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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 001-36157
ESSENT GROUP LTD.
(Exact name of registrant as specified in its charter)
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Bermuda |
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Not Applicable |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number) |
Clarendon House
2 Church Street
Hamilton HM11, Bermuda
(Address of principal executive offices and zip code)
(441) 297-9901
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Shares, $0.015 par value |
ESNT |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232-405 of this
chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such
files.) Yes
☒
No
☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in
Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated filer |
☒ |
|
Accelerated filer |
☐ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
☐ |
|
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
☐ No ☒
The number of the registrant’s common shares outstanding as of
November 3, 2022 was 107,707,483.
Essent Group Ltd. and Subsidiaries
Form 10-Q
Index
Unless the context otherwise indicates or requires, the terms “we,”
“our,” “us,” “Essent,” and the “Company,” as used in this Quarterly
Report on Form 10-Q, refer to Essent Group Ltd. and its
directly and indirectly owned subsidiaries, including our primary
operating subsidiaries, Essent Guaranty, Inc. and Essent
Reinsurance Ltd., as a combined entity, except where otherwise
stated or where it is clear that the terms mean only Essent Group
Ltd. exclusive of its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, or Quarterly Report,
includes forward-looking statements pursuant to the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements relate to expectations, beliefs,
projections, future plans and strategies, anticipated events or
trends and similar expressions concerning matters that are not
historical facts or present facts or conditions, such as statements
regarding our future financial condition or results of operations,
our prospects and strategies for future growth, the introduction of
new products and services, and the implementation of our marketing
and branding strategies. In many cases, you can identify
forward-looking statements by terms such as “may,” “will,”
“should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or the negative of these terms
or other comparable terminology.
The forward-looking statements contained in this Quarterly
Report reflect our views as of the date of this Quarterly
Report about future events and are subject to risks, uncertainties,
assumptions and changes in circumstances that may cause events or
our actual activities or results to differ significantly from those
expressed in any forward-looking statement. Although we believe
that the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future events, results,
actions, levels of activity, performance or achievements. A number
of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements,
including, but not limited to, those factors described below, in
Part I, Item 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Quarterly
Report, and in Part I, Item 1A “Risk Factors” of our
Annual Report on Form 10-K for the year ended
December 31, 2021 filed with the Securities and Exchange
Commission. These factors include, without limitation, the
following:
•the
duration, spread and severity of the outbreak of novel coronavirus
disease 2019 ("COVID-19"), which is currently ongoing and still
evolving; the actions taken to contain the virus or treat its
impact, including government and GSE actions to mitigate the
economic impact of the outbreak; the nature and extent of the
forbearance and modification options available to borrowers
affected by the outbreak on mortgages we insure; reserve and other
accounting estimates relating to the impact of the COVID-19
outbreak; borrower behavior in response to the outbreak and its
economic impact; how quickly and to what extent normal economic and
operating conditions can resume, including whether any future
outbreaks interrupt economic recovery; how quickly and to what
extent affected borrowers can recover from the negative economic
impact of the outbreak; and whether and to what extent the outbreak
and related economic conditions will exacerbate other risks and
uncertainties facing our business, financial condition and business
strategy;
•changes
in or to Fannie Mae and Freddie Mac, which we refer to collectively
as the GSEs, whether through Federal legislation, restructurings or
a shift in business practices;
•failure
to continue to meet the mortgage insurer eligibility requirements
of the GSEs;
•competition
for our customers or the loss of a significant
customer;
•lenders
or investors seeking alternatives to private mortgage
insurance;
•increase
in the number of loans insured through Federal government mortgage
insurance programs, including those offered by the Federal Housing
Administration;
•decline
in the volume of low down payment mortgage
originations;
•uncertainty
of loss reserve estimates;
•decrease
in the length of time our insurance policies are in
force;
•deteriorating
economic conditions (including inflation, rising interest rates and
other adverse economic trends);
•recently
enacted U.S. Federal tax reform and its impact on us, our
shareholders and our operations;
•the
definition of “Qualified Mortgage” reducing the size of the
mortgage origination market or creating incentives to use
government mortgage insurance programs;
•the
definition of “Qualified Residential Mortgage” reducing the number
of low down payment loans or lenders and investors seeking
alternatives to private mortgage insurance;
•the
implementation of the Basel III Capital Accord, which may
discourage the use of private mortgage insurance;
•management
of risk in our investment portfolio;
•fluctuations
in interest rates;
•inadequacy
of the premiums we charge to compensate for our losses
incurred;
•dependence
on management team and qualified personnel;
•disturbance
to our information technology systems;
•change
in our customers’ capital requirements discouraging the use of
mortgage insurance;
•declines
in the value of borrowers’ homes;
•limited
availability of capital or reinsurance;
•unanticipated
claims arise under and risks associated with our contract
underwriting program;
•industry
practice that loss reserves are established only upon a loan
default;
•disruption
in mortgage loan servicing, as a result of COVID-19 or
otherwise;
•risk
of future legal proceedings;
•customers’
technological demands;
•our
non-U.S. operations becoming subject to U.S. Federal income
taxation;
•becoming
considered a passive foreign investment company for U.S. Federal
income tax purposes; and
•potential
restrictions on the ability of our insurance subsidiaries to pay
dividends.
Readers are urged to consider these factors carefully in evaluating
the forward-looking statements and are cautioned not to place undue
reliance on these forward-looking statements. All of the
forward-looking statements we have included in this Quarterly
Report are based on information available to us on the date of
this Quarterly Report. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise, except as otherwise
required by law.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Essent Group Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
(In thousands, except per share amounts) |
|
2022 |
|
2021 |
|
Assets |
|
|
|
|
|
Investments |
|
|
|
|
|
Fixed maturities available for sale, at fair value (amortized cost:
2022 — $4,744,377;
2021 — $4,584,521)
|
|
$ |
4,253,705 |
|
|
$ |
4,649,800 |
|
|
Short-term investments available for sale, at fair value (amortized
cost: 2022 —
$331,605; 2021 — $313,086)
|
|
331,139 |
|
|
313,087 |
|
|
Total investments available for sale |
|
4,584,844 |
|
|
4,962,887 |
|
|
Other invested assets |
|
263,126 |
|
|
170,472 |
|
|
Total investments |
|
4,847,970 |
|
|
5,133,359 |
|
|
Cash |
|
79,467 |
|
|
81,491 |
|
|
Accrued investment income |
|
29,598 |
|
|
26,546 |
|
|
Accounts receivable |
|
59,069 |
|
|
46,157 |
|
|
Deferred policy acquisition costs |
|
10,408 |
|
|
12,178 |
|
|
Property and equipment (at cost, less accumulated depreciation of
$66,562 in 2022 and
$64,340 in 2021)
|
|
19,778 |
|
|
11,921 |
|
|
Prepaid federal income tax |
|
405,910 |
|
|
360,810 |
|
|
Other assets |
|
104,704 |
|
|
49,712 |
|
|
Total assets |
|
$ |
5,556,904 |
|
|
$ |
5,722,174 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
Liabilities |
|
|
|
|
|
Reserve for losses and LAE |
|
$ |
212,494 |
|
|
$ |
407,445 |
|
|
Unearned premium reserve |
|
169,413 |
|
|
185,385 |
|
|
Net deferred tax liability |
|
340,627 |
|
|
373,654 |
|
|
Credit facility borrowings (at carrying value, less unamortized
deferred costs of $4,400 in 2022 and $5,177 in 2021)
|
|
420,600 |
|
|
419,823 |
|
|
Other accrued liabilities |
|
119,562 |
|
|
99,753 |
|
|
Total liabilities |
|
1,262,696 |
|
|
1,486,060 |
|
|
Commitments and contingencies (see Note 7) |
|
|
|
|
|
Stockholders’ Equity |
|
|
|
|
|
Common shares, $0.015 par value:
|
|
|
|
|
|
Authorized - 233,333; issued and outstanding - 107,697 shares in
2022 and 109,377
shares in 2021
|
|
1,615 |
|
|
1,641 |
|
|
Additional paid-in capital |
|
1,345,598 |
|
|
1,428,952 |
|
|
Accumulated other comprehensive (loss) income |
|
(423,577) |
|
|
50,707 |
|
|
Retained earnings |
|
3,370,572 |
|
|
2,754,814 |
|
|
Total stockholders’ equity |
|
4,294,208 |
|
|
4,236,114 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
5,556,904 |
|
|
$ |
5,722,174 |
|
See accompanying notes to condensed consolidated financial
statements.
Essent Group Ltd. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In thousands, except per share amounts) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
209,230 |
|
|
$ |
202,348 |
|
|
$ |
619,303 |
|
|
$ |
608,996 |
|
|
Decrease (increase) in unearned premiums |
|
(1,296) |
|
|
16,370 |
|
|
15,972 |
|
|
46,226 |
|
|
Net premiums earned |
|
207,934 |
|
|
218,718 |
|
|
635,275 |
|
|
655,222 |
|
|
Net investment income |
|
32,594 |
|
|
21,573 |
|
|
86,613 |
|
|
65,104 |
|
|
Realized investment (losses) gains, net |
|
175 |
|
|
221 |
|
|
(7,648) |
|
|
609 |
|
|
Income from other invested assets |
|
9,617 |
|
|
40,741 |
|
|
36,275 |
|
|
41,389 |
|
|
Other income |
|
11,447 |
|
|
2,283 |
|
|
20,272 |
|
|
9,270 |
|
|
Total revenues |
|
261,767 |
|
|
283,536 |
|
|
770,787 |
|
|
771,594 |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
(Benefit) provision for losses and LAE |
|
4,252 |
|
|
(7,483) |
|
|
(178,805) |
|
|
34,490 |
|
|
Other underwriting and operating expenses |
|
42,144 |
|
|
42,272 |
|
|
124,838 |
|
|
125,625 |
|
|
Interest expense |
|
4,450 |
|
|
2,063 |
|
|
9,563 |
|
|
6,187 |
|
|
Total losses and expenses |
|
50,846 |
|
|
36,852 |
|
|
(44,404) |
|
|
166,302 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
210,921 |
|
|
246,684 |
|
|
815,191 |
|
|
605,292 |
|
|
Income tax expense |
|
32,870 |
|
|
41,331 |
|
|
131,204 |
|
|
104,496 |
|
|
Net income |
|
$ |
178,051 |
|
|
$ |
205,353 |
|
|
$ |
683,987 |
|
|
$ |
500,796 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.67 |
|
|
$ |
1.85 |
|
|
$ |
6.37 |
|
|
$ |
4.48 |
|
|
Diluted |
|
1.66 |
|
|
1.84 |
|
|
6.35 |
|
|
4.47 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
Basic |
|
106,870 |
|
|
111,001 |
|
|
107,314 |
|
|
111,708 |
|
|
Diluted |
|
107,337 |
|
|
111,387 |
|
|
107,732 |
|
|
112,070 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
178,051 |
|
|
$ |
205,353 |
|
|
$ |
683,987 |
|
|
$ |
500,796 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation (depreciation) of investments,
net of tax expense (benefit) of ($22,000) and ($8,599) in the three
months ended September 30, 2022 and 2021 and ($82,132) and
($10,944) in the nine months ended September 30, 2022 and
2021
|
|
(137,010) |
|
|
(36,917) |
|
|
(474,284) |
|
|
(59,760) |
|
|
Total other comprehensive income (loss) |
|
(137,010) |
|
|
(36,917) |
|
|
(474,284) |
|
|
(59,760) |
|
|
Comprehensive income |
|
$ |
41,041 |
|
|
$ |
168,436 |
|
|
$ |
209,703 |
|
|
$ |
441,036 |
|
See accompanying notes to condensed consolidated financial
statements.
Essent Group Ltd. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’
Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In thousands) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Common Shares |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
1,615 |
|
|
$ |
1,687 |
|
|
$ |
1,641 |
|
|
$ |
1,686 |
|
|
|
|
|
|
|
|
|
|
|
Issuance of management incentive shares |
|
— |
|
|
— |
|
|
9 |
|
|
9 |
|
|
Cancellation of treasury stock |
|
— |
|
|
(23) |
|
|
(35) |
|
|
(31) |
|
|
Balance, end of period |
|
1,615 |
|
|
1,664 |
|
|
1,615 |
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-In Capital |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
1,340,650 |
|
|
1,558,142 |
|
|
1,428,952 |
|
|
1,571,163 |
|
|
|
|
|
|
|
|
|
|
|
Dividends and dividend equivalents declared |
|
264 |
|
|
190 |
|
|
683 |
|
|
559 |
|
|
Issuance of management incentive shares |
|
— |
|
|
— |
|
|
(9) |
|
|
(9) |
|
|
Stock-based compensation expense |
|
4,702 |
|
|
5,511 |
|
|
13,707 |
|
|
16,075 |
|
|
Cancellation of treasury stock |
|
(18) |
|
|
(70,838) |
|
|
(97,735) |
|
|
(94,783) |
|
|
Balance, end of period |
|
1,345,598 |
|
|
1,493,005 |
|
|
1,345,598 |
|
|
1,493,005 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
(286,567) |
|
|
115,431 |
|
|
50,707 |
|
|
138,274 |
|
|
Other comprehensive loss |
|
(137,010) |
|
|
(36,917) |
|
|
(474,284) |
|
|
(59,760) |
|
|
Balance, end of period |
|
(423,577) |
|
|
78,514 |
|
|
(423,577) |
|
|
78,514 |
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
3,216,297 |
|
|
2,409,568 |
|
|
2,754,814 |
|
|
2,151,510 |
|
|
Net income |
|
178,051 |
|
|
205,353 |
|
|
683,987 |
|
|
500,796 |
|
|
Dividends and dividend equivalents declared |
|
(23,776) |
|
|
(20,120) |
|
|
(68,229) |
|
|
(57,505) |
|
|
Balance, end of period |
|
3,370,572 |
|
|
2,594,801 |
|
|
3,370,572 |
|
|
2,594,801 |
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Treasury stock acquired |
|
(18) |
|
|
(70,861) |
|
|
(97,770) |
|
|
(94,814) |
|
|
Cancellation of treasury stock |
|
18 |
|
|
70,861 |
|
|
97,770 |
|
|
94,814 |
|
|
Balance, end of period |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity |
|
$ |
4,294,208 |
|
|
$ |
4,167,984 |
|
|
$ |
4,294,208 |
|
|
$ |
4,167,984 |
|
See accompanying notes to condensed consolidated financial
statements.
Essent Group Ltd. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
(In thousands) |
|
2022 |
|
2021 |
|
Operating Activities |
|
|
|
|
|
Net income |
|
$ |
683,987 |
|
|
$ |
500,796 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
Realized investment losses (gains), net |
|
7,648 |
|
|
(609) |
|
|
Income from other invested assets |
|
(36,275) |
|
|
(41,389) |
|
|
Distribution of income from other invested assets |
|
11,149 |
|
|
1,568 |
|
|
Depreciation and amortization |
|
2,230 |
|
|
2,578 |
|
|
Stock-based compensation expense |
|
13,707 |
|
|
16,075 |
|
|
Amortization of premium on investment securities |
|
14,654 |
|
|
25,300 |
|
|
Deferred income tax provision |
|
49,106 |
|
|
62,670 |
|
|
Change in: |
|
|
|
|
|
Accrued investment income |
|
(3,052) |
|
|
(4,694) |
|
|
Accounts receivable |
|
(11,811) |
|
|
1,780 |
|
|
Deferred policy acquisition costs |
|
1,770 |
|
|
3,698 |
|
|
Prepaid federal income tax |
|
(45,100) |
|
|
(45,650) |
|
|
Other assets |
|
(50,722) |
|
|
(3,319) |
|
|
Reserve for losses and LAE |
|
(194,951) |
|
|
38,015 |
|
|
Unearned premium reserve |
|
(15,972) |
|
|
(46,226) |
|
|
Other accrued liabilities |
|
(9,912) |
|
|
7,574 |
|
|
Net cash provided by operating activities |
|
416,456 |
|
|
518,167 |
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
Net change in short-term investments |
|
(18,052) |
|
|
417,078 |
|
|
Purchase of investments available for sale |
|
(1,022,095) |
|
|
(1,503,051) |
|
|
Proceeds from maturities and paydowns of investments available for
sale |
|
183,232 |
|
|
214,424 |
|
|
Proceeds from sales of investments available for sale |
|
673,945 |
|
|
509,998 |
|
|
Purchase of other invested assets |
|
(69,019) |
|
|
(56,166) |
|
|
Return of investment from other invested assets |
|
1,490 |
|
|
16,000 |
|
|
Purchase of property and equipment |
|
(2,511) |
|
|
(1,695) |
|
|
Net cash used in investing activities |
|
(253,010) |
|
|
(403,412) |
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
Credit facility borrowings |
|
— |
|
|
25,000 |
|
|
Credit facility repayments |
|
— |
|
|
(25,000) |
|
|
Treasury stock acquired |
|
(97,770) |
|
|
(94,814) |
|
|
Payment of issuance costs for credit facility |
|
(154) |
|
|
— |
|
|
Dividends paid |
|
(67,546) |
|
|
(56,946) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
(165,470) |
|
|
(151,760) |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash |
|
(2,024) |
|
|
(37,005) |
|
|
Cash at beginning of year |
|
81,491 |
|
|
102,830 |
|
|
Cash at end of period |
|
$ |
79,467 |
|
|
$ |
65,825 |
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information |
|
|
|
|
|
Income tax payments |
|
$ |
(73,226) |
|
|
$ |
(35,000) |
|
|
Interest payments |
|
(8,044) |
|
|
(5,321) |
|
|
|
|
|
|
|
|
Noncash Transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities arising from obtaining right-of-use
assets |
|
$ |
10,096 |
|
|
$ |
— |
|
See accompanying notes to condensed consolidated financial
statements.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In these notes to condensed consolidated financial statements,
“Essent”, “Company”, “we”, “us”, and “our” refer to Essent Group
Ltd. and its subsidiaries, unless the context otherwise
requires.
Note 1. Nature of Operations and Basis of
Presentation
Essent Group Ltd. (“Essent Group”) is a Bermuda-based holding
company, which, through its wholly-owned subsidiaries, offers
private mortgage insurance and reinsurance for mortgages secured by
residential properties located in the United States. Mortgage
insurance facilitates the sale of low down payment (generally less
than 20%) mortgage loans into the secondary mortgage market,
primarily to two government-sponsored enterprises (“GSEs”), Fannie
Mae and Freddie Mac.
The primary mortgage insurance operations are conducted through
Essent Guaranty, Inc. (“Essent Guaranty”), a wholly-owned
subsidiary approved as a qualified mortgage insurer by the GSEs and
is licensed to write mortgage insurance in all 50 states and the
District of Columbia. Essent Guaranty reinsures new insurance
written ("NIW") to Essent Reinsurance Ltd. (“Essent Re”), an
affiliated Bermuda domiciled Class 3A Insurer licensed
pursuant to Section 4 of the Bermuda Insurance Act 1978 that
provides insurance and reinsurance coverage of mortgage credit
risk. In April 2021, Essent Guaranty and Essent Re agreed to
increase the quota share reinsurance coverage of Essent Guaranty’s
NIW provided by Essent Re from 25% to 35% effective January 1,
2021. The quota share reinsurance coverage provided by Essent Re
for Essent Guaranty’s NIW prior to January 1, 2021 will continue to
be 25%, the quota share percentage in effect at the time NIW was
first ceded. Essent Re also provides insurance and reinsurance to
Freddie Mac and Fannie Mae. In 2016, Essent Re formed Essent Agency
(Bermuda) Ltd., a wholly-owned subsidiary, which provides
underwriting consulting services to third-party reinsurers. In
accordance with certain state law requirements then in effect,
Essent Guaranty also reinsures that portion of the risk that is in
excess of 25% of the mortgage balance with respect to loans insured
prior to April 1, 2019, after consideration of other reinsurance,
to Essent Guaranty of PA, Inc. (“Essent PA”), an
affiliate.
In addition to offering mortgage insurance, we provide contract
underwriting services on a limited basis through CUW
Solutions, LLC ("CUW Solutions"), a Delaware limited liability
company, that provides, among other things, mortgage contract
underwriting services to lenders and mortgage insurance
underwriting services to affiliates.
We have prepared the condensed consolidated financial statements
included herein pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). We have condensed or
omitted certain information and footnote disclosures normally
included in consolidated financial statements prepared in
accordance with U.S. generally accepted accounting principles
(“GAAP”) pursuant to such rules and regulations. In the
opinion of management, the statements include all adjustments
(which include normal recurring adjustments) required for a fair
statement of financial position, results of operations and cash
flows for the interim periods presented. These statements should be
read in conjunction with the consolidated financial statements and
notes thereto, including Note 1 and Note 2 to the
consolidated financial statements, included in our Annual Report on
Form 10-K for the year ended December 31, 2021, which
discloses the principles of consolidation and a summary of
significant accounting policies. The results of operations for the
interim periods are not necessarily indicative of the results for
the full year. We evaluated the need to recognize or disclose
events that occurred subsequent to September 30, 2022 prior to
the issuance of these condensed consolidated financial
statements.
Certain amounts in prior years have been reclassified to conform to
the current year presentation.
Note 2. Recently Issued Accounting Standards
Accounting Standards Not Yet Adopted
In March 2020, the Financial Accounting
Standards Board ("FASB") issued ASU No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting.
The amendments in this update provide temporary optional guidance
to ease the potential burden in accounting for (or recognizing the
effects of) reference rate reform. It provides optional expedients
and exceptions for applying generally accepted accounting
principles to contract, hedging relationships and other
transactions affected by reference rate reform if certain criteria
are met. This standard may be elected and applied prospectively
over time from March 12, 2020 through December 31, 2022 as
reference rate reform activities occur. The adoption of, and future
elections under, this ASU are not expected to have a material
impact on our consolidated financial statements as the ASU will
ease, if warranted, the requirements for accounting for the future
effects of
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the rate reform. We continue to monitor the impact the
discontinuance of LIBOR or another reference rate will have on our
contracts and other transactions.
In June 2022, the FASB issued ASU No. 2022-03,
Fair Value Measurement (Topic 820): Fair Value Measurement of
Equity Securities Subject to Contractual Sale
Restrictions.
This update clarifies the guidance in ASC 820 on the fair value
measurement of an equity security that is subject to a contractual
sale restriction and requires specific disclosures related to such
an equity security. The update clarifies that a contractual sale
restriction prohibiting the sale of an equity security is a
characteristic of the reporting entity holding the equity security
and is not included in the equity security's unit of account.
Accordingly, an entity should not consider the contractual sale
restriction when measuring the equity security’s fair value. The
update also requires specific disclosures related to equity
securities that are subject to contractual sale restrictions,
including (1) the fair value of such equity securities reflected in
the balance sheet, (2) the nature and remaining duration of the
corresponding restrictions, and (3) any circumstances that could
cause a lapse in the restrictions. The ASU is effective for fiscal
years beginning after December 15, 2023, and interim periods within
those fiscal years, with early adoption permitted. The adoption of
this ASU is not expected to have a material effect on the Company's
consolidated operating results or financial position.
Note 3. Investments
Investments available for sale consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 (In thousands) |
|
Amortized
Cost |
|
Unrealized
Gains |
|
Unrealized
Losses |
|
Fair
Value |
|
U.S. Treasury securities |
|
$ |
566,466 |
|
|
$ |
2 |
|
|
$ |
(30,832) |
|
|
$ |
535,636 |
|
|
U.S. agency securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
U.S. agency mortgage-backed securities |
|
879,028 |
|
|
— |
|
|
(126,792) |
|
|
752,236 |
|
|
Municipal debt securities (1) |
|
627,772 |
|
|
95 |
|
|
(68,083) |
|
|
559,784 |
|
|
Non-U.S. government securities |
|
70,126 |
|
|
— |
|
|
(9,292) |
|
|
60,834 |
|
|
Corporate debt securities (2) |
|
1,501,150 |
|
|
7 |
|
|
(155,888) |
|
|
1,345,269 |
|
|
Residential and commercial mortgage securities |
|
586,771 |
|
|
123 |
|
|
(63,286) |
|
|
523,608 |
|
|
Asset-backed securities |
|
645,522 |
|
|
15 |
|
|
(37,207) |
|
|
608,330 |
|
|
Money market funds |
|
199,147 |
|
|
— |
|
|
— |
|
|
199,147 |
|
|
Total investments available for sale |
|
$ |
5,075,982 |
|
|
$ |
242 |
|
|
$ |
(491,380) |
|
|
$ |
4,584,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 (In thousands) |
|
Amortized
Cost |
|
Unrealized
Gains |
|
Unrealized
Losses |
|
Fair
Value |
|
U.S. Treasury securities |
|
$ |
447,926 |
|
|
$ |
3,833 |
|
|
$ |
(2,966) |
|
|
$ |
448,793 |
|
|
U.S. agency securities |
|
5,501 |
|
|
3 |
|
|
— |
|
|
5,504 |
|
|
U.S. agency mortgage-backed securities |
|
1,005,611 |
|
|
13,365 |
|
|
(10,113) |
|
|
1,008,863 |
|
|
Municipal debt securities (1) |
|
598,764 |
|
|
30,122 |
|
|
(1,287) |
|
|
627,599 |
|
|
Non-U.S. government securities |
|
77,366 |
|
|
3,232 |
|
|
(855) |
|
|
79,743 |
|
|
Corporate debt securities (2) |
|
1,428,645 |
|
|
36,067 |
|
|
(9,465) |
|
|
1,455,247 |
|
|
Residential and commercial mortgage securities |
|
541,638 |
|
|
10,452 |
|
|
(6,667) |
|
|
545,423 |
|
|
Asset-backed securities |
|
582,144 |
|
|
1,673 |
|
|
(2,114) |
|
|
581,703 |
|
|
Money market funds |
|
210,012 |
|
|
— |
|
|
— |
|
|
210,012 |
|
|
Total investments available for sale |
|
$ |
4,897,607 |
|
|
$ |
98,747 |
|
|
$ |
(33,467) |
|
|
$ |
4,962,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
(1) The following table summarizes municipal debt securities as
of: |
|
2022 |
|
2021 |
|
Special revenue bonds |
|
78.5 |
% |
|
77.1 |
% |
|
General obligation bonds |
|
21.5 |
|
|
20.5 |
|
|
Certificate of participation bonds |
|
— |
|
|
1.9 |
|
|
Tax allocation bonds |
|
— |
|
|
0.5 |
|
|
|
|
|
|
|
Total |
|
100.0 |
% |
|
100.0 |
% |
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
(2) The following table summarizes corporate debt securities as
of: |
|
2022 |
|
2021 |
|
Financial |
|
39.4 |
% |
|
33.7 |
% |
|
Consumer, non-cyclical |
|
17.5 |
|
|
19.8 |
|
|
Communications |
|
8.8 |
|
|
11.4 |
|
|
Industrial |
|
6.8 |
|
|
7.0 |
|
|
Consumer, cyclical |
|
7.2 |
|
|
7.0 |
|
|
Energy |
|
6.6 |
|
|
6.0 |
|
|
Technology |
|
5.6 |
|
|
6.8 |
|
|
Utilities |
|
6.1 |
|
|
4.6 |
|
|
Basic materials |
|
2.0 |
|
|
3.7 |
|
|
|
|
|
|
|
Total |
|
100.0 |
% |
|
100.0 |
% |
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The amortized cost and fair value of investments available for sale
at September 30, 2022, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties. Because most U.S.
agency mortgage-backed securities, residential and commercial
mortgage securities and asset-backed securities provide for
periodic payments throughout their lives, they are listed below in
separate categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Amortized
Cost |
|
Fair
Value |
|
U.S. Treasury securities: |
|
|
|
|
|
Due in 1 year |
|
$ |
169,120 |
|
|
$ |
167,667 |
|
|
Due after 1 but within 5 years |
|
353,483 |
|
|
330,053 |
|
|
Due after 5 but within 10 years |
|
38,835 |
|
|
34,103 |
|
|
Due after 10 years |
|
5,028 |
|
|
3,813 |
|
|
Subtotal |
|
566,466 |
|
|
535,636 |
|
|
U.S. agency securities: |
|
|
|
|
|
Due in 1 year |
|
— |
|
|
— |
|
|
Due after 1 but within 5 years |
|
— |
|
|
— |
|
|
Subtotal |
|
— |
|
|
— |
|
|
Municipal debt securities: |
|
|
|
|
|
Due in 1 year |
|
6,992 |
|
|
6,943 |
|
|
Due after 1 but within 5 years |
|
141,922 |
|
|
137,108 |
|
|
Due after 5 but within 10 years |
|
164,538 |
|
|
151,508 |
|
|
Due after 10 years |
|
314,320 |
|
|
264,225 |
|
|
Subtotal |
|
627,772 |
|
|
559,784 |
|
|
Non-U.S. government securities: |
|
|
|
|
|
Due in 1 year |
|
10,452 |
|
|
10,396 |
|
|
Due after 1 but within 5 years |
|
27,362 |
|
|
25,697 |
|
|
Due after 5 but within 10 years |
|
8,893 |
|
|
7,979 |
|
|
Due after 10 years |
|
23,419 |
|
|
16,762 |
|
|
Subtotal |
|
70,126 |
|
|
60,834 |
|
|
Corporate debt securities: |
|
|
|
|
|
Due in 1 year |
|
235,975 |
|
|
233,177 |
|
|
Due after 1 but within 5 years |
|
696,023 |
|
|
657,186 |
|
|
Due after 5 but within 10 years |
|
419,294 |
|
|
345,569 |
|
|
Due after 10 years |
|
149,858 |
|
|
109,337 |
|
|
Subtotal |
|
1,501,150 |
|
|
1,345,269 |
|
|
U.S. agency mortgage-backed securities |
|
879,028 |
|
|
752,236 |
|
|
Residential and commercial mortgage securities |
|
586,771 |
|
|
523,608 |
|
|
Asset-backed securities |
|
645,522 |
|
|
608,330 |
|
|
Money market funds |
|
199,147 |
|
|
199,147 |
|
|
Total investments available for sale |
|
$ |
5,075,982 |
|
|
$ |
4,584,844 |
|
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The components of realized investment (losses) gains, net on the
condensed consolidated statements of comprehensive income were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In thousands) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Realized gross gains |
|
$ |
1,650 |
|
|
$ |
654 |
|
|
$ |
14,397 |
|
|
$ |
1,422 |
|
|
Realized gross losses |
|
(1,370) |
|
|
(433) |
|
|
(14,634) |
|
|
(813) |
|
|
Impairment loss |
|
(105) |
|
|
— |
|
|
(7,411) |
|
|
— |
|
The fair value of investments available for sale in an unrealized
loss position and the related unrealized losses for which no
allowance for credit loss has been recorded were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
September 30, 2022 (In thousands) |
|
Fair
Value |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
Gross
Unrealized
Losses |
|
U.S. Treasury securities |
|
$ |
361,655 |
|
|
$ |
(15,490) |
|
|
$ |
161,968 |
|
|
$ |
(15,342) |
|
|
$ |
523,623 |
|
|
$ |
(30,832) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency mortgage-backed securities |
|
508,415 |
|
|
(74,350) |
|
|
243,821 |
|
|
(52,442) |
|
|
752,236 |
|
|
(126,792) |
|
|
Municipal debt securities |
|
527,796 |
|
|
(64,097) |
|
|
14,588 |
|
|
(3,986) |
|
|
542,384 |
|
|
(68,083) |
|
|
Non-U.S. government securities |
|
51,784 |
|
|
(5,922) |
|
|
9,050 |
|
|
(3,370) |
|
|
60,834 |
|
|
(9,292) |
|
|
Corporate debt securities |
|
1,166,786 |
|
|
(127,688) |
|
|
143,745 |
|
|
(28,200) |
|
|
1,310,531 |
|
|
(155,888) |
|
|
Residential and commercial mortgage securities
|
|
376,356 |
|
|
(38,046) |
|
|
143,118 |
|
|
(25,240) |
|
|
519,474 |
|
|
(63,286) |
|
|
Asset-backed securities |
|
481,105 |
|
|
(27,029) |
|
|
122,339 |
|
|
(10,178) |
|
|
603,444 |
|
|
(37,207) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,473,897 |
|
|
$ |
(352,622) |
|
|
$ |
838,629 |
|
|
$ |
(138,758) |
|
|
$ |
4,312,526 |
|
|
$ |
(491,380) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
December 31, 2021 (In thousands) |
|
Fair
Value |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
Gross
Unrealized
Losses |
|
Fair
Value |
|
Gross
Unrealized
Losses |
|
U.S. Treasury securities |
|
$ |
207,122 |
|
|
$ |
(2,170) |
|
|
$ |
28,012 |
|
|
$ |
(796) |
|
|
$ |
235,134 |
|
|
$ |
(2,966) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency mortgage-backed securities |
|
582,108 |
|
|
(9,414) |
|
|
26,131 |
|
|
(699) |
|
|
608,239 |
|
|
(10,113) |
|
|
Municipal debt securities |
|
91,719 |
|
|
(1,281) |
|
|
312 |
|
|
(6) |
|
|
92,031 |
|
|
(1,287) |
|
|
Non-U.S. government securities |
|
22,986 |
|
|
(855) |
|
|
— |
|
|
— |
|
|
22,986 |
|
|
(855) |
|
|
Corporate debt securities |
|
522,120 |
|
|
(7,200) |
|
|
46,875 |
|
|
(2,265) |
|
|
568,995 |
|
|
(9,465) |
|
|
Residential and commercial mortgage securities
|
|
268,617 |
|
|
(5,200) |
|
|
38,256 |
|
|
(1,467) |
|
|
306,873 |
|
|
(6,667) |
|
|
Asset-backed securities |
|
339,137 |
|
|
(1,954) |
|
|
13,101 |
|
|
(160) |
|
|
352,238 |
|
|
(2,114) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,033,809 |
|
|
$ |
(28,074) |
|
|
$ |
152,687 |
|
|
$ |
(5,393) |
|
|
$ |
2,186,496 |
|
|
$ |
(33,467) |
|
At September 30, 2022 and December 31, 2021, we held
2,720 and 1,180 individual investment securities, respectively,
that were in an unrealized loss position. We assess our intent to
sell these securities and whether we will be required to sell these
securities before the recovery of their amortized cost basis when
determining whether to record an impairment on the securities in an
unrealized loss position. In assessing whether the decline in the
fair value at September 30, 2022 of any of these securities
resulted from a credit loss or other factors, we made inquiries of
our investment managers to determine that each issuer was current
on its scheduled interest and principal payments. We reviewed the
credit rating of these securities noting that approximately 98% of
the securities at September 30, 2022 had investment-grade
ratings. We concluded that gross unrealized losses noted above were
primarily associated with the changes in interest rates subsequent
to purchase rather than due to credit. During the three and nine
months ended September 30, 2022, we recorded impairments of
$0.1 million and $7.4 million, respectively, due to our intent
to sell securities in an unrealized loss position. There were no
impairments recorded during the three or nine months ended
September 30, 2021.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company's other invested assets at September 30, 2022 and
December 31, 2021 totaled $263.1 million and $170.5 million,
respectively. Other invested assets are principally comprised of
limited partnership interests which are generally accounted for
under the equity method or fair value using net asset value (or its
equivalent) as a practical expedient. Our proportionate share of
earnings or losses or changes in fair value are reported in income
from other invested assets on the condensed consolidated statements
of comprehensive income. For entities accounted for under the
equity method that follow industry-specific guidance for investment
companies, our proportionate share of earnings or losses includes
changes in the fair value of the underlying assets of these
entities. Due to the timing of receiving financial information from
these partnerships, the results are generally reported on a one
month or quarter lag.
Through June 30, 2021, unrealized gains and losses reported by
these entities were included in other comprehensive income (“OCI”).
Subsequent to
June 30, 2021, management concluded that unrealized gains and
losses on these investments should be reflected in earnings rather
than OCI.
Income from other invested assets for the three and nine months
ended September 30, 2022, includes $9.9 million and
$22.5 million of net unrealized gains,
respectively.
Other invested assets that are accounted for at fair value using
the net asset value (or its equivalent) as a practical expedient
totaled $172.6 million as of September 30, 2022. The
majority of these investments were in limited partnerships invested
in real estate or technology. At September 30, 2022, maximum
future funding commitments were $29.3 million. For limited
partnership investments that have a contractual expiration date, we
expect the liquidation of the underlying assets to occur over the
next
two to nine years. For certain of these investments, the
Company does not have the contractual option to redeem, but
receives distributions based on the liquidation of the underlying
assets. In addition, the Company generally does not have the
ability to sell or transfer these investments without the consent
from the general partner of individual limited
partnerships.
The fair value of investments deposited with insurance regulatory
authorities to meet statutory requirements was $9.1 million at
September 30, 2022 and $9.7 million at December 31, 2021.
In connection with its insurance and reinsurance activities, Essent
Re is required to maintain assets in trusts for the benefit of its
contractual counterparties. The fair value of the investments
on deposit in these trusts was $1.0 billion at September 30,
2022 and $982.6 million at December 31, 2021. Essent Guaranty
is required to maintain assets on deposit in connection with its
fully collateralized reinsurance agreements (see Note 4). The
fair value of the assets on deposit was $8.6 million at
September 30, 2022 and $8.5 million at December 31, 2021.
Essent Guaranty is also required to maintain assets on deposit for
the benefit of the sponsor of a fixed income investment commitment.
The fair value of the assets on deposit was $9.0 million at
September 30, 2022 and $9.0 million at December 31,
2021.
Net investment income consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In thousands) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Fixed maturities |
|
$ |
33,948 |
|
|
$ |
23,001 |
|
|
$ |
91,245 |
|
|
$ |
69,037 |
|
|
Short-term investments |
|
872 |
|
|
30 |
|
|
1,132 |
|
|
158 |
|
|
Gross investment income |
|
34,820 |
|
|
23,031 |
|
|
92,377 |
|
|
69,195 |
|
|
Investment expenses |
|
(2,226) |
|
|
(1,458) |
|
|
(5,764) |
|
|
(4,091) |
|
|
Net investment income |
|
$ |
32,594 |
|
|
$ |
21,573 |
|
|
$ |
86,613 |
|
|
$ |
65,104 |
|
Note 4. Reinsurance
In the ordinary course of business, our insurance subsidiaries may
use reinsurance to provide protection against adverse loss
experience and to expand our capital sources. Reinsurance
recoverables are recorded as assets and included in other assets on
our condensed consolidated balance sheets, predicated on a
reinsurer's ability to meet their obligations under the reinsurance
agreements. If the reinsurers are unable to satisfy their
obligations under the agreements, our insurance subsidiaries would
be liable for such defaulted amounts.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The effect of reinsurance on net premiums written and earned is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
(In thousands) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net premiums written: |
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
239,773 |
|
|
$ |
229,228 |
|
|
$ |
692,687 |
|
|
$ |
693,434 |
|
|
Ceded (1) |
|
(30,543) |
|
|
(26,880) |
|
|
(73,384) |
|
|
(84,438) |
|
|
Net premiums written |
|
$ |
209,230 |
|
|
$ |
202,348 |
|
|
$ |
619,303 |
|
|
$ |
608,996 |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned: |
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
238,477 |
|
|
$ |
245,598 |
|
|
$ |
708,659 |
|
|
$ |
739,660 |
|
|
Ceded (1) |
|
(30,543) |
|
|
(26,880) |
|
|
(73,384) |
|
|
(84,438) |
|
|
Net premiums earned |
|
$ |
207,934 |
|
|
$ |
218,718 |
|
|
$ |
635,275 |
|
|
$ |
655,222 |
|
(1)Net
of profit commission.
Quota Share Reinsurance
Effective September 1, 2019, Essent
Guaranty entered into a quota share reinsurance agreement with a
panel of third-party reinsurers ("QSR 2019"). Each of the
third-party reinsurers has an insurer financial strength rating of
A or better by S&P Global Ratings, A.M. Best or both. Under QSR
2019, 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 written September 1, 2019 through December
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. QSR 2019 is scheduled to terminate on December 31,
2030. Essent Guaranty has certain termination rights under QSR
2019, including the option to terminate QSR 2019 with no
termination fee on December 31, 2021, and the option, subject to a
termination fee, to terminate QSR 2019 on December 31, 2022, or
annually thereafter. As Essent Guaranty did not exercise its option
to terminate QSR 2019 effective December 31, 2021, the maximum
profit commission that Essent Guaranty could earn will increase to
63% in 2022 and thereafter.
Effective January 1, 2022, Essent Guaranty entered into a quota
share reinsurance agreement with a panel of third-party reinsurers
("QSR 2022"). Each of the third-party reinsurers has an insurer
minimum financial strength rating of A- or better by S&P Global
Ratings, A.M. Best or both. Under QSR 2022, Essent Guaranty will
cede premiums earned related to 20% of risk on all eligible
policies written January 1, 2022 through December 31, 2022, in
exchange for reimbursement of ceded claims and claims expenses on
covered policies, a 20% ceding commission, and a profit commission
of up to 62% that varies directly and inversely with ceded claims.
QSR 2022 is scheduled to terminate on December 31, 2032. Essent
Guaranty has certain termination rights under QSR 2022, including
the option to terminate QSR 2022, subject to a termination fee, on
December 31, 2024, or quarterly thereafter.
Total RIF ceded under QSR 2019 and QSR 2022 was $6.5 billion as of
September 30, 2022.
Excess of Loss Reinsurance
Essent Guaranty has entered into fully collateralized reinsurance
agreements ("Radnor Re Transactions") with unaffiliated special
purpose insurers domiciled in Bermuda. For the reinsurance coverage
periods, Essent Guaranty and its affiliates retain the first layer
of the respective aggregate losses, and a Radnor Re special purpose
insurer will then provide second layer coverage up to the
outstanding reinsurance coverage amount. Essent Guaranty and its
affiliates retain losses in excess of the outstanding reinsurance
coverage amount. The reinsurance premium due to each Radnor Re
special purpose insurer is calculated by multiplying the
outstanding reinsurance coverage amount at the beginning of a
period by a coupon rate, which is the sum of one-month LIBOR or
SOFR plus a risk margin, and then subtracting actual investment
income collected on the assets in the related reinsurance trust
during that period. The aggregate excess of loss reinsurance
coverage decreases over a ten-year period as the underlying covered
mortgages amortize. Essent Guaranty has rights to terminate the
Radnor Re Transactions. The Radnor Re entities collateralized the
coverage by issuing mortgage insurance-linked notes ("ILNs") in an
aggregate amount equal to the initial coverage to unaffiliated
investors. The notes have ten-year legal maturities and are
non-
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
recourse to any assets of Essent Guaranty or its affiliates. The
proceeds of the notes were deposited into reinsurance trusts for
the benefit of Essent Guaranty and will be the source of
reinsurance claim payments to Essent Guaranty and principal
repayments on the ILNs.
Effective June 1, 2022, Essent Guaranty entered into a reinsurance
agreement with a panel of reinsurers that provides excess of loss
coverage on new insurance written from October 1, 2021 through
December 31, 2022. For the reinsurance coverage period, Essent
Guaranty and its affiliates retain the first layer of the
respective aggregate losses, and the reinsurance panel will then
provide second layer coverage up to the outstanding reinsurance
coverage amount. Essent Guaranty and its affiliates retain losses
in excess of the outstanding reinsurance coverage amount. Essent
Guaranty has also entered into reinsurance agreements with panels
of reinsurers that provide aggregate excess of loss coverage
immediately above or pari-passu to the coverage provided by the
Radnor Re Transactions. The aggregate excess of loss reinsurance
coverage decreases over a ten-year period as the underlying covered
mortgages amortize. Essent Guaranty has rights to terminate these
reinsurance agreements.
The following table summarizes Essent Guaranty's excess of loss
reinsurance agreements as of September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vintage Year |
|
Reinsurer |
|
Effective Date |
|
Optional Termination Date |
|
2015 & 2016 |
|
Radnor Re 2019-2 Ltd. |
|
June 20, 2019 |
|
June 25, 2024 |
|
|
2017 |
|
Radnor Re 2018-1 Ltd. |
|
March 22, 2018 |
|
March 25, 2023 |
(1) |
|
2017 |
|
Panel of Reinsurers |
|
November 1, 2018 |
|
October 1, 2023 |
(2) |
|
2018 |
|
Radnor Re 2019-1 Ltd. |
|
February 28, 2019 |
|
February 25, 2026 |
|
|
2018 |
|
Panel of Reinsurers |
|
February 28, 2019 |
|
February 25, 2026 |
|
|
2019 |
|
Radnor Re 2020-1 Ltd. |
|
January 30, 2020 |
|
January 25, 2027 |
|
|
2019 |
|
Panel of Reinsurers |
|
January 30, 2020 |
|
January 25, 2027 |
|
|
2020 & 2021 |
|
Radnor Re 2021-1 Ltd. |
|
June 23, 2021 |
|
June 26, 2028 |
|
|
2021 |
|
Radnor Re 2021-2 Ltd. |
|
November 10, 2021 |
|
November 25, 2027 |
|
|
2021 & 2022 |
|
Panel of Reinsurers |
|
June 1, 2022 |
|
January 1, 2030 |
|
|
2021 & 2022 |
|
Radnor Re 2022-1 Ltd. |
|
September 21, 2022 |
|
September 25, 2028 |
|
(1)If
the reinsurance agreement is not terminated at the optional
termination date, the risk margin component of the reinsurance
premium increases by 50%.
(2)If
the reinsurance agreement is not terminated at the optional
termination date, the reinsurance premium increases by
50%.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes Essent Guaranty's excess of loss
reinsurance coverages and retentions as of September 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Remaining
Reinsurance in Force |
|
|
|
|
Vintage Year |
|
Remaining
Insurance
in Force |
|
Remaining
Risk
in Force |
|
ILN |
|
Other Reinsurance |
|
|
Total |
|
Remaining
First Layer
Retention |
|
|
2015 & 2016 |
|
$ |
6,415,924 |
|
|
$ |
1,740,167 |
|
|
$ |
61,478 |
|
|
$ |
— |
|
|
|
$ |
61,478 |
|
|
$ |
206,925 |
|
|
|
2017 |
|
6,129,801 |
|
|
1,610,026 |
|
|
242,123 |
|
|
127,770 |
|
(6) |
|
369,893 |
|
|
216,632 |
|
|
|
2018 |
|
6,961,516 |
|
|
1,791,216 |
|
|
325,537 |
|
|
76,144 |
|
(7) |
|
401,681 |
|
|
248,875 |
|
|
|
2019
(3)
|
|
8,578,642 |
|
|
2,203,474 |
|
|
448,805 |
|
|
49,870 |
|
(8) |
|
498,675 |
|
|
214,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 & 2021
(4)
|
|
43,021,732 |
|
|
10,731,139 |
|
|
486,933 |
|
|
— |
|
|
|
486,933 |
|
|
278,919 |
|
|
|
2021
(5)
|
|
42,367,258 |
|
|
11,236,549 |
|
|
423,462 |
|
|
— |
|
|
|
423,462 |
|
|
279,415 |
|
|
|
2021 & 2022
(9)
|
|
63,515,812 |
|
|
17,043,854 |
|
|
— |
|
|
119,307 |
|
|
|
119,307 |
|
|
426,096 |
|
|
|
2021 & 2022
(10)
|
|
34,325,434 |
|
|
9,205,630 |
|
|
237,868 |
|
|
— |
|
|
|
237,868 |
|
|
303,761 |
|
|
|
Total |
|
$ |
211,316,119 |
|
|
$ |
55,562,055 |
|
|
$ |
2,226,206 |
|
|
$ |
373,091 |
|
|
|
$ |
2,599,297 |
|
|
$ |
1,940,960 |
|
(11) |
(3)Reinsurance
coverage on new insurance written from January 1, 2019 through
August 31, 2019.
(4)Reinsurance
coverage on new insurance written from August 1, 2020 through March
31, 2021.
(5)Reinsurance
coverage on new insurance written from April 1, 2021 through
September 30, 2021.
(6)Coverage
provided immediately above the coverage provided by Radnor Re
2018-1 Ltd.
(7)Coverage
provided pari-passu to the coverage provided by Radnor Re 2019-1
Ltd.
(8)Coverage
provided pari-passu to the coverage provided by Radnor Re 2020-1
Ltd.
(9)Reinsurance
coverage on new insurance written from October 1, 2021 through
December 31, 2022.
(10)Reinsurance
coverage on new insurance written from October 1, 2021 through July
31, 2022.
(11)The
total remaining first layer retention differs from the sum of the
individual reinsurance transactions as a result of overlapping
coverage between certain transactions.
Based on the level of delinquencies
reported to us, the ILN transactions entered into prior to March
31, 2020 became subject to a "trigger event" as of June 25,
2020. The amortization of principal of the notes issued by the
unaffiliated special purpose insurers in connection with those ILN
transactions is suspended and the aggregate excess of loss
reinsurance coverage will not amortize during the continuation of a
trigger event. As of November 26, 2021, Radnor Re 2019-2 was no
longer subject to a trigger event. Radnor Re 2020-1 was no longer
subject to a trigger event as of July 25, 2022.
The amount of monthly reinsurance premium ceded to the Radnor Re
entities will fluctuate due to changes in one-month LIBOR or SOFR
and changes in money market rates that affect investment income
collected on the assets in the reinsurance trusts. As the
reinsurance premium will vary based on changes in these rates, we
concluded that the Radnor Re Transactions contain embedded
derivatives that will be accounted for separately like freestanding
derivatives.
In connection with the Radnor Re Transactions, we concluded that
the risk transfer requirements for reinsurance accounting were met
as each Radnor Re entity is assuming significant insurance risk and
a reasonable possibility of a significant loss. In addition, we
assessed whether each Radnor Re entity was a variable interest
entity ("VIE") and the appropriate accounting for the Radnor Re
entities if they were VIEs. A VIE is a legal entity that does not
have sufficient equity at risk to finance its activities without
additional subordinated financial support or is structured such
that equity investors lack the ability to make significant
decisions relating to the entity’s operations through voting rights
or do not substantively participate in the gains and losses of the
entity. A VIE is consolidated by its primary beneficiary. The
primary beneficiary is the entity that has both (1) the power to
direct the activities of the VIE that most significantly affect the
entity’s economic performance and (2) the obligation to absorb
losses or the right to receive benefits that could be potentially
significant to the VIE. While also considering these factors, the
consolidation conclusion depends on the breadth of the
decision-making ability and ability to influence activities that
significantly affect the economic performance of the VIE. We
concluded that the Radnor Re entities are VIEs. However, given that
Essent Guaranty (1) does not have the unilateral power to direct
the activities that most significantly affect their economic
performance and (2) does not have the obligation to absorb losses
or the right to receive benefits that could be potentially
significant to these entities, the Radnor Re entities are not
consolidated in these financial statements.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table presents total assets of each Radnor Re special
purpose insurer as well as our maximum exposure to loss associated
with each Radnor Re entity, representing the fair value of the
embedded derivative, using observable inputs in active markets
(Level 2), included in other assets (other accrued liabilities) on
our condensed consolidated balance sheet and the estimated net
present value of investment earnings on the assets in the
reinsurance trust, each as of September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Exposure to Loss |
|
(In thousands) |
|
Total VIE Assets |
|
On - Balance Sheet |
|
Off - Balance Sheet |
|
Total |
|
Radnor Re 2018-1 Ltd. |
|
$ |
242,123 |
|
|
$ |
369 |
|
|
$ |
25 |
|
|
$ |
394 |
|
|
Radnor Re 2019-1 Ltd. |
|
325,537 |
|
|
(1,884) |
|
|
59 |
|
|
(1,825) |
|
|
Radnor Re 2019-2 Ltd. |
|
61,478 |
|
|
(1,474) |
|
|
1 |
|
|
(1,473) |
|
|
Radnor Re 2020-1 Ltd. |
|
448,805 |
|
|
(1,098) |
|
|
78 |
|
|
(1,020) |
|
|
|
|
|
|
|
|
|
|
|
Radnor Re 2021-1 Ltd. |
|
486,933 |
|
|
(1,882) |
|
|
136 |
|
|
(1,746) |
|
|
Radnor Re 2021-2 Ltd. |
|
423,462 |
|
|
1,033 |
|
|
220 |
|
|
1,253 |
|
|
Radnor Re 2022-1 Ltd. |
|
237,868 |
|
|
504 |
|
|
49 |
|
|
$ |
553 |
|
|
Total |
|
$ |
2,226,206 |
|
|
$ |
(4,432) |
|
|
$ |
568 |
|
|
$ |
(3,864) |
|
The assets of Radnor Re are the source of reinsurance claim
payments to Essent Guaranty and provide capital relief under the
PMIERs financial strength requirements (see Note 14). A
decline in the assets available to pay claims would reduce the
capital relief available to Essent Guaranty.
Note 5. Reserve for Losses and Loss Adjustment
Expenses
The following table provides a reconciliation of the beginning and
ending reserve balances for losses and loss adjustment expenses
(“LAE”) for the nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2022 |
|
2021 |
|
Reserve for losses and LAE at beginning of period |
|
$ |
407,445 |
|
|
$ |
374,941 |
|
|
Less: Reinsurance recoverables |
|
25,940 |
|
|
19,061 |
|
|
Net reserve for losses and LAE at beginning of period |
|
381,505 |
|
|
355,880 |
|
|
Add provision for losses and LAE, net of reinsurance, occurring
in: |
|
|
|
|
|
Current period |
|
63,236 |
|
|
83,973 |
|
|
Prior years |
|
(242,041) |
|
|
(49,483) |
|
|
Net incurred losses and LAE during the current period |
|
(178,805) |
|
|
34,490 |
|
|
Deduct payments for losses and LAE, net of reinsurance, occurring
in: |
|
|
|
|
|
Current period |
|
111 |
|
|
231 |
|
|
Prior years |
|
3,339 |
|
|
4,153 |
|
|
Net loss and LAE payments during the current period |
|
3,450 |
|
|
4,384 |
|
|
Net reserve for losses and LAE at end of period |
|
199,250 |
|
|
385,986 |
|
|
Plus: Reinsurance recoverables |
|
13,244 |
|
|
26,970 |
|
|
Reserve for losses and LAE at end of period |
|
$ |
212,494 |
|
|
$ |
412,956 |
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2022, $3.3 million was paid
for incurred claims and claim adjustment expenses attributable to
insured events of prior years. There has been a $242.0 million
favorable prior year development, including $164.1 million
related to defaults notices received in April 2020 through
September 2020 ("Early COVID Defaults"), during the nine months
ended September 30, 2022. Net reserves remaining as of
September 30, 2022 for prior years are $136.1 million as a
result of re-estimation of unpaid losses and loss adjustment
expenses. For the nine months ended September 30, 2021, $4.2
million was paid for incurred claims and claim adjustment expenses
attributable to insured events of prior years. There was a $49.5
million favorable prior year development during the nine months
ended September 30, 2021. Net reserves remaining as of
September 30, 2021 for prior years were $302.2 million as a
result of re-estimation of unpaid losses and loss adjustment
expenses. In both periods, the favorable prior years' loss
development was the result of a re-estimation of
amounts
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
ultimately to be paid on prior year defaults in the default
inventory, including the impact of previously identified defaults
that cured. Original estimates are increased or decreased as
additional information becomes known regarding individual
claims.
Due to business restrictions, stay-at-home orders and travel
restrictions implemented in March 2020 as a result of COVID-19,
unemployment in the United States increased significantly in the
second quarter of 2020, declining during the second half of 2020
and throughout 2021. As unemployment is one of the most common
reasons for borrowers to default on their mortgage, the increase in
unemployment resulted in an increase in the number of delinquencies
on the mortgages that we insure and has the potential to increase
claim frequencies on defaults.
In response to the COVID-19 pandemic, the United States government
enacted a number of policies to provide fiscal stimulus to the
economy and relief to those affected by this global disaster.
Specifically, mortgage forbearance programs and foreclosure
moratoriums were instituted by Federal legislation along with
actions taken by the Federal Housing Finance Agency (“FHFA”),
Fannie Mae and Freddie Mac (collectively the “GSEs”). The mortgage
forbearance plans provide for eligible homeowners who were
adversely impacted by COVID-19 to temporarily reduce or suspend
their mortgage payments for up to 18 months for loans in an active
COVID-19-related forbearance program as of February 28, 2021. 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 fiscal stimulus, forbearance programs and the
foreclosure moratoriums put in place and the credit characteristics
of the defaulted loans, we expected the ultimate number of Early
COVID Defaults that result in claims would be less than our
historical default-to-claim experience. Accordingly, we recorded a
reserve equal to approximately 7% of the initial risk in force for
the Early COVID Defaults. The reserve for the Early COVID Defaults
had not been adjusted as of December 31, 2021.
As of March 31, 2022, the defaulted loans reported to us in the
second and third quarters of 2020 had reached the end of their
forbearance periods. During the first quarter of 2022, the Early
COVID Defaults cured at elevated levels, and the cumulative cure
rate for the Early COVID Defaults at March 31, 2022 exceeded our
initial estimated cure rate implied by our 7% estimate of ultimate
loss for these defaults. Based on cure activity through March 31,
2022 and our expectations for future cure activity, we lowered our
estimate of ultimate loss for the Early COVID Defaults from 7% to
4% of the initial risk in force. During the three months ended June
30, 2022, Early COVID Defaults cured at levels that exceeded our
estimate as of March 31, 2022, and we further lowered our estimate
of loss for these defaults as of June 30, 2022 to 2% of the initial
risk in force. These revisions to our estimate of ultimate loss for
the Early COVID Defaults resulted in a benefit recorded to the
provision for losses of $164.1 million for the nine months
ended September 30, 2022. As of September 30, 2022, approximately
98% of the Early COVID Defaults had cured. Due to the level of
Early COVID Defaults remaining in the default inventory, as of
September 30, 2022, we resumed reserving for the Early COVID
Defaults using our normal reserve methodology. The transition of
defaults to foreclosure or claim has not returned to pre-pandemic
levels. As a result, the level of defaults in the default inventory
that have missed twelve or more payments is above pre-pandemic
levels.
The economy in the United States is currently experiencing elevated
levels of consumer price inflation. The Federal Reserve has
increased the target federal funds rate several times during 2022
in an effort to reduce consumer price inflation. These rate
increases have resulted in higher mortgage interest rates which may
lower home sale activity and affect the options available to
delinquent borrowers. It is reasonably possible that our estimate
of losses could change in the near term as a result of changes in
the economic environment, the impact of elevated levels of consumer
price inflation on home sale activity, housing inventory and home
prices.
In September 2022, Hurricane Ian made landfall in Florida and
caused property damage in certain counties. We expect to experience
increased defaults in these areas beginning in the fourth quarter
of 2022. We are currently unable to estimate how many claims we
ultimately may have to pay associated with any defaults in the
hurricane impacted areas. There are many factors contributing to
the uncertainty surrounding these insured loans. Under our master
policy, loan servicers are not required to notify us of a default
until the borrower has missed two consecutive minimum payments.
Also, the level of damage being reported in these areas varies
significantly from region to region. Further, under our master
policy, our exposure may be limited on hurricane-related claims.
For example, we are permitted to exclude a claim entirely where
damage to the property underlying a mortgage was the proximate
cause of the default and adjust a claim where the property
underlying a mortgage in default is subject to unrestored physical
damage. These events have not materially affected our reserves as
of September 30, 2022. The
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
Note 6. Debt Obligations
Credit Facility
Essent Group and its subsidiaries, Essent Irish Intermediate
Holdings Limited and Essent US Holdings, Inc. (collectively, the
"Borrowers"), are parties to a secured credit facility (the “Credit
Facility”) with committed capacity of $825 million. The Credit
Facility provides for a $400 million revolving credit facility and
$425 million of term loans. The Credit Facility also provides for
up to $175 million aggregate principal amount of uncommitted
incremental term loan and/or revolving credit facilities that may
be exercised at the Borrowers' option so long as the Borrowers
receive commitments from the lenders. Borrowings under the Credit
Facility may be used for working capital and general corporate
purposes, including, without limitation, capital contributions to
Essent’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.
A commitment fee is due quarterly on the average daily amount of
the undrawn revolving commitment. The applicable margin and the
commitment fee are based on the senior unsecured debt rating or
long-term issuer rating of Essent Group to the extent available, or
the insurer financial strength rating of Essent Guaranty. The
annual commitment fee rate at September 30, 2022 was 0.25%.
The obligations under the Credit Facility are secured by certain
assets of the Borrowers, excluding the stock and assets of its
insurance and reinsurance subsidiaries. The Credit Facility
contains several covenants, including financial covenants relating
to minimum net worth, capital and liquidity levels, maximum debt to
capitalization level and Essent Guaranty's compliance with the
PMIERs (see Note 14). The borrowings under the Credit Facility
contractually mature on December 10, 2026. As of September 30,
2022, the Company was in compliance with the covenants and $425
million had been borrowed under the Credit Facility with a weighted
average interest rate of 4.39%. As of December 31, 2021, $425
million had been borrowed with a weighted average interest rate of
1.79%.
Note 7. Commitments and Contingencies
Obligations under Guarantees
Under the terms of CUW Solutions' contract underwriting agreements
with lenders and subject to contractual limitations on liability,
we agree to indemnify certain lenders against losses incurred in
the event that we make an error in determining whether loans
processed meet specified underwriting criteria, to the extent that
such error materially restricts or impairs the salability of such
loan, results in a material reduction in the value of such loan or
results in the lender repurchasing the loan. The indemnification
may be in the form of monetary or other remedies. We paid less than
$0.1 million related to remedies for each of the nine months ended
September 30, 2022 and 2021. As of September 30, 2022,
management believes any potential claims for indemnification
related to contract underwriting services through
September 30, 2022 are not material to our consolidated
financial position or results of operations.
In addition to the indemnifications discussed above, in the normal
course of business, we enter into agreements or other relationships
with third parties pursuant to which we may be obligated under
specified circumstances to indemnify the counterparties with
respect to certain matters. Our contractual indemnification
obligations typically arise in the context of agreements entered
into by us to, among other things, purchase or sell services,
finance our business and business transactions, lease real property
and license intellectual property. The agreements we enter into in
the normal course of business generally require us to pay certain
amounts to the other party associated with claims or losses if they
result from our breach of the agreement, including the inaccuracy
of representations or warranties. The agreements we enter into may
also contain other indemnification provisions that obligate us to
pay amounts upon the occurrence of certain events, such as the
negligence or willful misconduct of our employees, infringement of
third-party intellectual property rights or claims that performance
of the agreement constitutes a violation of law. Generally, payment
by us under an indemnification provision is conditioned upon the
other party making a claim, and typically we can challenge the
other party’s claims. Further, our indemnification obligations may
be limited in time and/or amount, and in some instances, we may
have recourse against third parties for certain payments made by us
under an indemnification agreement or obligation. As of
September 30, 2022, contingencies triggering material
indemnification obligations or payments have not occurred
historically and are not expected to occur. The nature of the
indemnification provisions in the various types of agreements and
relationships described above are believed to be low risk and
pervasive, and we consider them to have a remote risk of loss or
payment. We have not recorded any provisions on the condensed
consolidated balance sheets related to
indemnifications.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8. Capital Stock
Our authorized share capital consists of 233.3 million shares of a
single class of common shares. The common shares have no
pre-emptive rights or other rights to subscribe for additional
shares, and no rights of redemption, conversion or exchange. Under
certain circumstances and subject to the provisions of Bermuda law
and our bye-laws, we may be required to make an offer to repurchase
shares held by members. The common shares rank pari-passu with one
another in all respects as to rights of payment and distribution.
In general, holders of common shares will have one vote for each
common share held by them and will be entitled to vote, on a
non-cumulative basis, at all meetings of shareholders. In the event
that a shareholder is considered a 9.5% Shareholder under our
bye-laws, such shareholder's votes will be reduced by whatever
amount is necessary so that after any such reduction the votes of
such shareholder will not result in any other person being treated
as a 9.5% Shareholder with respect to the vote on such matter.
Under these provisions certain shareholders may have their voting
rights limited to less than one vote per share, while other
shareholders may have voting rights in excess of one vote per
share.
Dividends
The following table presents the amounts declared and paid per
common share each quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
2021 |
|
March 31 |
|
|
$ |
0.16 |
|
|
June 30 |
|
|
0.17 |
|
|
September 30 |
|
|
0.18 |
|
|
December 31 |
|
|
0.19 |
|
|
|
|
|
|
|
Total dividends per common share declared and paid |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
Quarter Ended |
|
|
2022 |
|
March 31 |
|
|
$ |
0.20 |
|
|
June 30 |
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
0.22 |
|
|
|
|
|
|
|
Total dividends per common share declared and paid |
|
|
$ |
0.63 |
|
In November 2022, the Board of Directors declared a quarterly cash
dividend of $0.23 per common share payable on December 12, 2022, to
shareholders of record on December 1, 2022.
Share Repurchase Plan
In May 2021, the Board of Directors approved a share repurchase
plan that authorized the Company to repurchase $250 million of
its common shares in the open market by the end of 2022. In April
2022, the Company repurchased 543,399 common shares, for a total
year to date repurchase of 2,136,961 common shares at a cost of
$92.2 million, completing the May 2021 repurchase plan. The shares
repurchased were recorded at cost and included in treasury stock.
All treasury stock has been cancelled as of September 30,
2022. In May 2022, the Board of Directors approved a new share
repurchase plan that authorizes the Company to repurchase up to
$250 million of its common shares in the open market by the
end of 2023. There were no share repurchases under the 2022 plan,
leaving $250.0 million remaining unused under the authorized
repurchase plan as of September 30, 2022.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9. Stock-Based Compensation
In connection with the IPO in 2013, Essent Group's Board of
Directors adopted, and Essent Group's shareholders
approved, the Essent Group Ltd. 2013 Long-Term Incentive Plan (the
"2013 Plan"), which was effective upon completion of the initial
public offering. The types of awards available under the 2013 Plan
include nonvested shares, nonvested share units,
non-qualified
share options, incentive stock options, share appreciation rights,
and other share-based or cash-based awards. Nonvested shares and
nonvested share units granted under the 2013 Plan have rights to
dividends, which entitle holders to the same dividend value per
share as holders of common shares in the form of dividend
equivalent units ("DEUs"). DEUs are subject to the same vesting and
other terms and conditions as the corresponding nonvested shares
and nonvested share units. DEUs vest when the underlying shares or
share units vest and are forfeited if the underlying share or share
units forfeit prior to vesting.
The following table summarizes nonvested common share, nonvested
common share unit and DEU activity for the nine months ended
September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time and Performance-
Based Share Awards |
|
Time-Based
Share Awards |
|
Share Units |
|
DEUs |
|
(Shares in thousands) |
|
Number of
Shares |
|
Weighted
Average
Grant Date
Fair Value |
|
Number of
Shares |
|
Weighted
Average
Grant Date
Fair Value |
|
Number of
Share Units |
|
Weighted
Average
Grant Date
Fair Value |
|
Dividend Equivalent Units |
|
Weighted
Average
Grant Date
Fair Value |
|
Outstanding at beginning of year
|
|
500 |
|
|
$ |
31.29 |
|
|
140 |
|
|
$ |
45.31 |
|
|
461 |
|
|
$ |
47.94 |
|
|
28 |
|
|
$ |
41.75 |
|
|
Granted |
|
308 |
|
|
14.83 |
|
|
87 |
|
|
46.15 |
|
|
161 |
|
|
42.65 |
|
|
18 |
|
|
41.10 |
|
|
Vested |
|
(139) |
|
|
45.32 |
|
|
(69) |
|
|
44.86 |
|
|
(178) |
|
|
47.87 |
|
|
(13) |
|
|
41.28 |
|
|
Forfeited |
|
— |
|
|
N/A |
|
— |
|
|
N/A |
|
(79) |
|
|
48.71 |
|
|
(2) |
|
|
42.70 |
|
|
Outstanding at September 30, 2022
|
|
669 |
|
|
$ |
21.04 |
|
|
158 |
|
|
$ |
45.97 |
|
|
365 |
|
|
$ |
45.43 |
|
|
31 |
|
|
$ |
41.53 |
|
In February 2022, certain members of senior management were
granted nonvested common shares under the Essent Group Ltd.
2013 Long-Term Incentive Plan ("2013 Plan") that are subject to
time-based and performance-based vesting. The time-based share
awards granted in February 2022 vest in
three equal installments on March 1, 2023, 2024 and
2025. The performance-based share awards granted in February
2022 vest based upon our compounded annual book value per share
growth percentage and relative total shareholder return during a
three-year performance period that commenced on January 1,
2022 and vest on March 1, 2025. Shares were issued at the
maximum 200% of target. The portion of these nonvested
performance-based share awards that will be earned is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relative Total Shareholder Return
vs. S&P 1500 Financial Services Index |
|
|
|
|
≤25th percentile |
|
50th percentile
"Target" |
|
≥75th percentile |
Three-Year Book
Value Per Share
CAGR |
|
13% "Target"
|
|
100 |
% |
|
150 |
% |
|
200 |
% |
|
|
11% |
|
75 |
% |
|
125 |
% |
|
175 |
% |
|
|
9% |
|
50 |
% |
|
100 |
% |
|
150 |
% |
|
|
7% |
|
25 |
% |
|
75 |
% |
|
125 |
% |
|
|
5% |
|
0 |
% |
|
50 |
% |
|
100 |
% |
In the event that the compounded annual book value per share growth
or the relative total shareholder return falls between the
performance levels shown above, the nonvested common shares earned
will be determined on a straight-line basis between the respective
levels shown. In May 2022, additional shares were granted to a
member of senior management that are subject to the same time-based
and performance-based vesting as the February 2022
grants.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In connection with our incentive program covering bonus awards for
performance year 2021, in February 2022, time-based share
units were issued to certain employees that vest in
three equal installments on March 1, 2023, 2024 and
2025.
Quoted market prices are used for the valuation of common shares
granted that do not contain a market condition under ASC 718. The
performance-based share awards granted in February 2022 and
February 2021 contain a market condition and were valued based on
analysis provided by a third-party valuation firm using a risk
neutral simulation taking into effect the vesting conditions of the
grant.
In February 2021, the performance-based share awards granted in
2019 and 2020 to certain members of senior management were amended
to provide that such awards will no longer be subject to the
achievement of the compounded annual book value per share growth
metrics and will be subject to only service-based vesting. As a
result, the unvested shares subject to the amended 2019 awards
vested on March 1, 2022 and the amended 2020 awards will vest on
March 1, 2023, subject to the continued service requirements and
other terms and conditions set forth in the applicable award
agreements, without taking into consideration any performance
metrics. Total incremental compensation expense related to amending
these awards is $4.0 million. As of September 30, 2022,
there was $0.5 million of unrecognized compensation expense
related to amending these awards and we expect to recognize the
expense over a weighted average period of 0.4 years.
The total fair value on the vesting date of nonvested shares, share
units or DEUs that vested was $17.3 million and $18.4 million for
the nine months ended September 30, 2022 and 2021,
respectively. As of September 30, 2022, there was $21.2
million of total unrecognized compensation expense related to
nonvested shares or share units outstanding at September 30,
2022 and we expect to recognize the expense over a weighted average
period of 2.1 years.
Employees have the option to tender shares to Essent Group to pay
the minimum employee statutory withholding taxes associated with
shares upon vesting. Common shares tendered by employees to pay
employee withholding taxes totaled 129,965 in the nine months ended
September 30, 2022. The tendered shares were recorded at cost and
included in treasury stock. All treasury stock has been cancelled
as of September 30, 2022.
Compensation expense, net of forfeitures, and related tax effects
recognized in connection with nonvested shares was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
(In thousands) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Compensation expense |
|
$ |
4,702 |
|
|
$ |
5,511 |
|
|
$ |
13,707 |
|
|
$ |
16,075 |
|
|
Income tax benefit |
|
930 |
|
|
1,111 |
|
|
2,715 |
|
|
3,156 |
|
Note 10. Dividends Restrictions
Our U.S. insurance subsidiaries are subject to certain capital and
dividend rules and regulations as prescribed by jurisdictions in
which they are authorized to operate. Under the insurance laws of
the Commonwealth of Pennsylvania, Essent Guaranty and Essent PA may
pay ordinary dividends during any 12-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. The Pennsylvania statute also specifies that
dividends and other distributions can be paid out of positive
unassigned surplus without prior approval. At September 30,
2022, Essent Guaranty had unassigned surplus of approximately
$318.1 million and Essent PA had unassigned surplus of
approximately $18.5 million. In the three and nine months ended
September 30, 2022, Essent Guaranty paid dividends of
$60.0 million and $260.0 million, respectively, to its
parent, Essent US Holdings, Inc. Essent Guaranty paid dividends of
$47.2 million and $147.2 million to its parent, Essent US
Holdings, Inc. in the three and nine months ended
September 30, 2021. Essent PA did not pay a dividend in the
three and nine months ended September 30, 2022 or 2021. As of
September 30, 2022, Essent Guaranty and Essent PA could pay
additional ordinary dividends in 2022 of $237.7 million and $5.6
million, respectively.
Essent Re is subject to certain dividend restrictions as prescribed
by the Bermuda Monetary Authority and under certain agreements with
counterparties. In connection with the quota share reinsurance
agreement with Essent Guaranty, Essent Re has agreed to maintain a
minimum total equity of $100 million. As of September 30,
2022, Essent Re had total equity of $1.4 billion.
At September 30, 2022, our insurance subsidiaries were in
compliance with these rules, regulations and
agreements.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 11. Earnings per Share (EPS)
The following table reconciles the net income and the weighted
average common shares outstanding used in the computations of basic
and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
(In thousands, except per share amounts) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net income |
|
$ |
178,051 |
|
|
$ |
205,353 |
|
|
$ |
683,987 |
|
|
$ |
500,796 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
106,870 |
|
|
111,001 |
|
|
107,314 |
|
|
111,708 |
|
|
Dilutive effect of nonvested shares |
|
467 |
|
|
386 |
|
|
418 |
|
|
362 |
|
|
Diluted weighted average shares outstanding |
|
107,337 |
|
|
111,387 |
|
|
107,732 |
|
|
112,070 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.67 |
|
|
$ |
1.85 |
|
|
$ |
6.37 |
|
|
$ |
4.48 |
|
|
Diluted earnings per share |
|
$ |
1.66 |
|
|
$ |
1.84 |
|
|
$ |
6.35 |
|
|
$ |
4.47 |
|
There were 10,417 and 181,476 antidilutive shares for the three
months ended September 30, 2022 and 2021, respectively, and 90,413
and 230,595 antidilutive shares for the nine months ended September
30, 2022 and 2021, respectively.
The nonvested performance-based share awards are considered
contingently issuable for purposes of the EPS
calculation. Based on the compounded annual book value per
share growth and relative total shareholder return as of
September 30, 2022, the 2022 performance-based share awards
would be issuable at 146% of target under the terms of the
arrangements if September 30, 2022 was the end of the
contingency period, which is 73% of the shares issued and the 2021
performance-based share awards would be issuable at 100% of target
under the terms of the arrangements if September 30, 2022 was
the end of the contingency period, which is 50% of the shares
issued.
Based on the compounded annual book value per share growth and
relative total shareholder return as of September 30, 2021,
the 2021 performance-based share awards would be issuable at 100%
of target under the terms of the arrangements if September 30,
2021 was the end of the contingency period, which is 50% of the
shares issued.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 12. Accumulated Other Comprehensive Income
(Loss)
The following table presents the rollforward of accumulated other
comprehensive income (loss) for the three and nine months ended
September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
2022 |
|
2021 |
|
(In thousands) |
|
Before Tax |
|
Tax Effect |
|
Net of Tax |
|
Before Tax |
|
Tax Effect |
|
Net of Tax |
|
Balance at beginning of period |
|
$ |
(332,126) |
|
|
$ |
45,559 |
|
|
$ |
(286,567) |
|
|
$ |
143,136 |
|
|
$ |
(27,705) |
|
|
$ |
115,431 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the
period |
|
(158,835) |
|
|
21,899 |
|
|
(136,936) |
|
|
(45,295) |
|
|
8,548 |
|
|
(36,747) |
|
|
Less: Reclassification adjustment for losses included in
net income (1) |
|
(175) |
|
|
101 |
|
|
(74) |
|
|
(221) |
|
|
51 |
|
|
(170) |
|
|
Net unrealized losses on investments |
|
(159,010) |
|
|
22,000 |
|
|
(137,010) |
|
|
(45,516) |
|
|
8,599 |
|
|
(36,917) |
|
|
Other comprehensive loss |
|
(159,010) |
|
|
22,000 |
|
|
(137,010) |
|
|
(45,516) |
|
|
8,599 |
|
|
(36,917) |
|
|
Balance at end of period |
|
$ |
(491,136) |
|
|
$ |
67,559 |
|
|
$ |
(423,577) |
|
|
$ |
97,620 |
|
|
$ |
(19,106) |
|
|
$ |
78,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
(In thousands) |
|
Before Tax |
|
Tax Effect |
|
Net of Tax |
|
Before Tax |
|
Tax Effect |
|
Net of Tax |
|
Balance at beginning of year |
|
$ |
65,280 |
|
|
$ |
(14,573) |
|
|
$ |
50,707 |
|
|
$ |
168,324 |
|
|
$ |
(30,050) |
|
|
$ |
138,274 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses arising during the period |
|
(564,064) |
|
|
81,051 |
|
|
(483,013) |
|
|
(70,095) |
|
|
10,923 |
|
|
(59,172) |
|
|
Less: Reclassification adjustment for losses (gains) included in
net income (1) |
|
7,648 |
|
|
1,081 |
|
|
8,729 |
|
|
(609) |
|
|
21 |
|
|
(588) |
|
|
Net unrealized (losses) gains on investments |
|
(556,416) |
|
|
82,132 |
|
|
(474,284) |
|
|
(70,704) |
|
|
10,944 |
|
|
(59,760) |
|
|
Other comprehensive (loss) income |
|
(556,416) |
|
|
82,132 |
|
|
(474,284) |
|
|
(70,704) |
|
|
10,944 |
|
|
(59,760) |
|
|
Balance at end of period |
|
$ |
(491,136) |
|
|
$ |
67,559 |
|
|
$ |
(423,577) |
|
|
$ |
97,620 |
|
|
$ |
(19,106) |
|
|
$ |
78,514 |
|
(1)Included
in net realized investment gains (losses) on our condensed
consolidated statements of comprehensive income.
Note 13. Fair Value of Financial Instruments
We carry certain of our financial instruments at fair value. We
define fair value as the current amount that would be exchanged to
sell an asset or transfer a liability, other than in a forced
liquidation.
Fair Value Hierarchy
ASC No. 820 specifies a hierarchy of valuation techniques
based on whether the inputs to those valuation techniques are
observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs
reflect our market assumptions. The level within the fair value
hierarchy to measure the financial instrument shall be determined
based on the lowest level input that is significant to the fair
value measurement. The three levels of the fair value hierarchy are
as follows:
•Level 1 —
Quoted prices for identical instruments in active markets
accessible at the measurement date.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
•Level 2 —
Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; and valuations in which all significant inputs are
observable in active markets. Inputs are observable for
substantially the full term of the financial
instrument.
•Level 3 —
Valuations derived from one or more significant inputs that are
unobservable.
Determination of Fair Value
When available, we generally use quoted market prices to determine
fair value and classify the financial instrument in Level 1.
In cases where quoted market prices for similar financial
instruments are available, we utilize these inputs for valuation
techniques and classify the financial instrument in Level 2.
In cases where quoted market prices are not available, fair values
are based on estimates using discounted cash flows, present value
or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rates and
estimates of future cash flows and we classify the financial
instrument in Level 3. Accordingly, the fair value estimates
may not be realized in an immediate settlement of the
instrument.
We used the following methods and assumptions in estimating fair
values of financial instruments:
•Investments
available for sale — Investments available for sale are valued
using quoted market prices in active markets, when available, and
those investments are classified as Level 1 of the fair value
hierarchy. Level 1 investments available for sale include
investments such as U.S. Treasury securities and money market
funds. Investments available for sale are classified as
Level 2 of the fair value hierarchy if quoted market prices
are not available and fair values are estimated using quoted prices
of similar securities or recently executed transactions for the
securities. U.S. agency securities, U.S. agency mortgage-backed
securities, municipal debt securities, non-U.S. government
securities, corporate debt securities, residential and commercial
mortgage securities and asset-backed securities are classified as
Level 2 investments.
We use independent pricing sources to determine the fair value of
securities available for sale in Level 1 and Level 2 of
the fair value hierarchy. We use one primary pricing service to
provide individual security pricing based on observable market data
and receive one quote per security. To ensure securities are
appropriately classified in the fair value hierarchy, we review the
pricing techniques and methodologies of the independent pricing
service and believe that their policies adequately consider market
activity, either based on specific transactions for the issue
valued or based on modeling of securities with similar credit
quality, duration, yield and structure that were recently traded.
U.S. agency securities, U.S. agency mortgage-backed securities,
municipal debt securities, non-U.S. government securities and
corporate debt securities are valued by our primary vendor using
recently executed transactions and proprietary models based on
observable inputs, such as interest rate spreads, yield curves and
credit risk. Residential and commercial mortgage securities and
asset-backed securities are valued by our primary vendor using
proprietary models based on observable inputs, such as interest
rate spreads, prepayment speeds and credit risk. As part of our
evaluation of investment prices provided by our primary pricing
service, we obtained and reviewed their pricing methodologies which
include a description of how each security type is evaluated and
priced. We review the reasonableness of prices received from our
primary pricing service by comparison to prices obtained from
additional pricing sources. We have not made any adjustments to the
prices obtained from our primary pricing service.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Assets and Liabilities Measured at Fair Value
All assets measured at fair value are categorized in the table
below based upon the lowest level of significant input to the
valuations. All fair value measurements at the reporting date were
on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 (In thousands) |
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
Total |
|
Recurring fair value measurements |
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
535,636 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
535,636 |
|
|
U.S. agency securities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
U.S. agency mortgage-backed securities |
|
— |
|
|
752,236 |
|
|
— |
|
|
752,236 |
|
|
Municipal debt securities |
|
— |
|
|
559,784 |
|
|
— |
|
|
559,784 |
|
|
Non-U.S. government securities |
|
— |
|
|
60,834 |
|
|
— |
|
|
60,834 |
|
|
Corporate debt securities |
|
— |
|
|
1,345,269 |
|
|
— |
|
|
1,345,269 |
|
|
Residential and commercial mortgage securities |
|
— |
|
|
523,608 |
|
|
— |
|
|
523,608 |
|
|
Asset-backed securities |
|
— |
|
|
608,330 |
|
|
— |
|
|
608,330 |
|
|
Money market funds |
|
199,147 |
|
|
— |
|
|
— |
|
|
199,147 |
|
|
Total assets at fair value (1) (2) |
|
$ |
734,783 |
|
|
$ |
3,850,061 |
|
|
$ |
— |
|
|
$ |
4,584,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 (In thousands) |
|
Quoted Prices
in Active
Markets for
Identical
Instruments
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
Total |
|
Recurring fair value measurements |
|
|
|
|
|
|
|
|
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
448,793 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
448,793 |
|
|
U.S. agency securities |
|
— |
|
|
5,504 |
|
|
— |
|
|
5,504 |
|
|
U.S. agency mortgage-backed securities |
|
— |
|
|
1,008,863 |
|
|
— |
|
|
1,008,863 |
|
|
Municipal debt securities |
|
— |
|
|
627,599 |
|
|
— |
|
|
627,599 |
|
|
Non-U.S. government securities |
|
— |
|
|
79,743 |
|
|
— |
|
|
79,743 |
|
|
Corporate debt securities |
|
— |
|
|
1,455,247 |
|
|
— |
|
|
1,455,247 |
|
|
Residential and commercial mortgage securities |
|
— |
|
|
545,423 |
|
|
— |
|
|
545,423 |
|
|
Asset-backed securities |
|
— |
|
|
581,703 |
|
|
— |
|
|
581,703 |
|
|
Money market funds |
|
210,012 |
|
|
— |
|
|
— |
|
|
210,012 |
|
|
Total assets at fair value (1) (2) |
|
$ |
658,805 |
|
|
$ |
4,304,082 |
|
|
$ |
— |
|
|
$ |
4,962,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Does
not include the fair value of embedded derivatives, which we have
accounted for separately as freestanding derivatives and included
in other assets or other accrued liabilities in our condensed
consolidated balance sheet. See Note 4 for more
information.
(2)Does
not include certain other invested assets that are measured at fair
value using the net asset value per share (or its equivalent) as a
practical expedient, as applicable accounting standards do not
provide for classification within the fair value
hierarchy.
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 14. Statutory Accounting
Our U.S. insurance subsidiaries prepare statutory-basis financial
statements in accordance with the accounting practices prescribed
or permitted by their respective state’s department of insurance,
which is a comprehensive basis of accounting other than GAAP. We
did not use any prescribed or permitted statutory accounting
practices (individually or in the aggregate) that resulted in
reported statutory surplus or capital that was significantly
different from the statutory surplus or capital that would have
been reported had National Association of Insurance Commissioners’
statutory accounting practices been followed. The following table
presents Essent Guaranty’s and Essent PA’s statutory net income,
statutory surplus and contingency reserve liability as of and for
the nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2022 |
|
2021 |
|
Essent Guaranty |
|
|
|
|
|
Statutory net income |
|
$ |
479,389 |
|
|
$ |
364,654 |
|
|
Statutory surplus |
|
1,023,440 |
|
|
1,082,334 |
|
|
Contingency reserve liability |
|
1,990,536 |
|
|
1,721,424 |
|
|
|
|
|
|
|
|
Essent PA |
|
|
|
|
|
Statutory net income |
|
$ |
1,179 |
|
|
$ |
2,623 |
|
|
Statutory surplus |
|
57,489 |
|
|
55,779 |
|
|
Contingency reserve liability |
|
57,189 |
|
|
57,205 |
|
Net income determined in accordance with statutory accounting
practices differs from GAAP. In 2022 and 2021, the more
significant differences between net income determined under
statutory accounting practices and GAAP for Essent Guaranty and
Essent PA relate to policy acquisition costs and income
taxes. Under statutory accounting practices, policy
acquisition costs are expensed as incurred while such costs are
capitalized and amortized to expense over the life of the policy
under GAAP. We are eligible for a tax deduction, subject to
certain limitations for amounts required by state law or regulation
to be set aside in statutory contingency reserves when we purchase
non-interest-bearing United States Mortgage Guaranty Tax and Loss
Bonds (“T&L Bonds”) issued by the Treasury
Department. Under statutory accounting practices, this
deduction reduces the tax provision recorded by Essent Guaranty and
Essent PA and, as a result, increases statutory net income and
surplus as compared to net income and equity determined in
accordance with GAAP.
At September 30, 2022 and 2021, the statutory capital of our
U.S. insurance subsidiaries, which is defined as the total of
statutory surplus and contingency reserves, was in excess of the
statutory capital necessary to satisfy their regulatory
requirements.
Effective December 31, 2015, Fannie Mae and Freddie Mac, at the
direction of the Federal Housing Finance Agency, 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. 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 on March 31, 2019. As of
September 30, 2022, Essent Guaranty, our GSE-approved mortgage
insurance company, was in compliance with PMIERs 2.0.
Statement of Statutory Accounting Principles No. 58,
Mortgage Guaranty Insurance,
requires mortgage insurers to establish a special contingency
reserve for statutory accounting purposes included in total
liabilities equal to 50% of earned premium for that year. During
the nine months ended September 30, 2022, Essent Guaranty increased
its contingency reserve by $209.6 million and Essent PA
increased its contingency reserve by $0.7 million. This
reserve is required to be maintained for a period of 120 months to
protect against the effects of adverse economic cycles. After 120
months, the reserve is released to unassigned funds. In the event
an insurer’s loss ratio in any calendar year exceeds 35%, however,
the insurer may, after regulatory approval, release from its
contingency reserves an amount equal to the excess portion of such
losses. During the nine months ended September 30, 2022 and 2021,
Essent Guaranty released contingency reserves of $11.8 million
and $2.0 million,
Essent Group Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
respectively, and Essent PA released contingency reserves of
$0.9 million and $0.1 million, respectively, to
unassigned funds upon completion of the 120 month holding
period.
Under The Insurance Act 1978, as amended, and related regulations
of Bermuda (the "Insurance Act"), Essent Re is required to annually
prepare statutory financial statements and a statutory financial
return in accordance with the financial reporting provisions of the
Insurance Act, which is a basis other than GAAP. The Insurance Act
also requires that Essent Re maintain minimum share capital of $1
million and must ensure that the value of its general business
assets exceeds the amount of its general business liabilities by an
amount greater than the prescribed minimum solvency margins and
enhanced capital requirement pertaining to its general business. At
December 31, 2021, all such requirements were met.
Essent Re's statutory capital and surplus was $1.4 billion as of
September 30, 2022 and $1.3 billion as of December 31,
2021. Essent Re's statutory net income was $178.5 million and
$166.2 million for the nine months ended September 30, 2022 and
2021, respectively. Statutory capital and surplus as of
September 30, 2022 and December 31, 2021 and statutory
net income in the nine months ended September 30, 2022 and 2021
determined in accordance with statutory accounting practices were
not significantly different than the amounts determined under
GAAP.