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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)
Bermuda   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (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:
Title of each class Trading Symbol(s) Name of each exchange on which registered
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
 
1
     
1
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
     
     
     
     
     
     
     
     
 

i

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;

ii

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.
 

iii

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.

1

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.

2

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 —  — 
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.

3

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.
4

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
5

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  $ $ (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  (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  —  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  %
6

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  %

7

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 

8

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.
9

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.

10

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-
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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%.

12

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.
13

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) (1,473)
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
14

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
15

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.
16

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.

17

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% % 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.
 
18

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.
19

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.


20

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.
21

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.
 
22

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.

23

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,
24

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.

25

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read together with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year ended December 31, 2021 as filed with the Securities and Exchange Commission and referred to herein as the “Annual Report,” and our condensed consolidated financial statements and related notes as of and for the three and nine months ended September 30, 2022 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we refer to as the “Quarterly Report.” In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report and Part I, Item 1A “Risk Factors” in our Annual Report and Part II, Item 1A “Risk Factors” in this Quarterly Report. We are not undertaking any obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.
 
Overview
 
We are an established private mortgage insurance company. Essent Guaranty, Inc., our wholly-owned insurance subsidiary which we refer to as "Essent Guaranty," is licensed to write coverage in all 50 states and the District of Columbia. The financial strength ratings of Essent Guaranty are A3 with a stable outlook by Moody’s Investors Service (“Moody's”), BBB+ with a stable outlook by S&P Global Ratings (“S&P”) and A (Excellent) with a stable outlook by A.M. Best. On September 21, 2022, A.M. Best affirmed Essent Guaranty’s financial strength rating of A (Excellent) with a stable outlook and on November 4, 2022 S&P affirmed Essent Guaranty’s financial strength rating of BBB+ with a stable outlook.
 
Our holding company is domiciled in Bermuda and our U.S. insurance business is headquartered in Radnor, Pennsylvania. We operate additional underwriting and service centers in Winston-Salem, North Carolina and Irvine, California. We have a highly experienced, talented team with 350 employees as of September 30, 2022. We generated new insurance written, or NIW, of approximately $17.1 billion and $50.0 billion for the three and nine months ended September 30, 2022, respectively, compared to approximately $23.6 billion and $67.8 billion for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, we had approximately $222.5 billion of insurance in force.
 
We also offer mortgage-related insurance and reinsurance through our wholly-owned Bermuda-based subsidiary, Essent Reinsurance Ltd., which we refer to as "Essent Re." As of September 30, 2022, Essent Re provided insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately $2.0 billion of risk. Essent Re also reinsures Essent Guaranty’s NIW under a quota share reinsurance agreement. 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. The insurer financial strength rating of Essent Re is BBB+ with a stable outlook by S&P and A (Excellent) with a stable outlook by A.M. Best. On September 21, 2022, A.M. Best’s affirmed Essent Re’s financial strength rating of A (Excellent) with a stable outlook.

COVID-19

Due to the novel coronavirus disease 2019 ("COVID-19"), we experienced a significant increase in the amount of new defaults reported in 2020, especially during the second and third quarters of 2020. We segmented these two quarters’ 49,398 defaults as specifically COVID-19 related (“Early COVID Defaults”) and provided losses for these two cohorts differently as compared to our normal loss reserving methodology. The default-to-claim transition patterns of the Early COVID Defaults have been different than our historical defaults. We believe that the borrowers associated with the Early COVID Defaults have been able to take advantage of foreclosure moratoriums and mortgage forbearance programs instituted by Federal legislation along with actions taken by the Federal Housing Finance Agency (“FHFA”), Fannie Mae and Freddie Mac (collectively the “GSEs”) which has extend traditional default-to-claim timelines. As a result of these programs, along with Federal stimulus, these borrowers associated with the Early COVID Defaults have had more resources and an extended time period to address the issues that triggered the default, that we believe will result in a higher cure rate, and correspondingly lower claim payments than historical defaults.

Over 90% of loans insured by Essent are federally backed by Fannie Mae or Freddie Mac. As a mortgage loan in forbearance is considered delinquent, we will provide loss reserves as loans in forbearance are reported to us as delinquent once the borrower has missed two consecutive payments. However, we believe providing borrowers time to recover from the adverse financial impact of the COVID-19 event may allow some families to be able to remain in their homes and avoid foreclosure.
26

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 continue to work with them to modify their loans at which time the mortgage will be removed from delinquency status.
As of September 30, 2022, approximately 98% of the Early COVID Defaults had cured. While this level of cure activity exceeded our initial expectations for the Early COVID Defaults, 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.

Current Economic Developments

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. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers and our expectations for the amount of ultimate losses on these delinquencies. As noted in “— Liquidity and Capital Resources,” Essent had substantial liquidity and had Available Assets in excess of Minimum Required Assets under PMIERs 2.0 as of September 30, 2022. Future increases in defaults may result in an increase in our provisions for loss and loss adjustment expenses compared to prior periods, reduced profit commission under our quota share reinsurance agreements with panels of third-party reinsurers ("the QSR Agreements") and an increase in our Minimum Required Assets.

Legislative and Regulatory Developments
 
Our results are significantly impacted by, and our future success may be affected by, legislative and regulatory developments affecting the housing finance industry. See Part I, Item 1 “Business—Regulation” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legislative and Regulatory Developments” in our Annual Report for a discussion of the laws and regulations to which we are subject as well as legislative and regulatory developments affecting the housing finance industry.

    The U.S. Internal Revenue Service and Department of the Treasury published both final and newly proposed regulations in January 2021 relating to the tax treatment of passive foreign investment companies ("PFICs"). The final regulations provide guidance on various PFIC rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. In addition, the Company is evaluating the potential impact of the newly proposed PFIC regulations to its shareholders and business operations. The newly proposed regulations, among other provisions, set a limit on the amount of assets that may be deemed “good assets” within the PFIC asset test of a foreign holding company.

On August 16, 2022, the “Inflation Reduction Act of 2022” (“IRA”), was enacted, which, among other things, provides for a corporate alternative minimum tax and an excise tax on corporate stock repurchases. Based on our current analysis of the provisions, we do not expect the IRA to have a material impact on our financial position or results of operations. As the IRS issues additional guidance related to the IRA, we will evaluate any potential impact to our consolidated financial statements.

Factors Affecting Our Results of Operations
 
Net Premiums Written and Earned
 
Premiums associated with our U.S. mortgage insurance business are based on insurance in force ("IIF") during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average net premium rates in effect during a given period will also cause premiums to differ when compared to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus NIW less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by:
 
NIW, which is the aggregate principal amount of the new mortgages that are insured during a period. Many factors affect NIW, including, among others, the volume of low down payment home mortgage originations, the competition to provide credit enhancement on those mortgages, the number of customers who have approved us to provide mortgage insurance and changes in our NIW from certain customers;
 
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Cancellations of our insurance policies, which are impacted by payments on mortgages, home price appreciation, or refinancings, which in turn are affected by mortgage interest rates. Cancellations are also impacted by the levels of claim payments and rescissions;
 
Premium rates, which represent the amount of the premium due as a percentage of IIF. Premium rates are based on the risk characteristics of the loans insured, the percentage of coverage on the loans, competition from other mortgage insurers and general industry conditions; and