in
Essent Re has entered into GSE and other risk share transactions, including insurance and reinsurance transactions with Freddie Mac and Fannie Mae.Essent Re also reinsures 25% ofEssent Guaranty's NIW under a quota share reinsurance agreement. During the six months endedJune 30, 2020 and 2019, Essent Re paid no dividends toEssent Group andEssent Group made no capital contributions to Essent Re. As ofJune 30, 2020 , Essent Re had total stockholders' equity of$1.0 billion and net risk in force of$11.1 billion .
Financial Strength Ratings
The insurer financial strength rating ofEssent Guaranty , our principal mortgage insurance subsidiary, is rated A3 with a stable outlook by Moody's Investors Service ("Moody's"), BBB+ with a negative outlook by S&P and A (Excellent) with stable outlook byA.M. Best . The insurer financial strength rating of Essent Re is BBB+ with a negative outlook by S&P and A (Excellent) with stable outlook byA.M. Best .
Private Mortgage Insurer Eligibility Requirements
EffectiveDecember 31, 2015 , Fannie Mae and Freddie Mac, at the direction of the FHFA, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. This risk-based framework provides that an insurer must hold a substantially higher level of required assets for insured loans that are in default compared to a performing loan. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective onMarch 31, 2019 . As ofJune 30, 2020 ,Essent Guaranty , our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0. As ofJune 30, 2020 ,Essent Guaranty's Available Assets were$2.59 billion and its Minimum Required Assets were$1.46 billion based on our interpretation of PMIERs 2.0. Under PMIERs guidance issued by the GSEs effectiveJune 30, 2020 ,Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property located in aFederal Emergency Management Agency ("FEMA") Declared Major Disaster Area eligible for Individual Assistance and that either 1) is subject to a forbearance plan granted in response to a FEMA Declared Major Disaster, the terms of which are materially consistent with terms of forbearance plans, repayment plans or loan modification trial period offered by Fannie Mae or Freddie Mac, or 2) has an initial missed payment occurring up to either (i) 30 days prior to the first day of the incident period specified in the FEMA Major Disaster Declaration or (ii) 90 days following the last day of the incident period specified in the FEMA Major Disaster Declaration, not to exceed 180 days from the first day of the incident period specified in the FEMA Major Disaster Declaration. In the case of the foregoing, the 0.30 multiplier shall be applied to the risk-based required asset amount factor for each insured loan in default for no longer than four calendar months from the initial missed payment absent a forbearance plan described in 1) above. Further, under temporary provisions provided by the PMIERs guidance,Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property that has an initial missed payment occurring on or afterMarch 1, 2020 and prior toJanuary 1, 2021 (COVID-19 Crisis Period). The 0.30 multiplier will be applicable for insured loans in default 1) subject to a forbearance plan granted in response to a financial hardship related to COVID-19 (which shall be assumed to be the case for any loan that has an initial missed payment occurring during the COVID-19 Crisis Period and is subject to a forbearance plan, repayment plan or loan modification trial period), the terms of which are materially consistent with terms offered by Fannie Mae or Freddie Mac or 2) for up to four calendar months after the initial missed payment absent a forbearance plan. The 34,352 COVID-19 defaults included in ourJune 30, 2020 default inventory fall into categories 1) and 2) above and received the 0.30 multiplier in calculating the PMIERs required assets. Financial Condition Stockholders' Equity
As of
42--------------------------------------------------------------------------------
Table of Contents Investments As ofJune 30, 2020 , investments totaled$4.4 billion compared to$3.4 billion as ofDecember 31, 2019 . In addition, our total cash was$72.8 million as ofJune 30, 2020 , compared to$71.4 million as ofDecember 31, 2019 . The increase in investments was primarily due to investing net cash flows from operations, the net proceeds from the public offering of common shares and the borrowings under the Credit Facility during the six months endedJune 30, 2020 . Investments Available for Sale by Asset Class
Asset Class June 30, 2020 December 31, 2019 ($ in thousands) Fair Value Percent Fair Value Percent U.S. Treasury securities$ 259,259 5.9 %$ 242,206 7.2 % U.S. agency securities 14,682 0.3 33,605 1.0U.S. agency mortgage-backed securities 830,124 19.1 848,334 25.3 Municipal debt securities(1) 465,063 10.7 361,638 10.8 Non-U.S. government securities 54,637 1.2 54,995 1.7 Corporate debt securities(2) 912,137 21.0 880,301 26.3 Residential and commercial mortgage securities 312,511 7.2 288,281 8.6 Asset-backed securities 385,486 8.9 326,025 9.7 Money market funds 1,118,204 25.7 315,362 9.4 Total Investments Available for Sale$ 4,352,103 100.0 %$ 3,350,747 100.0 % June 30, December 31, (1) The following table summarizes municipal debt securities as of : 2020 2019 Special revenue bonds 74.3 % 74.5 % General obligation bonds 22.2 21.3 Certificate of participation bonds 2.8 3.4 Tax allocation bonds 0.7 0.8 Total 100.0 % 100.0 % June 30, December 31, (2) The following table summarizes corporate debt securities as of : 2020 2019 Financial 35.0 % 34.4 % Consumer, non-cyclical 20.8 20.1 Communications 10.9 10.3 Energy 7.6 8.3 Consumer, cyclical 7.2 7.6 Utilities 6.2 6.2 Technology 5.5 4.8 Industrial 3.5 4.2 Basic materials 3.3 4.1 Total 100.0 % 100.0 % 43
--------------------------------------------------------------------------------
Table of Contents
Investments Available for Sale by Rating
Rating(1) June 30, 2020 December 31, 2019
($ in thousands) Fair Value Percent Fair Value Percent
Aaa $ 2,642,359 60.7 % $ 1,817,905 54.2 %
Aa1 129,451 3.0 109,122 3.3
Aa2 171,704 3.9 145,282 4.3
Aa3 235,462 5.4 159,599 4.8
A1 213,946 4.9 206,643 6.2
A2 253,507 5.8 183,780 5.5
A3 211,209 4.9 191,933 5.7
Baa1 244,669 5.6 232,490 6.9
Baa2 183,639 4.2 179,664 5.4
Baa3 37,005 0.9 65,119 1.9
Below Baa3 29,152 0.7
59,210 1.8
Total Investments Available for Sale
(1) Based on ratings issued by Moody's, if available. S&P or Fitch Ratings
("Fitch") rating utilized if Moody's not available.
Investments Available for Sale by Effective Duration
Effective Duration June 30, 2020 December 31, 2019 ($ in thousands) Fair Value Percent Fair Value Percent < 1 Year$ 2,140,698 49.2 %$ 1,038,782 31.0 % 1 to < 2 Years 415,342 9.5 306,148 9.1 2 to < 3 Years 369,123 8.5 348,708 10.4 3 to < 4 Years 258,405 5.9 361,147 10.8 4 to < 5 Years 343,687 7.9 443,382 13.2 5 or more Years 824,848 19.0
852,580 25.5
Total Investments Available for Sale
44
--------------------------------------------------------------------------------
Table of Contents
Top Ten Investments Available for Sale Holdings
June 30, 2020
Rank Amortized Unrealized Credit
($ in thousands) Security Fair Value Cost Gain Rating(1)
1 Fannie Mae 3.500% 1/1/2058 $ 28,982 $ 27,508 $ 1,474 Aaa
2 Freddie Mac 4.000% 11/1/2048 25,869 24,847 1,022 Aaa
3 U.S. Treasury 0.250% 5/31/2025 25,578 25,560 18 Aaa
4 U.S. Treasury 2.625% 6/30/2023 21,194 19,672 1,522 Aaa
5 U.S. Treasury 5.250% 11/15/2028 21,100 18,750 2,350 Aaa
6 U.S. Treasury 1.500% 8/15/2026 18,646 17,449 1,197 Aaa
7 Ginnie Mae 4.000% 4/20/2049 15,932 15,647 285 Aaa
8 Fannie Mae 4.500% 5/1/2048 15,352 14,387 965 Aaa
9 U.S. Treasury 2.625% 7/15/2021 15,123 14,742 381 Aaa
10 Freddie Mac 4.500% 4/1/2049 14,531 13,865 666 Aaa
Total $ 202,307 $ 192,427 $ 9,880
Percent of Investments Available for Sale 4.6 %
(1) Based on ratings issued by Moody's, if available. S&P or Fitch rating
utilized if Moody's not available.
Rank December 31, 2019
($ in thousands) Security Fair Value
1 Fannie Mae 3.500% 1/1/2058 $ 30,112
2 U.S. Treasury 5.250% 11/15/2028 29,480
3 Freddie Mac 4.000% 11/1/2048 28,530
4 U.S. Treasury 2.625% 6/30/2023 20,465
5 U.S. Treasury 1.500% 8/15/2026 17,161
6 Fannie Mae 4.500% 5/1/2048 16,972
7 Freddie Mac 4.500% 4/1/2049 16,585
8 U.S. Treasury 2.625% 7/15/2021 14,978
9 Freddie Mac 4.000% 5/15/2050 14,700
10 Fannie Mae 4.000% 5/1/2056 13,079
Total $ 202,062
Percent of Investments Available for Sale 6.0 %
45--------------------------------------------------------------------------------
Table of Contents
The following tables include municipal debt securities for states that represent
more than 10% of the total municipal bond position as of
Amortized Credit
($ in thousands) Fair Value Cost Rating (1), (2)
Texas
University of Houston $ 6,722 $ 6,353 Aa2
Texas A&M University 6,382 5,909 Aaa
State of Texas 5,882 5,495 Aaa
City of Houston TX Combined Utility
System Revenue 5,246 4,645 Aa2
City of Austin TX Electric Utility Revenue 2,362 2,144
Aa3
Dallas/Fort Worth International Airport 2,257 2,175
A2
City of Houston TX 2,241 2,108
Aa3
North Texas Municipal Water District 2,100 1,951 Aaa North Texas Tollway System 1,891 1,759 A2 City of Dallas TX 1,869 1,672 Aa3 LCRA Transmission Services Corp 1,836 1,814
A2
City of Fort Worth TX Water & Sewer System Revenue 1,563 1,471
Aa1
Tarrant Regional Water District 1,559 1,447
Aaa
City of San Antonio TX Airport System 1,248 1,191
A1
City of Corpus Christi TX Utility System Revenue 1,167 1,076
Aa3
Harris County Toll Road Authority 1,076 1,029
Aa2
Central Texas Turnpike System 1,017 1,012
Baa1
Metropolitan Transit Authority of Harris County Sales & Use Tax Revenue 932 911
Aaa
County of Fort Bend TX 869 800
Aa1
San Jacinto Community College District 595 545
Aa3
Austin-Bergstrom Landhost Enterprises , Inc. 584 589
A3
Austin Independent School District 311 301 Aaa
$ 49,709 $ 46,397
Amortized Credit
($ in thousands) Fair Value Cost Rating (1), (2)
New York
New York City Transitional Finance
Authority Future Tax Secured Revenue $ 8,797 $ 8,172 Aa1
State of New York Personal Income Tax Revenue 7,411 6,921
Aa1
Metropolitan Transportation Authority 7,378 7,276
A2
City of New York NY 7,225 6,512
Aa1
ThePort Authority ofNew York and New Jersey 5,901 5,565
Aa3
The Research Foundation of State University of New York 3,486 3,165 A1 City of Yonkers NY 2,456 2,304 A2 TSASC, Inc. 2,327 2,189 A2 County of Nassau NY 2,197 2,003 A2 Long Island Power Authority 1,893 1,758 A2 New York State Dormitory Authority 1,803 1,767
Aa3
New York City Transitional Finance
Authority Building Aid Revenue 1,594 1,486 Aa2
Town of Oyster Bay NY 1,094 1,042 Aa2
$ 53,562 $ 50,160 (1) Certain of the above securities may include financial guaranty insurance
or state enhancements. The above ratings include the effect of these
credit enhancements, if applicable.
(2) Based on ratings issued by Moody's, if available. S&P or Fitch rating
utilized if Moody's not available.
46--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
Essent Guaranty has entered into fully collateralized reinsurance agreements ("Radnor Re Transactions") with unaffiliated special purpose insurers domiciled inBermuda . The Radnor Re special purpose insurers are special purpose variable interest entities that are not consolidated in our condensed consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. As ofJune 30, 2020 , our estimated off-balance sheet maximum exposure to loss from theRadnor Re entities was$1.1 million , representing the estimated net present value of investment earnings on the assets in the reinsurance trusts. See Note 4 to our condensed consolidated financial statements for additional information.
Critical Accounting Policies
As of the filing date of this report, there were no significant changes in our critical accounting policies from those discussed in our 2019 Form 10-K. See Note 2 to our condensed consolidated financial statements for recently issued accounting standards adopted or under evaluation. 47
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
