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(Exact name of registrant as specified in its charter)
iBermuda
Not
Applicable
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
iClarendon House
i2 Church Street
iHamiltoniHM11, iBermuda
(Address of principal executive offices and zip code)
(i441) i297-9901
(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
iCommon Shares,
$0.015 par value
iESNT
iNew 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. iYes☒ 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.) iYes☒ 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.
iLarge accelerated filer
☒
Accelerated
filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 i☐ No ☒
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, 2022 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;
•recently enacted U.S. Federal tax reform and its impact on us, our shareholders and our operations;
•the definition of “Qualified Mortgage” reducing the size of the mortgage origination market or creating incentives to use government mortgage insurance programs;
•the definition of “Qualified Residential Mortgage” reducing the number of low down payment loans or lenders and investors
seeking alternatives to private mortgage insurance;
•the implementation of the Basel III Capital Accord, which may discourage the use of private mortgage insurance;
•management of risk in our investment portfolio;
•fluctuations in interest rates;
•inadequacy of the premiums we charge to compensate for our losses incurred;
•dependence on management team and qualified personnel;
•disturbance
to our information technology systems;
•change in our customers’ capital requirements discouraging the use of mortgage insurance;
•declines in the value of borrowers’ homes;
•limited availability of capital or reinsurance;
•unanticipated claims arise under and risks associated with our contract underwriting program;
•industry practice that loss reserves are established only upon
a loan default;
•disruption in mortgage loan servicing, as a result of COVID-19 or otherwise;
•risk of future legal proceedings;
•customers’ technological demands;
•our non-U.S. operations becoming subject to U.S. Federal income taxation;
•becoming considered a passive foreign investment company for U.S. Federal income tax purposes; and
•potential restrictions on the ability of our insurance subsidiaries
to pay dividends.
Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements we have included in this Quarterly Report are based on information available to us on the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Three
Months Ended September 30,
Nine Months Ended September 30,
(In thousands, except per share amounts)
2023
2022
2023
2022
Revenues:
Net
premiums written
$
i240,574
$
i209,230
$
i656,095
$
i619,303
Decrease
in unearned premiums
i6,231
(i1,296)
i15,197
i15,972
Net
premiums earned
i246,805
i207,934
i671,292
i635,275
Net
investment income
i47,072
i32,594
i135,558
i86,613
Realized
investment losses, net
(i235)
i175
(i2,312)
(i7,648)
(Loss)
income from other invested assets
(i3,143)
i9,617
(i10,697)
i36,275
Other
income
i5,609
iii11,447//
i18,641
i20,272
Total
revenues
i296,108
i261,767
i812,482
i770,787
Losses
and expenses:
Provision (benefit) for losses and LAE
i10,822
i4,252
i11,902
(i178,805)
Other
underwriting and operating expenses
i54,814
i42,144
i145,183
i124,838
Premiums
retained by agents
i13,175
i—
i13,175
i—
Interest
expense
i7,854
i4,450
i22,184
i9,563
Total
losses and expenses
i86,665
i50,846
i192,444
(i44,404)
Income
before income taxes
i209,443
i210,921
i620,038
i815,191
Income
tax expense
i31,484
i32,870
i99,019
i131,204
Net
income
$
i177,959
$
i178,051
$
i521,019
$
i683,987
Earnings
per share:
Basic
$
i1.68
$
i1.67
$
i4.90
$
i6.37
Diluted
i1.66
i1.66
i4.86
i6.35
Weighted
average shares outstanding:
Basic
i105,979
i106,870
i106,387
i107,314
Diluted
i107,025
i107,337
i107,232
i107,732
Net
income
$
i177,959
$
i178,051
$
i521,019
$
i683,987
Other
comprehensive income loss:
Change in unrealized appreciation (depreciation) of investments, net of tax expense (benefit) of ($i12,800)
and ($i22,000) in the three months ended September 30, 2023 and 2022 and $(i8,418)
and ($i82,132) in the nine months ended September 30, 2023 and 2022.
(i76,248)
(i137,010)
(i53,593)
(i474,284)
Total
other comprehensive income loss
(i76,248)
(i137,010)
(i53,593)
(i474,284)
Comprehensive
income
$
i101,711
$
i41,041
$
i467,426
$
i209,703
See
accompanying notes to condensed consolidated financial statements.
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. iNature 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 i20%) 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”), which is domiciled in the state of Pennsylvania. Essent Guaranty is headquartered in Radnor, Pennsylvania and maintains an operations center in Winston-Salem, North Carolina. Essent Guaranty is approved as a qualified mortgage insurer by the GSEs and is licensed to write mortgage insurance in all i50 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 provided by Essent Re from i25% to i35%
effective January 1, 2021. The quota share reinsurance coverage provided for Essent Guaranty’s NIW prior to January 1, 2021 will continue to be i25%, 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,
Essent Guaranty also reinsures that portion of the risk that is in excess of i25% of the mortgage balance with respect to any loan insured prior to April 1, 2019, after consideration of other reinsurance, to Essent Guaranty of PA, Inc. (“Essent PA”), an affiliate domiciled in the state of Pennsylvania.
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. CUW Solutions is headquartered in Radnor, Pennsylvania and it maintains an operations center in Winston-Salem, North Carolina that is subleased from Essent Guaranty.
As a result of our acquisitions of Agents National Title Insurance Company and Boston National Holdings LLC on July 1, 2023, we now offer title insurance products and title and settlement services. Our title insurance operations are headquartered in Columbia, Missouri, and we operate our title agency operations
in Charlotte, North Carolina and Pittsburgh, Pennsylvania.
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, 2022, 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, 2023 prior to the issuance of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 2. iRecently Issued Accounting Standards
i
Accounting
Standards Adopted in 2023
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, 2024, as amended by ASU 2022-06, as reference rate reform activities occur. The adoption of this ASU did not have a material impact on our consolidated
financial statements.
Accounting Standards Not Yet Adopted
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. iInvestments
i
Investments
available for sale consist of the following:
Notes to Condensed Consolidated Financial Statements (Unaudited)
i
The amortized cost and fair value of investments available for sale at September 30, 2023, 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
$
i526,416
$
i524,639
Due
after 1 but within 5 years
i305,939
i286,589
Due
after 5 but within 10 years
i62,373
i55,799
Due
after 10 years
i14,410
i12,158
Subtotal
i909,138
i879,185
U.S.
agency securities:
Due in 1 year
i7,198
i7,180
Subtotal
i7,198
i7,180
Municipal
debt securities:
Due in 1 year
i2,388
i2,347
Due
after 1 but within 5 years
i101,186
i96,172
Due
after 5 but within 10 years
i168,182
i153,099
Due
after 10 years
i365,780
i310,892
Subtotal
i637,536
i562,510
Non-U.S.
government securities:
Due after 1 but within 5 years
i32,135
i30,496
Due
after 5 but within 10 years
i5,064
i3,945
Due
after 10 years
i20,208
i14,130
Subtotal
i57,407
i48,571
Corporate
debt securities:
Due in 1 year
i194,084
i190,994
Due
after 1 but within 5 years
i569,356
i534,150
Due
after 5 but within 10 years
i483,787
i415,847
Due
after 10 years
i181,646
i139,442
Subtotal
i1,428,873
i1,280,433
U.S.
agency mortgage-backed securities
i898,677
i750,938
Residential
and commercial mortgage securities
i563,358
i493,693
Asset-backed
securities
i640,382
i614,818
Money
market funds
i360,360
i360,360
Total
investments available for sale
$
i5,502,929
$
i4,997,688
/
i
The
components of realized investment (losses) gains, net on the condensed consolidated statements of comprehensive income were as follows:
Notes to Condensed Consolidated Financial Statements (Unaudited)
i
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:
At
September 30, 2023 and December 31, 2022, we held i2,624 and i2,578
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, 2023 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 i98%
of the securities at September 30, 2023 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 impairment. There were ino impairments recorded in the three months ended September 30, 2023. We recorded impairments of $i0.2 million
in the nine months ended September 30, 2023 and impairments of $i0.1 million and $i7.4 million
in the three and nine months ended September 30, 2022, respectively, due to our intent to sell securities in an unrealized loss position.
The Company's other invested assets at September 30, 2023 and December 31, 2022 totaled $i272.6 million and $i257.9
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
Notes
to Condensed Consolidated Financial Statements (Unaudited)
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.
Other invested assets that are accounted for at fair value using the net asset value (or its equivalent) as a practical expedient totaled $i137.4 million as of September 30,
2023. The majority of these investments were in limited partnerships invested in real estate or technology. At September 30, 2023, maximum future funding commitments were $i49.0 million. For limited partnership investments that have a contractual expiration date, we expect the liquidation of the underlying assets to occur over the next one to inine
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 $i9.4
million at September 30, 2023 and $i9.1 million at December 31, 2022. 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 $i1.0
billion at September 30, 2023 and $i972.4 million at December 31, 2022. 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 $i5.0
million at September 30, 2023 and $i8.6 million at December 31, 2022. 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 $i9.0
million at September 30, 2023 and $i9.1 million at December 31, 2022.
i
Net investment income consists of:
Three
Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2023
2022
2023
2022
Fixed maturities
$
i45,373
$
i33,948
$
i132,623
$
i91,245
Short-term
investments
i3,641
i872
i8,660
i1,132
Gross
investment income
i49,014
i34,820
i141,283
i92,377
Investment
expenses
(i1,942)
(i2,226)
(i5,725)
(i5,764)
Net
investment income
$
i47,072
$
i32,594
$
i135,558
$
i86,613
/
Note 4.
iReinsurance
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
i
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)
2023
2022
2023
2022
Net
premiums written:
Direct
$
i270,868
$
i239,773
$
i759,526
$
i692,687
Ceded
(1)
(i30,294)
(i30,543)
(i103,431)
(i73,384)
Net
premiums written
$
i240,574
$
i209,230
$
i656,095
$
i619,303
Net
premiums earned:
Direct
$
i277,099
$
i238,477
$
i774,723
$
i708,659
Ceded
(1)
(i30,294)
(i30,543)
(i103,431)
(i73,384)
Net
premiums earned
$
i246,805
$
i207,934
$
i671,292
$
i635,275
(1)Net
of profit commission.
/
Quota Share Reinsurance
Essent Guaranty has entered into quota share reinsurance agreements with a panels of third-party reinsurers ("QSR" agreements). 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 each QSR agreement, Essent Guaranty will cede premiums earned on all eligible policies written during a specified period, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a specified ceding commission, and a profit commission that varies directly and inversely with ceded claims. Essent Guaranty has certain termination rights
under each QSR agreement, including the option to terminate each QSR agreement subject to a termination fee.
The following tables summarizes Essent Guaranty's quota share reinsurance agreements as of September 30, 2023:
(1)Under
QSR-2019, Essent Guaranty cedes i40% of premiums on singles policies and i20% on all other policies.
(2)The
original profit commission on QSR-2019 was up to i60%; however because Essent Guaranty did not exercise its option to terminate the QSR Agreement on December 31, 2021, the maximum profit commission that Essent Guaranty could earn increased to i63% in 2022
and thereafter.
Total RIF ceded under the QSR agreements was $i8.1 billion as of September 30, 2023.
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 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 iten-year
period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate the Radnor Re Transactions. The
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 iten-year legal maturities and are non-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.
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 iten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate these reinsurance agreements.
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.
i
The following table summarizes Essent Guaranty's excess of loss coverages and retentions provided by insurance linked notes as of September 30, 2023:
The
following table summarizes Essent Guaranty's excess of loss reinsurance coverages and retentions provided by panels of reinsurers as of September 30, 2023:
(1)
First layer retentions shown are ILN retention levels as a result of overlapping coverage within the vintage.
(2) This reinsurance agreement was terminated on the optional termination date.
/
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.
Radnor Re 2020-1 was no longer subject to a trigger event as of July 25, 2022. During the second quarter of 2023, Radnor Re 2019-1 and Radnor Re 2020-1 retired approximately ii90/%
of their outstanding notes though a tender offer made by these special purpose insurers.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The amount of monthly reinsurance premiums ceded to the Radnor Re entities will fluctuate due to changes in one-month 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. The change in the fair value of the embedded derivatives is reported in earnings and included in other income.
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.
i
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 derivatives, 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 trusts, each as of September 30, 2023:
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 5. iReserve for Losses and Loss Adjustment Expenses
i
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)
2023
2022
Reserve for losses and LAE at beginning of period
$
i216,464
$
i407,445
Less:
Reinsurance recoverables
i14,618
i25,940
Net
reserve for losses and LAE at beginning of period
i201,846
i381,505
Net
reserves acquired during the period
i14,513
i—
Add
provision for losses and LAE, net of reinsurance, occurring in:
Current period
i101,547
i63,236
Prior
years
(i89,645)
(i242,041)
Net
incurred losses and LAE during the current period
i11,902
(i178,805)
Deduct
payments for losses and LAE, net of reinsurance, occurring in:
Current period
i187
i111
Prior
years
i7,496
i3,339
Net
loss and LAE payments during the current period
i7,683
i3,450
Net
reserve for losses and LAE at end of period
i220,578
i199,250
Plus:
Reinsurance recoverables
i20,755
i13,244
Reserve
for losses and LAE at end of period
$
i241,333
$
i212,494
/
For
the nine months ended September 30, 2023, $i7.5 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $i89.6
million favorable prior year development during the nine months ended September 30, 2023. Reserves remaining as of September 30, 2023 for prior years are $i104.7 million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the nine months ended September 30, 2022, $i3.3
million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There was a $i242.0 million favorable prior year development during the nine months ended September 30, 2022. Reserves remaining as of September 30, 2022 for prior years were $i136.1
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 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. During the nine months ended September 30, 2023, we acquired $i14.5 million
of reserves, excluding $i0.1 million of reinsurance recoverables, in connection with the acquisition of our title insurance operations.
Due to business restrictions, stay-at-home orders and travel restrictions initially 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 through 2022. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment has increased
the number of delinquencies on the mortgages 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The
defaulted loans reported to us in the second and third quarters of 2020 (“Early COVID Defaults”) had reached the end of their forbearance periods as of March 31, 2022. 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 estimate of ultimate loss for these defaults established at the onset of the pandemic. Based on cure activity through March 31, 2022 and our expectations for future cure activity, as of March 31, 2022, we lowered our estimate of ultimate loss for the Early COVID Defaults from i7%
to i4% 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 i2%
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 $i164.1 million for the six months ended June 30, 2022. Due to the level of Early COVID Defaults remaining in the default inventory, beginning in the third quarter of 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 and 2023 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. 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.
Note 6. iDebt 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 ifive-year secured credit facility with a committed capacity of $i825 million (the Credit Facility"). The Credit Facility also provides
for up to $i175 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, 2023 was i0.25%. 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, 2023, the Company was in compliance with the covenants and $i425
million had been borrowed under the term loan portion of the Credit Facility with a weighted average interest rate of i7.07%. As of December 31, 2022, $i425 million had been borrowed with a weighted average interest rate of i6.02%.
Note 7.
iCommitments and Contingencies
Obligations under Guarantees
Under the terms of CUW Solutions' contractunderwriting 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. iNo remedy payments were made in the nine months ended September 30, 2023, and we paid less than $i0.1
million related to remedies in the nine months ended September 30, 2022. As of September 30, 2023, management believes any potential claims for indemnification related to contract
Notes to Condensed Consolidated Financial Statements (Unaudited)
underwriting
services through September 30, 2023 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, 2023, 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.
Note 8. iCapital Stock
Our
authorized share capital consists of i233.3 million shares of a single class of common shares. The common shares have no preemptive 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 ione
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 i9.5% 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 i9.5%
Shareholder with respect to the vote on such matter. Under these provisions certain shareholders may have their voting rights limited to less than ione vote per share, while other shareholders may have voting rights in excess of ione
vote per share.
Dividends
i
The following table presents the amounts declared and paid per common share each quarter:
Quarter
Ended
2023
2022
March 31
$
ii0.25/
$
ii0.20/
June
30
ii0.25/
ii0.21/
September
30
ii0.25/
ii0.22/
December
31
ii—/
ii0.23/
Total
dividends per common share declared and paid
$
ii0.75/
$
ii0.86/
/
In
October 2023, the Board of Directors declared a quarterly cash dividend of $ii0.25/ per common share payable on December
11, 2023 to shareholders of record on December 1, 2023.
Share Repurchase Plan
In May 2022, the Board of Directors approved a share repurchase plan that authorizes the Company to repurchase up to $i250 million of its common shares in the open market by the end of 2023. Through September
30, 2023, the Company repurchased i1,233,638 common shares at a cost of $i51.0 million under the 2022 plan, leaving $i199.0 million
remaining unused under the authorized repurchase plan as of September 30, 2023. In October 2023, the Board of Directors approved a share
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 2013 Plan was most recently amended effective upon shareholder approval in May 2023 to increase the number of shares available for issuance under the 2013 Plan by i2 million
shares. 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 maximum number of shares and share units available for issuance is i5.6 million
under the 2013 Plan, as amended. As of September 30, 2023, there were i3.8 million common shares available for future grant under the 2013 Plan.
i
The
following table summarizes nonvested common share, nonvested common share unit and DEU activity for the nine months ended September 30, 2023:
In
February 2023, certain members of senior management were granted nonvested common shares under the 2013 Plan that were subject to time-based and performance-based vesting. The time-based share awards granted in February 2023 vest in three equal installments commencing on March 1 of the year following the grant year. The performance-based share awards granted in February 2023 vest based upon our compounded annual book value per share growth percentage and relative total shareholder return during a ithree-year performance period that commenced on January 1,
2023 and vest on March 1, 2026. Shares were issued at the maximum i200% of target. iThe
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 January 2023, nonvested common share units were issued to all vice president and staff level employees and are subject
to time-based vesting in three equal installments on January 6, 2024, 2025 and 2026. In connection with our incentive program covering bonus awards for performance year 2022, in February 2023, time-based share units were issued to certain employees that vest in three equal installments on March 1, 2024, 2025 and 2026. In August 2023, time-based share units were granted to certain members of senior management that vest in three equal installments on October 1, 2026, 2027 and 2028.
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 2021, 2022 and 2023 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 shares subject to the amended 2019 and 2020 awards vested on March 1, 2022 and March
1, 2023, respectively.
The total fair value on the vesting date of nonvested shares, share units or DEUs that vested was $i14.6 million and $i17.3
million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, there was $i31.2 million of total unrecognized compensation expense related to nonvested shares or share units outstanding at September 30,
2023 and we expect to recognize the expense over a weighted average period of i2.6 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 i114,471
in the nine months ended September 30, 2023. The tendered shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of September 30, 2023.
i
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)
2023
2022
2023
2022
Compensation expense
$
i4,479
$
i4,702
$
i13,939
$
i13,707
Income
tax benefit
i888
i930
i2,767
i2,715
/
Note 10.
iDividends 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 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, 2023, Essent Guaranty had unassigned surplus of approximately $i284.6 million and Essent PA had unassigned surplus of approximately $i13.3
million. In three and nine months ended September 30, 2023, Essent Guaranty paid dividends of $i60 million and $i240 million,
respectively, to its parent, Essent US Holdings, Inc. In three and nine months ended September 30, 2022, Essent Guaranty paid dividends of $i60 million and $i260 million,
respectively, to its parent, Essent US Holdings, Inc. Essent PA did iiiino///t
pay a dividend in the three and nine months ended September 30, 2023 or 2022. As of September 30, 2023, Essent Guaranty and Essent PA could pay additional ordinary dividends in 2023 of $i284.6 million and $i5.3
million, respectively.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 $i100 million. As of September 30, 2023, Essent Re had total equity of $i1.7 billion. At September 30, 2023, our insurance subsidiaries
were in compliance with these rules, regulations and agreements.
Note 11. iEarnings per Share (EPS)
i
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)
2023
2022
2023
2022
Net income
$
i177,959
$
i178,051
$
i521,019
$
i683,987
Basic
weighted average shares outstanding
i105,979
i106,870
i106,387
i107,314
Dilutive
effect of nonvested shares
i1,046
i467
i845
i418
Diluted
weighted average shares outstanding
i107,025
i107,337
i107,232
i107,732
Basic
earnings per share
$
i1.68
$
i1.67
$
i4.90
$
i6.37
Diluted
earnings per share
$
i1.66
$
i1.66
$
i4.86
$
i6.35
/
There
were i65,435 and i10,417 antidilutive shares for the three months
ended September 30, 2023 and 2022, respectively, and i64,108 and i90,413
antidilutive shares for the nine months ended September 30, 2023 and 2022, respectively.
Nonvested performance-based share awards are considered contingently issuable for purposes of the EPS calculation. The 2023, 2022 and 2021 performance-based share awards vest based upon our compounded annual book value per share growth percentage and relative total shareholder return during a iithree-year/
performance period. The performance-based share awards granted in years before 2021 vest based upon our compounded annual book value per share growth percentage during a iithree-year/
performance period. iThe following table summarizes the performance-based shares issuable if the reporting date was the end of the contingency period.
2023
Performance-Based Grants
2022 Performance-Based Grants
2021 Performance-Based Grants
2020 Performance-Based Grants
Reporting Date
Percent Issuable Relative to Target
As a Percent of Shares Issued
Percent Issuable Relative to Target
As a Percent of Shares Issued
Percent
Issuable Relative to Target
As a Percent of Shares Issued
Percent Issuable Relative to Target and Shares Issued
Unrealized
holding gains (losses) arising during the period
(i64,323)
i8,760
(i55,563)
(i564,064)
i81,051
(i483,013)
Less:
Reclassification adjustment for losses included in net income (1)
i2,312
(i342)
i1,970
i7,648
i1,081
i8,729
Net
unrealized gains (losses) on investments
(i62,011)
i8,418
(i53,593)
(i556,416)
i82,132
(i474,284)
Other
comprehensive income (loss)
(i62,011)
i8,418
(i53,593)
(i556,416)
i82,132
(i474,284)
Balance
at end of period
$
(i505,241)
$
i68,858
$
(i436,383)
$
(i491,136)
$
i67,559
$
(i423,577)
(1)Included
in net realized investment losses on our condensed consolidated statements of comprehensive income.
/
Note 13. iFair 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.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Assets and Liabilities
Measured at Fair Value
i
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.
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
$
i556,438
$
i—
$
i—
$
i556,438
U.S.
agency securities
i—
i49,058
i—
i49,058
U.S.
agency mortgage-backed securities
i—
i783,743
i—
i783,743
Municipal
debt securities
i—
i602,690
i—
i602,690
Non-U.S.
government securities
i—
i62,399
i—
i62,399
Corporate
debt securities
i—
i1,414,321
i—
i1,414,321
Residential
and commercial mortgage securities
i—
i511,824
i—
i511,824
Asset-backed
securities
i—
i624,561
i—
i624,561
Money
market funds
i136,591
i—
i—
i136,591
Total
assets at fair value (1) (2)
$
i693,029
$
i4,048,596
$
i—
$
i4,741,625
(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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 14. iStatutory 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. iThe 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)
2023
2022
Essent Guaranty
Statutory
net income
$
i312,583
$
i479,389
Statutory
surplus
i989,933
i1,023,440
Contingency
reserve liability
i2,213,400
i1,990,536
Essent
PA
Statutory net (loss) income
$
(i3,174)
$
i1,179
Statutory
surplus
i52,292
i57,489
Contingency
reserve liability
i53,883
i57,189
Net
income determined in accordance with statutory accounting practices differs from GAAP. In 2023 and 2022, 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, 2023 and 2022, 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, 2023, 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. 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, 2023, Essent Guaranty increased its contingency reserve by $i164.7
million and Essent PA decreased its contingency reserve by $i2.9 million. During the nine months ended September 30, 2023 and 2022, Essent Guaranty released contingency reserves of $i38.2
million and
Notes to Condensed Consolidated Financial Statements (Unaudited)
$i11.8
million, respectively, and Essent PA released contingency reserves of $i3.3 million and $i0.9 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, 2022, all such requirements were met.
Essent Re's statutory
capital and surplus was $i1.7 billion as of September 30, 2023 and $i1.5
billion as of December 31, 2022. Essent Re's statutory net income was $i227.5 million and $i178.5
million for the nine months ended September 30, 2023 and 2022, respectively. Statutory capital and surplus as of September 30, 2023 and December 31, 2022 and statutory net income in the nine months ended September 30, 2023 and 2022 determined in accordance with statutory accounting practices were not significantly different than the amounts determined under GAAP.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 15. iAcquisitions
Effective July
1, 2023, Essent Holdings acquired all of the issued and outstanding shares of capital stock of Agents National Title Holding Company (“Agents National Title”) and the issued and outstanding membership interests of Boston National Holdings LLC (“Boston National Title”) for $i92.6 million in cash in a single settlement with the seller. The purchase price is subject to further customary post-closing adjustments as described in a securities purchase agreement among the parties to the transaction. The acquisition provides complementary products and services to our mortgage insurance business,
adding a team of seasoned title professionals to Essent and providing a platform to leverage our capital, lender network and operational expertise in a well-established, adjacent real estate sector.
The acquired businesses contributed revenues of $ii23.5/ million,
principally comprised of $i20.6 million of net premiums earned and $i2.0 million
of settlement services revenues, which are included in other income, and pre-tax net losses of $ii4.0/ million
to our results for the three and nine months ended September 30, 2023. iThe following unaudited pro forma summary presents consolidated information for Essent as if the business combination had occurred on January 1, 2022.
Pro
Forma
Three Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2023
2022
2023
2022
Revenues
$
i296,108
$
i286,512
$
i856,595
$
i880,321
Earnings
i178,139
i172,799
i514,823
i675,684
We
did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These pro forma amounts have been calculated after applying our accounting policies and adjusting the results of Agents National Title and Boston National Title to reflect the additional amortization that would have been charged to earnings assuming the fair value adjustments for the intangible assets acquired had been applied from January 1, 2022, including consequential income tax effects.
We incurred $i0.2 million
and $i4.4 million of acquisition-related costs for the three and nine months ended September 30, 2023, respectively, as well as $i3 million
of acquisition-related costs during the fourth quarter of 2022. These expenses are included in other underwriting and operating expenses on our condensed consolidated income statement and are reflected in pro forma earnings for the three and nine months ended September 30, 2022 in the table above.
i
The following table summarizes the consideration transferred to acquire Agents National Title and Boston National Title and the amounts of identified assets acquired and liabilities
assumed at the acquisition date:
Notes to Condensed Consolidated Financial Statements (Unaudited)
The intangible assets acquired relate to agency relationships and customer lists, valued at $i20.6 million
and $i5.7 million, respectively. The goodwill is primarily attributable to the workforce and state regulatory licenses associated with the acquired businesses, and $i11.6 million
of the goodwill is tax deductible. The carrying amount of goodwill was unchanged from July 1, 2023 through September 30, 2023. The fair value of the intangible assets and goodwill is provisional subject to post-closing adjustments and completion of the final valuation.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following
discussion should be read together with the “Selected Financial Data” and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year ended December 31, 2022 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, 2023 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
Essent Group Ltd. is a Bermuda-based holding company (collectively with its subsidiaries,
“Essent”) serving the housing finance industry by offering private mortgage insurance, reinsurance, risk management products and title insurance and settlement services to mortgage lenders, borrowers, and investors to support homeownership.
Essent Guaranty, Inc., our wholly-owned mortgage insurance subsidiary which we refer to as "Essent Guaranty," is licensed to write coverage in all 50 states and the District of Columbia. Our U.S. mortgage insurance business is headquartered in Radnor, Pennsylvania, with an additional underwriting and service center in Winston-Salem, North Carolina.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. Our mortgage insurance operations generated
new insurance written, or NIW, of approximately $12.5 billion and $38.9 billion for the three and nine months ended September 30, 2023, respectively, compared to approximately $17.1 billion and $50.0 billion for the three and nine months ended September 30, 2022, respectively.
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, 2023, Essent Re provided insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately $2.2 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 ratings of Essent Re are BBB+ with a stable outlook by S&P and A (Excellent) with a stable outlook by A.M. Best.
As a result of our acquisitions of Agents National Title Insurance Company and Boston National Holdings LLC effective July 1, 2023, we now offer title insurance products and title and settlement services. Our title insurance operations
are headquartered in Columbia, Missouri, and we operate our title agency operations in Charlotte, North Carolina and Pittsburgh, Pennsylvania.
We have a highly experienced, talented team with 589 employees as of September 30, 2023.
Current Economic Developments
The Federal Reserve has increased the target federal funds rate several times during 2022 and 2023 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, 2023. 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.
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 “non-passive 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.
The SEC issued a proposed rule in January 2023 that, among other things, prohibits certain participants in an asset-backed security, including a synthetic asset-backed security (synthetic ABS), from engaging in transactions that would involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity (conflicted transaction). The definition of conflicted transactions is broadly defined and synthetic ABS could be broadly interpreted to include mortgage insurance linked notes (“ILNs”). If this SEC proposal is adopted as proposed, it could affect or prohibit our ability to enter into reinsurance transactions using ILNs. We are assessing the potential impact
of the rule on future ILN reinsurance transactions if the rule is adopted as proposed.
Factors Affecting Our Results of Operations
Net Premiums Written and Earned
Premiums associated with our U.S. mortgage insurance business are based on mortgage insurance in force, or 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;
•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
•Premiums ceded or assumed under reinsurance arrangements. See Note 4 to our condensed consolidated financial statements.
Mortgage insurance premiums are paid either on a monthly installment basis (“monthly premiums”), in a single payment at origination (“single premiums”), or in some cases as an annual premium. For monthly
premiums, we receive a monthly premium payment which is recorded as net premiums earned in the month the coverage is provided. Monthly premium
payments are based on the original mortgage amount rather than the amortized loan balance. Net premiums written may be in excess of net premiums earned due to single premium policies. For single premiums, we receive a single premium payment at origination, which is recorded as “unearned premium” and earned over the estimated life of the policy, which ranges from 36 to 156 months depending on the term of the underlying mortgage and loan-to-value ratio at date of origination. If single premium policies are cancelled due to
repayment of the underlying loan and the premium is non-refundable, the remaining unearned premium balance is immediately recognized as earned premium revenue. Substantially all of our single premium policies in force as of September 30, 2023 were non-refundable. Premiums collected on annual policies are recognized as net premiums earned on a straight-line basis over the year of coverage. For the nine months ended September 30, 2023 and 2022, monthly premium policies comprised 96% and 94% of our NIW, respectively.
Premiums associated with our GSE and other risk share transactions are based on the level of risk in force and premium rates on the transactions.
Title
insurance premiums are based on the number of title insurance policies issued and generally recognized as income at the transaction closing date which approximates the policy effective date.
Persistency and Business Mix
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 86.6% at September 30, 2023. Generally, higher prepayment speeds lead to lower persistency.
Prepayment speeds and the relative mix of business between
single premium policies and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages. Because premiums are paid at origination on single premium policies, assuming all other factors remain constant, if loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, our premium earned with respect to those loans and therefore our profitability declines. Currently, the expected return on single premium policies is less than the expected return on monthly policies.
Net Investment Income
Our
investment portfolio was predominantly comprised of investment-grade fixed income securities and money market funds as of September 30, 2023. The principal factors that influence investment income are the size of the investment portfolio and the yield on individual securities. As measured by amortized cost (which excludes changes in fair market value, such as from changes in interest rates), the size of our investment portfolio is mainly a function of increases in capital and cash generated from or used in operations which is impacted by net premiums received, investment earnings, net claim payments and expenses. Realized gains and losses are a function of the difference between the amount received on the sale of a security and the security’s amortized cost, as well as any provision for credit losses or impairments recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon
rate of the security compared to the yield of comparable securities at the time of sale.
Income from Other Invested Assets
As part of our overall investment strategy, we also allocate a relatively small percentage of our portfolio to limited partnership investments in real estate, consumer credit and traditional venture capital and private equity investments. The results of these investing activities are reported in income from other invested assets. These investments are generally accounted for under the equity method or fair value using net asset value (or its equivalent) as a practical expedient. 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. Fluctuations in the fair value of these entities may increase the volatility of the Company’s reported results of operations.
Other income includes revenues associated with underwriting consulting services to third-party reinsurers, title settlement services and contract underwriting services. The level of these revenues
are dependent upon the number of customers who have engaged us for these services. Revenue from underwriting consulting services to third-party reinsurers is also dependent upon the level of premiums associated with the transactions underwritten for these customers. Revenue from title settlement services and contract underwriting revenue are also dependent upon the number of loans underwritten for these customers.
In connection with the acquisition of our mortgage insurance platform, we entered into a services agreement with Triad Guaranty Inc. and its wholly-owned subsidiary, Triad Guaranty Insurance Corporation, which we refer to collectively as “Triad,” to provide certain information technology maintenance and development and customer support-related services. In return for these services,
we receive a flat monthly fee which is recorded in other income. During 2022, Triad exercised its one year renewal option extending the services agreement through November 2023.
As more fully described in Note 4 to our condensed consolidated financial statements, the premiums ceded under certain reinsurance contracts with unaffiliated third parties varies based on changes in market interest rates. Under GAAP, these contracts contain embedded derivatives that are accounted for separately as freestanding derivatives. The change in the fair value of the embedded derivatives is reported in earnings and included in other income.
Provision
for Losses and Loss Adjustment Expenses
The provision for losses and loss adjustment expenses reflects the current expense that is recorded within a particular period to reflect actual and estimated loss payments that we believe will ultimately be made as a result of insured loans that are in default.
Losses incurred are generally affected by:
•the overall state of the economy, which broadly affects the likelihood that borrowers may default on their loans and have the ability to cure such defaults;
•changes in housing values, which affect our ability to mitigate our
losses through the sale of properties with loans in default as well as borrower willingness to continue to make mortgage payments when the value of the home is below or perceived to be below the mortgage balance;
•the product mix of IIF, with loans having higher risk characteristics generally resulting in higher defaults and claims;
•the size of loans insured, with higher average loan amounts tending to increase losses incurred;
•the loan-to-value ratio, with higher average loan-to-value ratios tending to increase losses incurred;
•the percentage of coverage on insured loans, with deeper
average coverage tending to increase losses incurred;
•credit quality of borrowers, including higher debt-to-income ratios and lower FICO scores, which tend to increase incurred losses;
•the level and amount of reinsurance coverage maintained with third parties;
•the rate at which we rescind policies. Because of tighter underwriting standards generally in the mortgage lending industry and terms set forth in our master policy, we expect that our level of rescission activity will be lower than rescission activity seen in the mortgage insurance industry for vintages originated prior to the financial crisis; and
•the
distribution of claims over the life of a book. As of September 30, 2023, 67% of our IIF relates to business written since January 1, 2021 and was less than three years old. As a result, based on historical industry performance, we expect the number of defaults and claims we experience, as well as our provision for losses and loss adjustment expenses ("LAE"), to increase as our portfolio seasons. See “— Mortgage Insurance Earnings and Cash Flow Cycle” below.
We establish loss reserves for delinquent
loans when we are notified that a borrower has missed at least two consecutive monthly payments (“Case Reserves”), as well as estimated reserves for defaults that may have occurred but not yet been reported to us (“IBNR Reserves”). We also establish reserves for the associated loss adjustment expenses, consisting of the estimated cost of the claims administration process, including legal and other fees. Using both internal and external information, we establish our reserves based on the likelihood that a default will reach claim status and estimated claim severity. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in our Annual Report for further information.
Based upon our experience and industry data, claims incidence for mortgage insurance is generally highest
in the third through sixth years after loan origination. As of September 30, 2023, 67% of our IIF relates to business written since January 1, 2021 and was less than three years old. Although the claims experience on new insurance written by us to date has been favorable, we expect incurred losses and claims to increase as a greater amount of this book of insurance reaches its anticipated period of highest claim frequency. The actual default rate and the average reserve per default that we experience as our portfolio matures is difficult to predict and is dependent on the specific characteristics of our current in-force book (including the credit score of the borrower, the loan-to-value ratio of the mortgage, geographic concentrations, etc.), as well as the profile of new business we write in the future. In addition, the default rate and the average reserve per default
will be affected by future macroeconomic factors such as housing prices, interest rates and employment.
Due to business restrictions, stay-at-home orders and travel restrictions initially implemented in March 2020 as a result of the novel coronavirus disease 2019 ("COVID-19"), unemployment in the United States increased significantly in the second quarter of 2020, declining during the second half of 2020 through 2022. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment increased the number of delinquencies on the mortgages we insure, and has the potential to increase claim frequencies on defaults. We experienced a significant increase in the amount of new defaults reported in 2020, especially during the second and third quarters of 2020. We received 36,784 defaults in the three months ended June
30, 2020 and 12,614 defaults in the three months ended September 30, 2020, which resulted in a significant increase in our default rate from 0.83% at March 31, 2020 to 4.54% at September 30, 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.
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”) and Fannie Mae and Freddie Mac (collectively the “GSEs”). The mortgage forbearance plans permit these borrowers 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 continue to 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 while extending traditional default-to-claim timelines. Based on the forbearance programs in place and the credit characteristics of the Early COVID Defaults, we believe that the ultimate number of Early COVID
Defaults that result in claims will be less than our historical default-to-claim experience. Accordingly, we applied a lower reserve rate to the Early COVID Defaults than the rate used for defaults that had missed a comparable number of payments as of March 31, 2020 and in prior periods that did not have access to forbearance plans.
The defaulted loans reported to us in the second and third quarters of 2020 had reached the end of their forbearance periods as of March 31, 2022. 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 estimate of ultimate loss for these defaults established
at the onset of the pandemic. Based on cure activity through March 31, 2022 and our expectations for future cure activity, as of March 31, 2022, we lowered our estimate of ultimate loss for the Early COVID Defaults. 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 year ended December 31, 2022. Due to the level of Early
COVID Defaults remaining in the default inventory, beginning in the third quarter of 2022, we resumed reserving for the Early COVID Defaults using our normal reserve methodology. As of September 30, 2023, approximately 99% of the Early COVID Defaults had cured. While the level of cure activity for the Early COVID Defaults exceeded our initial expectations, the transition of defaults to foreclosure or claim has not returned to pre-pandemic levels as of September 30, 2023. 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 has been experiencing elevated levels of consumer price inflation. The Federal Reserve has increased the target federal funds rate several times during 2022 and 2023 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.
As more fully described in Note 4 to our condensed consolidated financial statements, at September 30, 2023, we had approximately
$1.6 billion of excess of loss reinsurance covering NIW from January 1, 2017 to December 31, 2022 and a quota share reinsurance on portions of our NIW effective September 1, 2019 through December 31, 2020 and January 1, 2022 through December 31, 2023. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers, the performance of defaults and our expectations for the amount of ultimate losses on these delinquencies.
Third-Party Reinsurance
We
use third-party reinsurance to provide protection against adverse loss experience and to expand our capital sources. When we enter into a reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements have the impact of reducing our earned premiums, but also reduce our risk in force ("RIF"), which provides capital relief, and may include capital relief under the PMIERs financial strength requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement. For additional information regarding reinsurance, see Note 4 to our condensed consolidated financial statements.
Other Underwriting and Operating Expenses
Our other underwriting and operating expenses
include components that are substantially fixed, as well as expenses that generally increase or decrease in line with the level of NIW.
Our most significant expense is compensation and benefits for our employees, which represented 57% and 57% of other underwriting and operating expenses for the three and nine months ended September 30, 2023, respectively, compared to 59% and 60% of other underwriting and operating expenses for the three and nine months ended September 30, 2022, respectively. Compensation and benefits expense includes base and incentive cash compensation, stock compensation expense, benefits and payroll taxes.
Underwriting and other expenses include legal, consulting, other professional
fees, premium taxes, travel, entertainment, marketing, licensing, supplies, hardware, software, rent, utilities, depreciation and amortization and other expenses. We anticipate that as we continue to add new customers and increase our IIF, our expenses will also continue to increase.
Premiums Retained by Agents
Premiums retained by agents represent the portion of title insurance premiums retained by our third-party agents pursuant to the terms of their respective agency contracts. These amounts are recorded as an expense and reported separately on the condensed consolidated statements of comprehensive income, consistent with industry practice. The percentage of premiums retained by agents vary according to regional
differences in real estate closing practices and state regulations.
Interest Expense
Interest expense is incurred as a result of borrowings under our secured credit facility (the “Credit Facility”). Borrowings under the Credit Facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions 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.
Income taxes are incurred based on the amount of earnings or losses generated in the jurisdictions in which we operate and the applicable tax rates and regulations in those jurisdictions. Our U.S. insurance subsidiaries are generally not subject to income taxes in most states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating expenses.
Essent
Group Ltd. ("Essent Group") and its wholly-owned subsidiary, Essent Re, are domiciled in Bermuda, which does not have a corporate income tax. Under a quota share reinsurance agreement, Essent Re reinsures 25% of Essent Guaranty’s NIW through December 31, 2020 and 35% of Essent Guaranty’s NIW after December 31, 2020. Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae.
The amount of income tax expense or benefit recorded in future periods will be dependent on the jurisdictions in which we operate and the tax laws and regulations in effect.
Mortgage Insurance Earnings and Cash Flow Cycle
In
general, the majority of any underwriting profit (premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year. Subsequent years of a book generally result in modest underwriting profit or underwriting losses. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.
Key Performance Indicators
Insurance
In Force
As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. The following table includes a summary of the change in our IIF for the three and nine months ended September 30, 2023 and 2022 for our U.S. mortgage insurance portfolio. In addition, this table includes our RIF at the end of each period.
Our average net premium rate is calculated by dividing net premiums earned for the U.S. mortgage insurance portfolio by average insurance in force for the period and is dependent
on a number of factors, including: (1) the risk characteristics and average coverage on the mortgages we insure; (2) the mix of monthly premiums compared to single premiums in our portfolio; (3) cancellations of non-refundable single premiums during the period; (4) changes to our pricing for NIW; and (5) premiums ceded under third-party reinsurance agreements. The following table presents the average net premium rate for our U.S. mortgage insurance portfolio:
The
continued use of third-party reinsurance along with changes to the level of future cancellations of non-refundable single premium policies and mix of IIF may reduce our average net premium rate in future periods.
Persistency Rate
The measure for assessing the impact of policy cancellations on IIF is our persistency rate, defined as the percentage of IIF that remains on our books after any twelve-month period. See additional discussion regarding the impact of the persistency rate on our performance in “— Factors Affecting Our Results of Operations — Persistency and Business Mix.”
Risk-to-Capital
The risk-to-capital
ratio has historically been used as a measure of capital adequacy in the U.S. mortgage insurance industry and is calculated as a ratio of net risk in force to statutory capital. Net risk in force represents total risk in force net of reinsurance ceded and net of exposures on policies for which loss reserves have been established. Statutory capital for our U.S. insurance companies is computed based on accounting practices prescribed or permitted by the Pennsylvania Insurance Department. See additional discussion in “— Liquidity and Capital Resources — Insurance Company Capital.”
As of September 30, 2023, our combined net risk in force for our U.S. mortgage insurance companies was $34.2 billion and our combined statutory capital was $3.3 billion, resulting in a risk-to-capital ratio of 10.3:1. The amount of capital required
varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk-to-capital ratio is 25.0 to 1. State insurance regulators are currently examining their respective capital rules to determine whether, in light of the financial crisis, changes are needed to more accurately assess mortgage insurers’ ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business.
For the three months ended September 30, 2023, we reported net income of $178.0 million, compared to net income of $178.1 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we reported net income of $521.0 million, compared to net income of $684.0 million for the nine months ended September 30, 2022. The decreases in our operating results in 2023 over the same periods in 2022 were primarily due to increases in the provision for losses and LAE,
decreases in income from other invested assets and increases in expenses, in part due to the title insurance and settlement services operations that we acquired effective July 1, 2023, partially offset by increases in net premiums earned, net interest income and decreases in income tax expense.
Net Premiums Written and Earned
Net premiums earned increased in the three and nine months ended September 30, 2023 by 19% and 6%, respectively, compared to the three and nine months ended September 30, 2022. Net premiums earned in the three and nine months ended September 30, 2023 include $20.6 million of net
premiums earned by our title insurance operations. The increase in net premiums earned in the three months ended September 30, 2023 was also due to the increase in our average IIF from $219.3 billion at September 30, 2022 to $237.3 billion at September 30, 2023. The increase in net premiums earned in the nine months ended September 30, 2023 was also due to the increase in our average IIF from $212.4 billion at September 30, 2022 to $233.1 billion at September 30, 2023, partially offset by a decrease in the average net premium rate. The average net premium rate was 0.35% and 0.35% for the three months ended September 30, 2023
and 2022, respectively, and 0.34% and 0.37% in the nine months ended September 30, 2023 and 2022, respectively. See "—Key Performance Indicators—Average Net Premium Rate" above. In the nine months ended September 30, 2023, ceded premiums increased to $103.4 million from $73.4 million, due to reduced profit commission under our QSR Agreement as a result of higher ceded losses, new third-party reinsurance agreements entered in 2023 a full nine months of premiums ceded under third-party reinsurance agreements entered in 2022 and additional net ceded premium of approximately $8 million to retire approximately 90% of the outstanding notes for two of our seasoned ILN transactions in the second quarter of 2023. In the three and nine months ended September
30, 2023, premiums earned on the cancellation of non-refundable single premium policies decreased to $1.6 million and $5.0 million, respectively,
from $4.0 million and $18.3 million in the three and nine months ended September 30, 2022, respectively, as a result of a decrease in existing borrowers refinancing their mortgages during 2023 as compared to 2022.
Net premiums written increased by 15% in the three months ended September 30, 2023 and increased by 6% in the nine months
ended September 30, 2023 compared to the three and nine months ended September 30, 2022. Net premiums written in the three and nine months ended September 30, 2023 include $20.6 million of net premiums written by our title insurance operations. The increase in net premiums written was also due to an increase in average IIF in the respective periods, partially offset by a decrease in new single premium policies written, changes in the mix of mortgages we insure and changes in our pricing. In the nine months ended September 30, 2023, the increase in net premiums written was also partially offset by an increase in premiums ceded under third-party reinsurance agreements.
In the three months ended
September 30, 2023 and 2022, unearned premiums decreased by $6.2 million and $1.3 million, respectively. The change in unearned premiums was a result of net premiums written on single premium policies of $4.7 million and $16.1 million, respectively, which was offset by $10.9 million and $14.8 million, respectively, of unearned premium that was recognized in earnings during the periods. In the nine months ended September 30, 2023 and 2022, unearned premiums decreased by $15.2 million and $16.0 million, respectively. This was a result of net premiums written on single premium policies of $18.9 million and $34.5 million, respectively, which was offset by $34.1 million and $50.5 million, respectively, of unearned premium that was recognized in earnings during the periods.
Net
Investment Income
Our net investment income was derived from the following sources for the periods indicated:
Three Months Ended September
30,
Nine Months Ended September 30,
(In thousands)
2023
2022
2023
2022
Fixed maturities
$
45,373
$
33,948
$
132,623
$
91,245
Short-term
investments
3,641
872
8,660
1,132
Gross investment income
49,014
34,820
141,283
92,377
Investment
expenses
(1,942)
(2,226)
(5,725)
(5,764)
Net investment income
$
47,072
$
32,594
$
135,558
$
86,613
The
changes in net investment income for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 was due to an increase in the pre-tax investment income yield as well as the increase in the weighted average balance of our investment portfolio. The pre-tax investment income yield increased from 2.7% and 2.5% in the three and nine months ended September 30, 2022 to 3.6% and 3.5% in the three and nine months ended September 30, 2023, respectively, primarily due to a general increase in investment yields due to rising interest rates. The pre-tax investment income yields are calculated based on amortized cost and exclude investment expenses. The average cash and investment portfolio balance was $5.5 billion and $5.4 billion for the three and nine months ended September 30,
2023, respectively, compared to $5.1 billion and $5.0 billion for the three and nine months ended September 30, 2022, respectively. The increase in the average cash and investment portfolio was primarily due to investing cash flows from operations. See “— Liquidity and Capital Resources” for further details of our investment portfolio.
Income from Other Invested Assets
Income from other invested assets for the three months ended September 30, 2023 was a loss of $3.1 million as compared to a gain of $9.6 million for the three months ended September 30, 2022. Income from other invested assets for the nine months ended September
30, 2023 was a loss of $10.7 million as compared to a gain of $36.3 million for the nine months ended September 30, 2022. The decrease in income from other invested assets was primarily due to lower fair value adjustments recorded during the three and nine months ended September 30, 2023 as compared to the same periods in 2022.
Other income for the three months ended September
30, 2023 was $5.6 million as compared to $11.4 million for the three months ended September 30, 2022. Other income for the nine months ended September 30, 2023 was $18.6 million compared to $20.3 million for the nine months ended September 30, 2022. The decreases in other income for the three and nine months ended September 30, 2023 as compared to the same periods in 2022 were primarily due to changes in the fair value of the embedded derivatives contained in certain of our reinsurance agreements. In the three months ended September 30, 2023, we recorded an unfavorable decrease in the fair value of these embedded derivatives of $0.9 million compared to a favorable increase in the fair value of the embedded derivatives
of $5.2 million in the three months ended September 30, 2022. In the nine months ended September 30, 2023, we recorded a favorable increase in the fair value of these embedded derivatives of $1.5 million compared to a favorable increase in the fair value of the embedded derivatives of $4.0 million in the nine months ended September 30, 2022. Other income also includes Triad service fee income, contract underwriting revenues and underwriting consulting services to third-party reinsurers. In the three and nine months ended September 30, 2023, other income includes settlement services revenues from our title operations.
Provision
for Losses and Loss Adjustment Expenses
In the three and nine months ended September 30, 2023 we recorded a provision for losses of $10.8 million and $11.9 million, respectively, primarily due to a provision for losses recorded for current year defaults partially offset by cure activity for defaults reported in prior years. The increase in the provision for losses and LAE in the three months ended September 30, 2023 as compared to the same period in 2022 was primarily due to an increase in defaults during the three months ended September 30, 2023, compared to a decrease in defaults during the same period in 2022, offset by an increase in the average reserve per default in the third quarter of 2022. The increase in the provision for
losses and LAE in the nine months ended September 30, 2023 as compared to the same period in 2022 was primarily due to a decrease in the estimate of ultimate loss for Early COVID Defaults during the nine months ended September 30, 2022 which resulted in a benefit recorded to the provision for losses of $164.1 million, as well as cure activity for defaults with reserves using our normal reserve methodology.
The following table presents a rollforward of insured loans in default for our U.S. mortgage insurance portfolio for the periods indicated:
Claims received included in ending default inventory
142
98
(1)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of $0.1 million, as
well as title insurance reserves of $14.7 million, as of September 30, 2023.
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE:
Three
Months Ended September 30,
Nine Months Ended September 30,
(In thousands)
2023
2022
2023
2022
Reserve for losses and LAE at beginning of period
$
216,943
$
209,973
$
216,464
$
407,445
Less:
Reinsurance recoverables
17,958
13,657
14,618
25,940
Net reserve for losses and LAE at beginning of period
198,985
196,316
201,846
381,505
Net
reserves acquired during the period
14,513
—
14,513
—
Add provision for losses and LAE occurring in:
Current period
37,477
20,141
101,547
63,236
Prior
years
(26,655)
(15,889)
(89,645)
(242,041)
Incurred losses and LAE during the current period
10,822
4,252
11,902
(178,805)
Deduct
payments for losses and LAE occurring in:
Current period
156
30
187
111
Prior years
3,586
1,288
7,496
3,339
Loss
and LAE payments during the current period
3,742
1,318
7,683
3,450
Net reserve for losses and LAE at end of period
220,578
199,250
220,578
199,250
Plus:
Reinsurance recoverables
20,755
13,244
20,755
13,244
Reserve for losses and LAE at end of period
$
241,333
$
212,494
$
241,333
$
212,494
The
following tables provide a detail of reserves and defaulted RIF by the number of missed payments and pending claims for our U.S. mortgage insurance portfolio:
(1)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at
Essent Re of $0.1 million, as well as title insurance reserves of $14.7 million, as of September 30, 2023.
(2)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at
Essent Re of $0.1 million as of September 30, 2022.
During the three months ended September 30, 2023, the provision for losses and LAE was $10.8 million, comprised of $37.5 million of current year losses partially offset by $26.7 million of favorable prior years’ loss development. During the three months ended September 30, 2022, the provision for losses and LAE was a benefit of $4.3 million, comprised of $15.9 million of favorable prior years’ loss development partially offset by a provision of $20.1 million for current year losses. In both periods, the prior years’ loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults
that cured.
During the nine months ended September 30, 2023, the provision for losses and LAE was $11.9 million, comprised of $101.5 million of current year losses partially offset by $89.6 million of favorable prior years’ loss development. During the nine months ended September 30, 2022, the provision for losses and LAE was a benefit of $178.8 million, comprised of $242.0 million of favorable prior years’ loss development partially offset by a provision of $63.2 million for current year losses. In both periods, the prior years’ loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults that cured.
The
following table includes additional information about our claims paid and claim severity for our U.S. mortgage insurance portfolio for the periods indicated:
Three Months Ended September 30,
Nine
Months Ended September 30,
($ in thousands)
2023
2022
2023
2022
Number of claims paid
129
68
319
188
Amount
of claims paid
$
2,956
$
1,261
$
6,806
$
3,224
Claim severity
66
%
47
%
62
%
44
%
Other
Underwriting and Operating Expenses
Following are the components of our other underwriting and operating expenses for the periods indicated:
The
significant factors contributing to the change in other underwriting and operating expenses are:
•Compensation and benefits increased in the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022 primarily due to an increase in the number of employees resulting from the acquisition of the title operations, as well as increased stock compensation expense. Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.
•Premium taxes increased primarily due to an increase in premiums written, including title insurance premiums written in the three
months ended September 30, 2023.
•Other expenses increased primarily as a result of the title and settlement services direct cost incurred in the three months ended September 30, 2023, and increases in professional fees and software related expenses partially offset by an increase in ceding commission earned under the QSR Agreement. In the three and nine months ended September 30, 2023, other expenses included approximately $0.2 million and $4.3 million, respectively, of transaction costs associated with the Company's title business acquisition. Other expenses include professional fees, travel, marketing, hardware, software, rent,
depreciation and amortization and other facilities expenses.
Interest Expense
For the three and nine months ended September 30, 2023, we incurred interest expense of $7.9 million and $22.2 million, respectively, as compared to $4.5 million and $9.6 million for the three and nine months ended September 30, 2022, respectively. The increases were primarily due to an increase in the weighted average interest rate for borrowings outstanding. For the three and nine months ended September 30, 2023, the borrowings under the Credit Facility had a weighted average interest rate of 7.14% and 6.71%, respectively, as compared to 3.94% and 2.75% for the three and nine months ended
September 30, 2022, respectively.
Income Taxes
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax expense was $31.5 million and $32.9 million for the three months ended September 30, 2023 and 2022, respectively, and $99.0 million and $131.2 million for the nine months ended September 30, 2023 and 2022, respectively. The provision for income taxes for the nine months ended September
30, 2023 was calculated using an estimated annual effective tax rate of 15.2% as compared to an estimated annual effective tax rate of 15.8% for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 income tax expense includes $2.0 million of discrete tax benefit associated with realized and unrealized losses recognized during the period partially offset by excess tax deficits associated with the vesting of common shares and common share units. For the nine months ended September 30, 2023, income tax expense also includes $5.3 million of net expense associated with prior year tax returns. For the nine months ended September 30, 2022, income tax expense includes $9.6 million of discrete tax expense associated with realized and unrealized
gains and losses. The tax effects associated with the realized and unrealized gains and losses, vesting of common shares and common share units, and prior year tax return items are treated as discrete items in the reporting period in which they occur and are not considered in determining the annual effective tax rate.
Liquidity and Capital Resources
Overview
Our sources of funds consist primarily of:
•our investment portfolio and interest income on the portfolio;
•net
premiums that we will receive from our existing IIF as well as policies that we write in the future;
•interest
payments and repayment of borrowings under our Credit Facility;
•the other costs and operating expenses of our business;
•the repurchase of common shares under the share repurchase plan approved by our Board of Directors; and
•the payment of dividends on our common shares.
As of September 30, 2023, we had substantial liquidity with cash of $96.8 million, short-term investments of $755.9 million and fixed maturity investments of $4.2 billion. We also had $400 million available capacity under the revolving credit component
of our Credit Facility, with $425 million of borrowings outstanding under our Credit Facility. Borrowings under the Credit Facility contractually mature on December 10, 2026. Holding company net cash and investments available for sale totaled $648.7 million at September 30, 2023. In addition, Essent Guaranty is a member of the Federal Home Loan Bank of Pittsburgh (the “FHLBank”) and has access to secured borrowing capacity with the FHLBank to provide Essent Guaranty with supplemental liquidity. Essent Guaranty had no outstanding borrowings with the FHLBank at September 30, 2023.
Management believes that the Company has sufficient liquidity available
both at its holding companies and in its insurance and other operating subsidiaries to meet its operating cash needs and obligations and committed capital expenditures for the next 12 months.
While the Company and all of its subsidiaries are expected to have sufficient liquidity to meet all their expected obligations, additional capital may be required to meet any new capital requirements that are adopted by regulatory authorities or the GSEs, to respond to changes in the business or economic environment, to provide additional capital related to the growth of our risk in force in our mortgage insurance portfolio,
or to fund new business initiatives. We regularly review potential investments and acquisitions, some of which may be material, that, if consummated, would expand our existing business or result in new lines of business, and at any given time we may be in discussions concerning possible transactions. We continually evaluate opportunities based upon market conditions to further increase our financial flexibility through the issuance of equity or debt, or other options including reinsurance or credit risk transfer transactions. There can be no guarantee that any such opportunities will be available on acceptable terms or at all.
At the operating subsidiary level, liquidity could be impacted by any one of the following factors:
•significant decline in the value of our investments;
•inability
to sell investment assets to provide cash to fund operating needs;
•decline in expected revenues generated from operations;
•increase in expected claim payments related to our IIF; or
•increase in operating expenses.
Our U.S. mortgage insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. Under the insurance laws of the Commonwealth of Pennsylvania, the insurance subsidiaries
may pay dividends during any twelve-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year’s statutory net income. The Pennsylvania statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. At September 30, 2023, Essent Guaranty had unassigned surplus of approximately $284.6 million and Essent PA had unassigned surplus of approximately $13.3 million. As of September 30, 2023, Essent Guaranty and Essent PA could pay additional ordinary dividends in 2023 of $284.6 million and $5.3 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 a quota share reinsurance agreement with Essent Guaranty, Essent Re has agreed to maintain a minimum total equity of $100 million. As of September 30, 2023, Essent Re had total equity of $1.7 billion. In connection with its insurance and reinsurance activities, Essent Re is required to maintain assets in trusts for the
benefit of its contractual counterparties. See Note 3 to our condensed consolidated financial statements. At September 30, 2023, our insurance subsidiaries
were in compliance with these rules, regulations and agreements.
Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Nine Months Ended September 30,
(In thousands)
2023
2022
Net
cash provided by operating activities
$
547,548
$
416,456
Net cash used in investing activities
(396,342)
(253,010)
Net cash used in financing activities
(135,667)
(165,470)
Net
increase (decrease) in cash
$
15,539
$
(2,024)
Operating Activities
Cash flow provided by operating activities totaled $547.5 million for the nine months ended September 30, 2023, as compared to $416.5 million for the nine months ended September 30, 2022. The increase in cash flow provided by operating activities was primarily due to an increase in prepayments, a component of other assets, in the nine
months ended September 30, 2022 and increases in net premiums written and investment income partially offset by an increase in operating expenses paid in the nine months ended September 30, 2023.
Investing Activities
Cash flow used in investing activities totaled $396.3 million for nine months ended September 30, 2023 compared to $253.0 million used in investing activities for the nine months ended September 30, 2022. In both periods, cash flow used in investing activities relates primarily to investing cash flows from operations. For the nine months ended September
30, 2023, cash used in investing activities also includes $86.8 million of net cash paid for the title business acquisition.
Financing Activities
Cash flow used in financing activities totaled $135.7 million and $165.5 million for the nine months ended September 30, 2023 and 2022, respectively, primarily related to the quarterly cash dividends paid, repurchases of common stock under our share repurchase plans and treasury stock acquired from employees to satisfy tax withholding obligations.
Insurance Company Capital
We
compute a risk-to-capital ratio for our U.S. mortgage insurance companies on a separate company statutory basis, as well as for our combined mortgage insurance operations. The risk-to-capital ratio is our net risk in force divided by our statutory capital. Our net risk in force represents risk in force net of reinsurance ceded, if any, and net of exposures on policies for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual contributions to the contingency reserve of 50% of net premiums earned. These contributions must generally be maintained for a period of ten years. However, with regulatory approval,
a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.
During the nine months ended September 30, 2023 and 2022, no capital contributions were made to our U.S. mortgage insurance subsidiaries and Essent Guaranty paid dividends to Essent US Holdings, Inc. of $260 million, respectively. During the nine months ended September 30, 2023, Essent US Holdings made a capital contribution of $6 million to its title insurance subsidiary.
Essent Guaranty has entered into reinsurance
agreements that provide excess of loss reinsurance coverage for new defaults on portfolios of mortgage insurance policies issued in 2017 through June 30, 2023. The aggregate excess of loss reinsurance coverages decrease over a ten-year period as the underlying covered mortgages amortize. Based on the level of delinquencies reported to us, the insurance-linked note transactions (the "ILNs") that Essent Guaranty has entered into prior to
March 31, 2020 became subject to a "trigger event" as of June 25, 2020.
The aggregate excess of loss reinsurance coverage will not amortize during the continuation of a trigger event. Radnor Re 2020-1 was no longer subject to a trigger event as of July 25, 2022.
Essent Guaranty has entered into a quota share reinsurance agreement with a panel of third-party reinsurers ("QSR" agreement"). 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 each QSR agreement, Essent Guaranty will cede premiums on a percentage of risk on all eligible policies written during a specified period, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a specific ceding commission, as well as a profit commission that varies directly and inversely with ceded claims. These reinsurance coverages also reduces
net risk in force and PMIERs Minimum Required Assets. See Note 4 to our condensed consolidated financial statements.
The following tables summarizes Essent Guaranty's QSR agreements as of September 30, 2023:
(1)Under
QSR-2019, Essent Guaranty cedes 40% of premiums on singles policies and 20% on all other policies.
(2)The initial profit commission on QSR-2019 was up to 60%. Since Essent Guaranty did not exercise its option to terminate this QSR agreement on December 31, 2021, the maximum profit commission that Essent Guaranty could earn increased to 63% in 2022 and thereafter.
Our combined risk-to-capital calculation for our U.S. mortgage insurance subsidiaries as of September 30, 2023 was as follows:
Combined statutory capital: ($ in thousands)
Policyholders’
surplus
$
1,042,240
Contingency reserves
2,267,283
Combined statutory capital
$
3,309,522
Combined net risk in force
$
34,203,678
Combined risk-to-capital ratio
10.3:1
For additional
information regarding regulatory capital, see Note 14 to our condensed consolidated financial statements. Our combined statutory capital equals the sum of statutory capital of Essent Guaranty plus Essent PA, after eliminating the impact of intercompany transactions. The combined risk-to-capital ratio equals the sum of the net risk in force of Essent Guaranty and Essent PA divided by combined statutory capital. The information above has been derived from the annual and quarterly statements of our insurance subsidiaries, which have been prepared in conformity with accounting practices prescribed or permitted by the Pennsylvania Insurance Department and the National Association of Insurance Commissioners Accounting Practices and Procedures Manual. Such practices vary from accounting principles generally accepted in the United States.
Essent
Re has entered into GSE and other risk share transactions, including insurance and reinsurance transactions with Freddie Mac and Fannie Mae. Under a quota share reinsurance agreement, Essent Re reinsures 25% of Essent Guaranty’s NIW through December 31, 2020 and 35% of Essent Guaranty’s NIW after December 31, 2020. During the nine months ended September 30, 2023 and 2022, Essent Re paid no dividends to Essent Group and Essent Group made no capital contributions to Essent Re. As of September 30, 2023, Essent Re had total stockholders’ equity of $1.7 billion and net risk in force of $21.7 billion.
Financial Strength Ratings
The
insurer financial strength rating of Essent Guaranty, our principal mortgage insurance subsidiary, is rated A3 with a stable outlook by Moody’s Investors Service (“Moody's”), BBB+ with a stable outlook by S&P and A (Excellent) with stable
outlook by A.M. Best. The insurer financial strength rating of Essent Re is BBB+ with a stable outlook by S&P and A (Excellent) with stable outlook by A.M. Best.
Private Mortgage Insurer Eligibility Requirements
Effective December
31, 2015, Fannie Mae and Freddie Mac, at the direction of the FHFA, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. This risk-based framework provides that an insurer must hold a substantially higher level of required assets for insured loans that are in default compared to a performing loan. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0")
which became effective on March 31, 2019. As of September 30, 2023, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0. As of September 30, 2023, Essent Guaranty's Available Assets were $3.32 billion or 174% of its Minimum Required Assets of $1.91 billion based on our interpretation of PMIERs 2.0.
Under PMIERs guidance issued by the GSEs effective June 30, 2020, Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property located in a Federal Emergency Management Agency (“FEMA”) Declared Major Disaster Area eligible for Individual Assistance and that either 1) is
subject to a forbearance plan granted in response to a FEMA Declared Major Disaster, the terms of which are materially consistent with terms of forbearance plans, repayment plans or loan modification trial period offered by Fannie Mae or Freddie Mac, or 2) has an initial missed payment occurring up to either (i) 30 days prior to the first day of the incident period specified in the FEMA Major Disaster Declaration or (ii) 90 days following the last day of the incident period specified in the FEMA Major Disaster Declaration, not to exceed 180 days from the first day of the incident period specified in the FEMA Major Disaster Declaration. In the case of the foregoing, the 0.30 multiplier shall be applied to the risk-based required asset amount factor for a non-performing primary mortgage guaranty insurance loan for no longer than three calendar months beginning with the month the loan becomes a non-performing primary mortgage guaranty insurance loan by reaching two missed
monthly payments absent a forbearance plan described in 1) above. Further, under temporary provisions provided by the PMIERs guidance, Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property that has an initial missed payment occurring on or after March 1, 2020 and prior to April 1, 2021 (COVID-19 Crisis Period). The 0.30 multiplier will be applicable for insured loans in default 1) subject to a forbearance plan granted in response to a financial hardship related to COVID-19 (which shall be assumed to be the case for any loan that has an initial missed payment occurring during the COVID-19 Crisis Period and is subject to a forbearance plan, repayment plan or loan modification trial period), the terms of which are materially consistent with terms offered by Fannie Mae or Freddie Mac or 2) for
no longer than three calendar months beginning with the month the loan becomes a non-performing primary mortgage guaranty insurance loan by reaching two missed monthly payments.
FHFA and the GSEs announced that effective November 1, 2023, defaulted loans will be no longer eligible for COVID forbearance plans and will follow the GSEs standard forbearance plans going forward.
Financial Condition
Stockholders’ Equity
As of September 30, 2023,
stockholders’ equity was $4.8 billion, compared to $4.5 billion as of December 31, 2022. Stockholders' equity increased primarily due to net income generated in 2023, partially offset by dividends paid and the repurchase of common shares under our share repurchase plan and an increase in accumulated other comprehensive loss related to an increase in our net unrealized investment losses.
Investments
As of September 30, 2023, investments totaled $5.3 billion compared to $5.0 billion as of December 31, 2022. In addition, our total cash was $96.8 million as of September 30, 2023, compared to $81.2 million
as of December 31, 2022. The increase in investments was primarily due to investing net cash flows from operations during the nine months ended September 30, 2023 and partially offset by a decrease in our net unrealized investment losses.
(1)As of September 30, 2023, for securities in an unrealized loss position, management believes the declines in fair value are principally associated with the changes in the interest rate environment subsequent to its purchase. Also, see Note 3 to
our condensed consolidated financial statements, which summarizes the aggregate amount of gross unrealized losses by asset class in which the fair value of investments available for sale has been less than cost for less than 12 months and for 12 months or more.
(2)Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.
The following tables include municipal debt securities for states that represent more than 10% of the total municipal bond position as of September 30, 2023:
San
Joaquin Hills Calif Transn Corridor Agy Toll Road Rev
$
6,149
$
7,725
A1
Anaheim Calif Pub Fing Auth
$
5,330
$
7,725
A1
California St Muni Fin
Auth
$
5,057
$
7,725
A1
Golden State Tobacco Securitization Corp
$
3,735
$
5,027
A3
Airport Commission Of The City And County Of San Francisco
$
3,525
$
3,623
A1
Carson
Calif
$
3,203
$
4,392
Aa3
California Health Facs Fing Auth
$
3,197
$
3,356
Aa3
San Jose Calif Uni Sch Dist
$
3,075
$
4,090
Aaa
Tuolumne
Wind Proj Auth Calif Rev
$
2,891
$
3,043
A2
California Mun Fin Auth Environmental Impt
$
2,880
$
3,740
Aa3
Kern Cnty Calif
$
2,676
$
2,742
Baa2
Chabot-Las
Positas Cmnty College Dist
$
2,534
$
2,693
Aa2
Port Oakland Calif
$
2,345
$
2,468
A1
City Of Inglewood Ca
$
2,251
$
3,117
Aa2
Riverside
Cnty Calif
$
2,073
$
2,250
Aa2
Monterey Pk Ca Pensn Oblig
$
1,993
$
2,968
Aa2
San Francisco Calif City & Cnty Pub Utils Commn
$
1,915
$
2,329
Aa2
Foothill
Eastern Transn Corridor Agy Calif
$
1,605
$
2,350
A1
Bay Area Calif Wtr Spply & Conservation
$
1,563
$
1,685
Aa3
Riverside County Transportation
Commission
$
1,261
$
1,665
A2
Regents Of The University Of California
$
1,238
$
1,360
Aa3
University Of California
$
1,226
$
1,276
Aa2
Torrance
Calif Jt Pwrs Fing Auth
$
1,116
$
1,240
Aa2
El Cajon Calif
$
918
$
1,282
Aa2
El Monte Calif
$
816
$
1,000
Aa2
Alameda
Corridor Transn Auth Calif
$
802
$
860
A3
Los Angeles Department Of Airports Los Angeles International Air
$
785
$
802
Aa3
Cathedral City Calif
Redev Agy
$
706
$
710
Aa2
Pomona Calif Redev Agy
$
666
$
700
Aa2
California Statewide Cmntys Dev Auth
$
493
$
725
A1
Sacramento
Cnty Calif
$
486
$
485
A1
California Cnty Calif Tob Sec
$
431
$
471
A3
California State University
$
217
$
249
Aa2
Oxnard
Calif Un High Sch Dist
$
208
$
250
Aa2
San Jose Calif Fing Auth
$
166
$
205
Aa2
Riverside Calif Pension Oblig
$
151
$
155
Aa2
Compton
Calif
$
114
$
114
Aa3
Los Angeles Calif Mun Impt Corp
$
89
$
110
Aa3
$
93,448
$
113,830
(1)Certain
of the above securities may include financial guaranty insurance or state enhancements. The above ratings include the effect of these credit enhancements, if applicable.
(2)Based on ratings issued by Moody’s, if available. S&P or Fitch rating utilized if Moody’s not available.
Essent Guaranty has entered into
fully collateralized reinsurance agreements ("Radnor Re Transactions") with unaffiliated special purpose insurers domiciled in Bermuda. The Radnor Re special purpose insurers are special purpose variable interest entities that are not consolidated in our condensed consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. As of September 30, 2023, our estimated off-balance sheet maximum exposure to loss from the Radnor Re entities was $0.3 million, representing the estimated net present value of investment earnings on the assets in the reinsurance trusts. See Note 4 to our condensed consolidated financial statements for additional information.
Critical
Accounting Policies
As of the filing date of this report, there were no significant changes in our critical accounting policies from those discussed in our 2022 Form 10-K. See Note 2 to our condensed consolidated financial statements for recently issued accounting standards adopted or under evaluation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large
investment portfolio of various holdings, types and maturities. Investment income is one of our primary sources of cash flow supporting operations and claim payments. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance. While our investment portfolio is exposed to factors affecting markets worldwide, it is most sensitive to fluctuations in the drivers of U.S. markets.
We manage market risk via defined investment policy implemented by our treasury function with oversight from our board of directors and our senior management. Important drivers of our market risk exposure monitored and managed by us include but are not limited to:
•Changes to the level of interest rates. Increasing
interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable-rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates which may in turn require that the investment portfolio be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse.
•Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.
•Market
volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third-party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.
•Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.
•Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their advantage. This typically occurs when rates
fall below the interest rate of the debt.
Market risk is measured for all investment assets at the individual security level. Market risks that are not fully captured by the quantitative analysis are highlighted. In addition, material market risk changes that occur from the last reporting period to the current are discussed. Changes to how risks are managed will also be identified and described.
At September 30, 2023, the effective duration of our investments available for sale was 3.4 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 3.4% in fair value of our investments available for sale. Excluding short-term investments, our investments available
for sale effective duration was 4.0 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 4.0% in fair value of our investments available for sale.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this Quarterly Report. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023, the end of the period covered by this Quarterly Report.
Changes in Internal Control Over Financial Reporting
During our most recent fiscal quarter, there has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are not currently subject to any material legal proceedings.
Item 1A. Risk Factors
Risk factors that affect our business and financial results are discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2022. Except as discussed below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report, along with the disclosure below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
Repurchases of Securities
The table below sets forth information regarding repurchases of our common shares during the three months ended September 30, 2023.
Period ($
in thousands, except per share amounts)
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
(1)As
of September 30, 2023, the Company was authorized to purchase up to $250 million of its common shares, announced in May 2022, of which $51.0 million had been utilized. The remaining $199.0 million in the table represents the amount available to repurchase shares under the share repurchase plan as of September 30, 2023.
Certification
of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
The following financial information from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets (Unaudited); (ii) the Condensed Consolidated Statements of Comprehensive Income (Unaudited); (iii) the Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited); (iv) the Condensed Consolidated Statements of Cash Flows (Unaudited); and (v) the Notes to Condensed Consolidated Financial Statements (Unaudited).
*
Management
contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, on the date indicated.
