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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 ☐ No i☒
Unless the context otherwise indicates or requires, the terms “we,”“our,”“us,”“Essent,” and the “Company,” as used in this Quarterly Report on Form 10-Q, refer to Essent Group Ltd. and its directly and indirectly owned subsidiaries, including our primary operating subsidiaries, Essent Guaranty, Inc. and Essent Reinsurance Ltd., as a combined entity, except where otherwise stated or where it is clear that the terms mean only Essent Group Ltd. exclusive of its subsidiaries.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q, or Quarterly Report, includes forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts or present facts or conditions, such as statements regarding our future financial condition or results of operations, our prospects and strategies for future growth, the introduction of new products and services, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,”“will,”“should,”“expects,”“plans,”“anticipates,”“believes,”“estimates,”“predicts,”“potential” or the negative of these terms or other comparable
terminology.
The forward-looking statements contained in this Quarterly Report reflect our views as of the date of this Quarterly Report about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, those factors described below, in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of
this Quarterly Report, and in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission. These factors include, without limitation, the following:
•the duration, spread and severity of the outbreak of novel coronavirus disease 2019 ("COVID-19"), which is currently ongoing and still evolving; the actions taken to contain the virus or treat its impact, including government and GSE actions to mitigate the economic impact of the outbreak; the nature and extent of the forbearance and modification options available to borrowers affected by the outbreak on mortgages we insure; reserve and other accounting estimates relating to the impact of the COVID-19 outbreak; borrower behavior in response to the outbreak
and its economic impact; how quickly and to what extent normal economic and operating conditions can resume, including whether any future outbreaks interrupt economic recovery; how quickly and to what extent affected borrowers can recover from the negative economic impact of the outbreak; and whether and to what extent the outbreak and related economic conditions will exacerbate other risks and uncertainties facing our business, financial condition and business strategy;
•changes in or to Fannie Mae and Freddie Mac, which we refer to collectively as the GSEs, whether through Federal legislation, restructurings or a shift in business practices;
•failure to continue to meet the mortgage insurer eligibility requirements of the GSEs;
•competition
for our customers or the loss of a significant customer;
•lenders or investors seeking alternatives to private mortgage insurance;
•increase in the number of loans insured through Federal government mortgage insurance programs, including those offered by the Federal Housing Administration;
•decline in the volume of low down payment mortgage originations;
•uncertainty of loss reserve estimates;
•decrease in the length of time our insurance policies are in force;
•deteriorating
economic conditions (including inflation, rising interest rates and other adverse economic trends);
•recently enacted U.S. Federal tax reform and its impact on us, our shareholders and our operations;
•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 June 30,
Six Months Ended June 30,
(In thousands, except per share amounts)
2022
2021
2022
2021
Revenues:
Net
premiums written
$
i210,342
$
i202,287
$
i410,073
$
i406,648
Decrease
in unearned premiums
i1,669
i15,150
i17,268
i29,856
Net
premiums earned
i212,011
i217,437
i427,341
i436,504
Net
investment income
i29,339
i21,743
i54,019
i43,531
Realized
investment (losses) gains, net
(i471)
(i253)
(i7,823)
i388
Income
from other invested assets
i1,953
i122
i26,658
i648
Other
income
i1,577
iii4,212//
i8,825
i6,987
Total
revenues
i244,409
i243,261
i509,020
i488,058
Losses
and expenses:
(Benefit) provision for losses and LAE
(i76,199)
i9,651
(i183,057)
i41,973
Other
underwriting and operating expenses
i41,898
i41,114
i82,694
i83,353
Interest
expense
i2,887
i2,073
i5,113
i4,124
Total
losses and expenses
(i31,414)
i52,838
(i95,250)
i129,450
Income
before income taxes
i275,823
i190,423
i604,270
i358,608
Income
tax expense
i44,054
i30,628
i98,334
i63,165
Net
income
$
i231,769
$
i159,795
$
i505,936
$
i295,443
Earnings
per share:
Basic
$
i2.17
$
i1.43
$
i4.70
$
i2.64
Diluted
i2.16
i1.42
i4.69
i2.63
Weighted
average shares outstanding:
Basic
i106,921
i112,118
i107,540
i112,067
Diluted
i107,283
i112,454
i107,933
i112,416
Net
income
$
i231,769
$
i159,795
$
i505,936
$
i295,443
Other
comprehensive income (loss):
Change in unrealized appreciation (depreciation) of investments, net of tax expense (benefit) of ($i24,235)
and $i7,856 in the three months ended June 30, 2022 and 2021 and ($i60,132)
and ($i2,345) in the six months ended June 30, 2022 and 2021
(i134,268)
i36,360
(i337,274)
(i22,843)
Total
other comprehensive income (loss)
(i134,268)
i36,360
(i337,274)
(i22,843)
Comprehensive
income
$
i97,501
$
i196,155
$
i168,662
$
i272,600
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”), a wholly-owned subsidiary 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 of Essent Guaranty’s NIW provided by Essent Re from i25% to i35%
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 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 then in effect, Essent Guaranty also reinsures that portion of the risk that is in excess of i25% of the mortgage balance with respect to loans insured prior to April 1, 2019, after consideration of other reinsurance, to Essent Guaranty of PA, Inc. (“Essent PA”), an affiliate.
In addition to offering mortgage insurance, we provide contract
underwriting services on a limited basis through CUW Solutions, LLC ("CUW Solutions"), a Delaware limited liability company, that provides, among other things, mortgage contract underwriting services to lenders and mortgage insurance underwriting services to affiliates.
We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) pursuant to such rules and regulations. In the opinion of management, the statements include all adjustments (which include normal
recurring adjustments) required for a fair statement of financial position, results of operations and cash flows for the interim periods presented. These statements should be read in conjunction with the consolidated financial statements and notes thereto, including Note 1 and Note 2 to the consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2021, which discloses the principles of consolidation and a summary of significant accounting policies. The results of operations for the interim periods are not necessarily indicative of the results for the full year. We evaluated the need to recognize or disclose events that occurred subsequent to June 30, 2022 prior to the issuance of these condensed consolidated financial statements.
Certain
amounts in prior years have been reclassified to conform to the current year presentation.
Note 2. iRecently Issued Accounting Standards
i
Accounting
Standards Not Yet Adopted
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide temporary optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. It provides optional expedients and exceptions for applying generally accepted accounting principles to contract, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard may be elected and applied prospectively over time from March 12, 2020 through December
31, 2022 as reference rate reform activities occur. The adoption of, and future elections under, this ASU are not expected to have a material impact on our consolidated financial statements as the ASU will ease, if warranted, the requirements for accounting for the future effects of
Notes to Condensed Consolidated Financial Statements (Unaudited)
the rate reform. We continue
to monitor the impact the discontinuance of LIBOR or another reference rate will have on our contracts and other transactions.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This update clarifies the guidance in ASC 820 on the fair value measurement of an equity security that is subject to a contractual sale restriction and requires specific disclosures related to such an equity security. The update clarifies that a contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security and is not included in the equity security's unit of account. Accordingly, an entity
should not consider the contractual sale restriction when measuring the equity security’s fair value. The update also requires specific disclosures related to equity securities that are subject to contractual sale restrictions, including (1) the fair value of such equity securities reflected in the balance sheet, (2) the nature and remaining duration of the corresponding restrictions, and (3) any circumstances that could cause a lapse in the restrictions. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. The adoption of this ASU is not expected to have a material effect on the Company's consolidated operating results or financial position.
Note 3.
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 June 30, 2022, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most U.S. agency mortgage-backed securities, residential and commercial mortgage securities and asset-backed securities provide for periodic payments throughout their lives, they are listed below in separate categories.
Notes to Condensed Consolidated Financial Statements (Unaudited)
i
The components of realized investment (losses) gains, net on the condensed consolidated statements of comprehensive income were as follows:
Three
Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2022
2021
2022
2021
Realized gross gains
$
i171
$
i18
$
i12,747
$
i768
Realized
gross losses
(i173)
(i271)
(i13,264)
(i380)
Impairment
loss
(i469)
i—
(i7,306)
i—
/
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
June 30, 2022 and December 31, 2021, we held i2,465 and i1,180
individual investment securities, respectively, that were in an unrealized loss position. We assess our intent to sell these securities and whether we will be required to sell these securities before the recovery of their amortized cost basis when determining whether to record an impairment on the securities in an unrealized loss position. In assessing whether the decline in the fair value at June 30, 2022 of any of these securities resulted from a credit loss or other factors, we made inquiries of our investment managers to determine that each issuer was current on its scheduled interest and principal payments. We reviewed the credit rating of these securities noting that approximately i98%
of the securities at June 30, 2022 had investment-grade ratings. We concluded that gross unrealized losses noted above were primarily associated with the changes in interest rates subsequent to purchase rather than due to credit. During the three and six months ended June 30, 2022, we recorded impairments of $i0.5 million and $i7.3
million, respectively, due to our intent to sell securities in an unrealized loss position. There were iino/
impairments recorded during the three or six months ended June 30, 2021.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The Company's other invested assets at June 30,
2022 and December 31, 2021 totaled $i217.8 million and $i170.5 million, respectively. Other invested assets are principally comprised of limited
partnership interests which are generally accounted for under the equity method or fair value using net asset value (or its equivalent) as a practical expedient. Our proportionate share of earnings or losses or changes in fair value are reported in income from other invested assets on the condensed consolidated statements of comprehensive income. For entities accounted for under the equity method that follow industry-specific guidance for investment companies, our proportionate share of earnings or losses includes changes in the fair value of the underlying assets of these entities. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.
Through June 30, 2021, unrealized gains and losses reported by these entities were included in other comprehensive
income (“OCI”). Subsequent to June 30, 2021, management concluded that unrealized gains and losses on these investments should be reflected in earnings rather than OCI. Income from other invested assets for the three and six months ended June 30, 2022, includes $i2.4 million of net unrealized losses and $i12.6 million
of net unrealized gains, respectively.
Other invested assets that are accounted for at fair value using the net asset value (or its equivalent) as a practical expedient totaled $i134.5 million as of June 30, 2022. Substantially all of these investments were in limited partnerships invested in real estate or technology. At June 30, 2022, maximum future funding commitments were $i28.6
million. For limited partnership investments that have a contractual expiration date, we expect the liquidation of the underlying assets to occur over the next two to 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 $i9.3 million at June 30, 2022 and $i9.7
million at December 31, 2021. In connection with its insurance and reinsurance activities, Essent Re is required to maintain assets in trusts for the benefit of its contractual counterparties. The fair value of the investments on deposit in these trusts was $i1.0 billion at June 30, 2022 and $i982.6
million at December 31, 2021. Essent Guaranty is required to maintain assets on deposit in connection with its fully collateralized reinsurance agreements (see Note 4). The fair value of the assets on deposit was $i8.5 million at June 30, 2022 and $i8.5
million at December 31, 2021. Essent Guaranty is also required to maintain assets on deposit for the benefit of the sponsor of a fixed income investment commitment. The fair value of the assets on deposit was $i9.0 million at June 30, 2022 and $i9.0
million at December 31, 2021.
i
Net investment income consists of:
Three
Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2022
2021
2022
2021
Fixed maturities
$
i31,074
$
i23,012
$
i57,298
$
i46,036
Short-term
investments
i215
i47
i258
i128
Gross
investment income
i31,289
i23,059
i57,556
i46,164
Investment
expenses
(i1,950)
(i1,316)
(i3,537)
(i2,633)
Net
investment income
$
i29,339
$
i21,743
$
i54,019
$
i43,531
/
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 June 30,
Six Months Ended June 30,
(In thousands)
2022
2021
2022
2021
Net
premiums written:
Direct
$
i232,660
$
i228,949
$
i452,914
$
i464,206
Ceded
(1)
(i22,318)
(i26,662)
(i42,841)
(i57,558)
Net
premiums written
$
i210,342
$
i202,287
$
i410,073
$
i406,648
Net
premiums earned:
Direct
$
i234,329
$
i244,099
$
i470,182
$
i494,062
Ceded
(1)
(i22,318)
(i26,662)
(i42,841)
(i57,558)
Net
premiums earned
$
i212,011
$
i217,437
$
i427,341
$
i436,504
(1)Net
of profit commission.
/
Quota Share Reinsurance
Effective September 1, 2019, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers ("QSR 2019"). Each of the third-party reinsurers has an insurer financial strength rating of A or better by S&P Global Ratings, A.M. Best or both. Under QSR 2019, Essent Guaranty will cede premiums earned related to i40%
of risk on eligible single premium policies and i20% of risk on all other eligible policies written September 1, 2019 through December 31, 2020, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a i20%
ceding commission, and a profit commission of up to i60% that varies directly and inversely with ceded claims. QSR 2019 is scheduled to terminate on December 31, 2030. Essent Guaranty has certain termination rights under QSR 2019, including the option to terminate QSR 2019 with no termination fee on December 31, 2021, and the option, subject to a termination fee, to terminate QSR 2019 on December 31, 2022, or annually thereafter. As Essent
Guaranty did not exercise its option to terminate QSR 2019 effective December 31, 2021, the maximum profit commission that Essent Guaranty could earn will increase to i63% in 2022 and thereafter.
Effective January 1, 2022, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers ("QSR 2022"). Each of the third-party reinsurers has an insurer minimum financial strength
rating of A- or better by S&P Global Ratings, A.M. Best or both. Under QSR 2022, Essent Guaranty will cede premiums earned related to i20% of risk on all eligible policies written January 1, 2022 through December 31, 2022, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a i20%
ceding commission, and a profit commission of up to i62% that varies directly and inversely with ceded claims. QSR 2022 is scheduled to terminate on December 31, 2032. Essent Guaranty has certain termination rights under QSR 2022, including the option to terminate QSR 2022, subject to a termination fee, on December 31, 2024, or quarterly thereafter.
Total RIF ceded under QSR 2019 and QSR 2022 was $ii5.8/
billion as of June 30, 2022.
Excess of Loss Reinsurance
Essent Guaranty has entered into fully collateralized reinsurance agreements ("Radnor Re Transactions") with unaffiliated special purpose insurers domiciled in Bermuda. For the reinsurance coverage periods, Essent Guaranty and its affiliates retain the first layer of the respective aggregate losses, and a Radnor Re special purpose insurer will then provide second layer coverage up to the outstanding reinsurance coverage amount. Essent Guaranty and its affiliates retain losses in excess of the outstanding reinsurance coverage amount. The reinsurance premium due to each Radnor Re special purpose insurer is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period
by a coupon rate, which is the sum of one-month LIBOR or SOFR plus a risk margin, and then subtracting actual investment income collected on the assets in the related reinsurance trust during that period. The aggregate excess of loss reinsurance coverage decreases over a iten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate the Radnor Re Transactions. The Radnor Re entities collateralized the coverage by issuing mortgage insurance-linked notes ("ILNs") in an aggregate amount equal to the initial coverage to unaffiliated investors. The notes have iten-year
legal maturities and are non-
Notes to Condensed Consolidated Financial Statements (Unaudited)
recourse to any assets of Essent Guaranty or its affiliates. The proceeds of the notes were deposited into reinsurance trusts for the benefit of Essent Guaranty and will be the source of reinsurance claim payments to Essent Guaranty and principal repayments on the ILNs.
Effective
June 1, 2022, Essent Guaranty entered into a reinsurance agreement with a panel of reinsurers that provides excess of loss coverage on new insurance written from October 1, 2021 through December 31, 2022. For the reinsurance coverage period, Essent Guaranty and its affiliates retain the first layer of the respective aggregate losses, and the reinsurance panel will then provide second layer coverage up to the outstanding reinsurance coverage amount. Essent Guaranty and its affiliates retain losses in excess of the outstanding reinsurance coverage amount. Essent Guaranty has also entered into reinsurance agreements with panels of reinsurers that provide aggregate excess of loss coverage immediately above or pari-passu to the coverage provided by the Radnor Re Transactions. The aggregate excess of loss reinsurance coverage
decreases over a iten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate these reinsurance agreements.
i
The
following table summarizes Essent Guaranty's excess of loss reinsurance agreements as of June 30, 2022:
(1)If the reinsurance agreement is not terminated at the optional termination date, the risk margin component of the reinsurance premium increases by i50%.
(2)If
the reinsurance agreement is not terminated at the optional termination date, the reinsurance premium increases by i50%.
Based on the level of delinquencies reported to us, the ILN transactions entered into prior to March 31, 2020 became subject to a "trigger event" as of June 25,
2020. The amortization of principal of the notes issued by the unaffiliated special purpose insurers in connection with those ILN transactions is suspended and the aggregate excess of loss reinsurance coverage will not amortize during the continuation of a trigger event. As of November 26, 2021, Radnor Re 2019-2 was no longer subject to a trigger event. Radnor Re 2020-1 was no longer subject to a trigger event as of July 25, 2022.
The amount of monthly reinsurance premium ceded to the Radnor Re entities will fluctuate due to changes in one-month LIBOR or SOFR and changes in money market rates that affect investment income collected on the assets in the reinsurance trusts. As the reinsurance premium will vary based on changes in these rates, we concluded that the Radnor Re Transactions
contain embedded derivatives that will be accounted for separately like freestanding derivatives.
In connection with the Radnor Re Transactions, we concluded that the risk transfer requirements for reinsurance accounting were met as each Radnor Re entity is assuming significant insurance risk and a reasonable possibility of a significant loss. In addition, we assessed whether each Radnor Re entity was a variable interest entity ("VIE") and the appropriate accounting for the Radnor Re entities if they were VIEs. A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. A VIE
is consolidated by its primary beneficiary. The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of the decision-making ability and ability to influence activities that significantly affect the economic performance of the VIE. We concluded that the Radnor Re entities are VIEs. However, given that Essent Guaranty (1) does not have the unilateral power to direct the activities that most significantly affect their economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits that could be potentially significant to these entities, the Radnor Re entities are not consolidated in these financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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
derivative, using observable inputs in active markets (Level 2), included in other assets (other accrued liabilities) on our condensed consolidated balance sheet and the estimated net present value of investment earnings on the assets in the reinsurance trust, each as of June 30, 2022:
Maximum
Exposure to Loss
(In thousands)
Total VIE Assets
On - Balance Sheet
Off - Balance Sheet
Total
Radnor Re 2018-1 Ltd.
$
i242,123
$
i32
$
i30
$
i62
Radnor
Re 2019-1 Ltd.
i325,537
(i2,457)
i67
(i2,390)
Radnor
Re 2019-2 Ltd.
i92,252
(i1,526)
i3
(i1,523)
Radnor
Re 2020-1 Ltd.
i495,889
(i1,836)
i86
(i1,750)
Radnor
Re 2020-2 Ltd.
i64,499
(i470)
i2
(i468)
Radnor
Re 2021-1 Ltd.
i519,999
(i1,616)
i155
(i1,461)
Radnor
Re 2021-2 Ltd.
i439,407
(i1,735)
i164
(i1,571)
Total
$
i2,179,706
$
(i9,608)
$
i507
$
(i9,101)
/
The
assets of Radnor Re are the source of reinsurance claim payments to Essent Guaranty and provide capital relief under the PMIERs financial strength requirements (see Note 14). A decline in the assets available to pay claims would reduce the capital relief available to Essent Guaranty.
Note 5. 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 six months ended June 30:
(In thousands)
2022
2021
Reserve for losses and LAE at beginning of period
$
i407,445
$
i374,941
Less:
Reinsurance recoverables
i25,940
i19,061
Net
reserve for losses and LAE at beginning of period
i381,505
i355,880
Add
provision for losses and LAE, net of reinsurance, occurring in:
Current period
i43,095
i72,600
Prior
years
(i226,152)
(i30,627)
Net
incurred losses and LAE during the current period
(i183,057)
i41,973
Deduct
payments for losses and LAE, net of reinsurance, occurring in:
Current period
i81
i128
Prior
years
i2,051
i3,139
Net
loss and LAE payments during the current period
i2,132
i3,267
Net
reserve for losses and LAE at end of period
i196,316
i394,586
Plus:
Reinsurance recoverables
i13,657
i27,286
Reserve
for losses and LAE at end of period
$
i209,973
$
i421,872
/
For
the six months ended June 30, 2022, $i2.1 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There has been a $i226.2
million favorable prior year development, including $i164.1 million related to defaults notices received in April 2020 through September 2020 ("Early COVID Defaults"), during the six months ended June 30, 2022. Net reserves remaining as of June 30, 2022 for prior years are $i153.3
million as a result of re-estimation of unpaid losses and loss adjustment expenses. For the six months ended June 30, 2021, $i3.1 million was paid for incurred claims and claim adjustment expenses attributable to insured events of prior years. There was a $i30.6
million favorable prior year development during the six months ended June 30, 2021. Net reserves remaining as of June 30, 2021 for prior years were $i322.1 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Due to business restrictions, stay-at-home orders and travel restrictions implemented in
March 2020 as a result of COVID-19, unemployment in the United States increased significantly in the second quarter of 2020, declining during the second half of 2020 and throughout 2021. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment resulted in an increase in the number of delinquencies on the mortgages that we insure and has the potential to increase claim frequencies on defaults.
In response to the COVID-19 pandemic, the United States government enacted a number of policies to provide fiscal stimulus to the economy and relief to those affected by this global disaster. Specifically, mortgage forbearance programs and foreclosure moratoriums were instituted by Federal legislation along with actions taken by the Federal Housing Finance Agency (“FHFA”), Fannie Mae and Freddie Mac (collectively the “GSEs”).
The mortgage forbearance plans provide for eligible homeowners who were adversely impacted by COVID-19 to temporarily reduce or suspend their mortgage payments for up to 18 months for loans in an active COVID-19-related forbearance program as of February 28, 2021. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status. We believe that the forbearance process could have a favorable effect on the frequency of claims that we ultimately pay.
Based on the fiscal stimulus, forbearance programs and the foreclosure moratoriums put in place and the credit characteristics of the defaulted loans, we expected the ultimate number of Early COVID Defaults that
result in claims would be less than our historical default-to-claim experience. Accordingly, we recorded a reserve equal to approximately i7% of the initial risk in force for the Early COVID Defaults. The reserve for the Early COVID Defaults had not been adjusted as of December 31, 2021.
As of March 31, 2022, the defaulted loans reported to us in the second and third quarters of 2020 had reached the end of their forbearance
periods. During the first quarter of 2022, the Early COVID Defaults cured at elevated levels, and the cumulative cure rate for the Early COVID Defaults at March 31, 2022 exceeded our initial estimated cure rate implied by our i7% estimate of ultimate loss for these defaults. Based on cure activity through March 31, 2022 and our expectations for future cure activity, we lowered our estimate of ultimate loss for the Early COVID Defaults from 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 $i62.9 million and $i164.1 million
for the three and six months ended June 30, 2022, respectively. The reserve for losses and LAE at June 30, 2022 includes $i70.8 million of reserves for Early COVID Defaults. It is reasonably possible that our estimate of the losses for the Early COVID Defaults could change in the near term as a result of changes in the economic environment, the continued impact of the pandemic on the economic environment, and the results of existing and future
governmental programs designed to assist individuals and businesses impacted by the virus. A i100 basis point increase or decrease in our estimate of ultimate loss applied to the initial risk in force of the Early COVID Defaults would result in a corresponding increase or decrease in our reserve for losses and LAE of approximately $i35
million as of June 30, 2022.
The credit characteristics of defaults reported subsequent to September 30, 2020 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, beginning in the fourth quarter of 2020 we observed a normalization of the proportion of unemployment claims related to permanent layoffs as compared to a higher proportion of temporary layoffs during the second and third quarters of 2020. We believe that while defaults subsequent to September 30, 2020 were impacted by the pandemic's effect on the economy, the underlying credit performance of these defaults may not be the same as the expected performance for the Early COVID Defaults
that occurred following the onset of the pandemic and defaults after September 30, 2020 are more likely to transition consistent with pre-pandemic defaults. Accordingly, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults reported after September 2020 using our normal reserve methodology.
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 secured credit facility (the “Credit Facility”) with committed capacity of $i825 million. The Credit Facility provides for a $i400
million revolving credit facility and $i425 million of term loans. 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 June 30, 2022 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 June 30, 2022, the Company was in compliance with the covenants and $i425
million had been borrowed under the Credit Facility with a weighted average interest rate of i2.92%. As of December 31, 2021, $i425 million had been borrowed
with a weighted average interest rate of i1.79%.
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. We paid less than $ii0.1/
million related to remedies for each of the six months ended June 30, 2022 and 2021. As of June 30, 2022, management believes any potential claims for indemnification related to contract underwriting services through June 30, 2022 are not material to our consolidated financial position or results of operations.
In addition to the indemnifications discussed above, in the normal course of business, we enter into agreements or other relationships with third parties pursuant to which we may be obligated under specified circumstances to indemnify the counterparties with respect to certain matters.
Our contractual indemnification obligations typically arise in the context of agreements entered into by us to, among other things, purchase or sell services, finance our business and business transactions, lease real property and license intellectual property. The agreements we enter into in the normal course of business generally require us to pay certain amounts to the other party associated with claims or losses if they result from our breach of the agreement, including the inaccuracy of representations or warranties. The agreements we enter into may also contain other indemnification provisions that obligate us to pay amounts upon the occurrence of certain events, such as the negligence or willful misconduct of our employees, infringement of third-party intellectual property rights or claims that performance of the agreement constitutes a violation of law. Generally, payment by us under an indemnification provision is conditioned upon the other party making a claim,
and typically we can challenge the other party’s claims. Further, our indemnification obligations may be limited in time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us under an indemnification agreement or obligation. As of June 30, 2022, contingencies triggering material indemnification obligations or payments have not occurred historically and are not expected to occur. The nature of the indemnification provisions in the various types of agreements and relationships described above are believed to be low risk and pervasive, and we consider them to have a remote risk of loss or payment. We have not recorded any provisions on the condensed consolidated balance sheets related to indemnifications.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 pre-emptive rights or other rights to subscribe for additional shares, and no rights of redemption, conversion or exchange. Under certain circumstances and subject to the provisions of Bermuda law and our bye-laws, we may be required to make an offer to repurchase shares held by members. The common shares rank pari-passu with one another in all respects as to rights of payment and distribution. In general, holders of common shares will have 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 one 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
2021
March 31
$
ii0.16/
June
30
ii0.17/
September
30
ii0.18/
December
31
ii0.19/
Total
dividends per common share declared and paid
$
ii0.70/
Quarter
Ended
2022
March 31
$
ii0.20/
June
30
ii0.21/
Total
dividends per common share declared and paid
$
ii0.41/
/
In
August 2022, the Board of Directors declared a quarterly cash dividend of $ii0.22/
per common share payable on September 12, 2022, to shareholders of record on September 1, 2022.
Share Repurchase Plan
In May 2021, the Board of Directors approved a share repurchase plan that authorized the Company to repurchase $i250 million
of its common shares in the open market by the end of 2022. In April 2022, the Company repurchased i543,399 common shares, for a total year to date repurchase of i2,136,961
common shares at a cost of $i92.2 million, completing the May 2021 repurchase plan. The shares repurchased were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of June 30, 2022. In May 2022, the Board of Directors approved a new 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. There were ino share repurchases under the 2022 plan, leaving $i250.0
million remaining unused under the authorized repurchase plan as of June 30, 2022.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 9. iStock-Based
Compensation
In connection with the IPO in 2013, Essent Group's Board of Directors adopted, and Essent Group's shareholders approved, the Essent Group Ltd. 2013 Long-Term Incentive Plan (the "2013 Plan"), which was effective upon completion of the initial public offering. The types of awards available under the 2013 Plan include nonvested shares, nonvested share units, non-qualified share options, incentive stock options, share appreciation rights, and other share-based or cash-based awards. Nonvested shares and nonvested share units granted under the 2013 Plan have rights to dividends, which entitle holders to the same dividend value per share as holders of common shares in the form of dividend equivalent units ("DEUs"). DEUs are subject to the same vesting and other terms and conditions as the corresponding nonvested shares
and nonvested share units. DEUs vest when the underlying shares or share units vest and are forfeited if the underlying share or share units forfeit prior to vesting.
i
The following table summarizes nonvested common share, nonvested common share unit and DEU activity for the six months ended June 30, 2022:
In
February 2022, certain members of senior management were granted nonvested common shares under the Essent Group Ltd. 2013 Long-Term Incentive Plan ("2013 Plan") that are subject to time-based and performance-based vesting. The time-based share awards granted in February 2022 vest in three equal installments on March 1, 2023, 2024 and 2025. The performance-based share awards granted in February 2022 vest based upon our compounded annual book value per share growth percentage and relative total shareholder return during a ithree-year
performance period that commenced on January 1, 2022 and vest on March 1, 2025. 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
≤25th
percentile
50th percentile "Target"
≥75th percentile
Three-Year Book Value Per Share CAGR
i13% "Target"
i100
%
i150
%
i200
%
i11%
i75
%
i125
%
i175
%
i9%
i50
%
i100
%
i150
%
i7%
i25
%
i75
%
i125
%
i5%
i0
%
i50
%
i100
%
In
the event that the compounded annual book value per share growth or the relative total shareholder return falls between the performance levels shown above, the nonvested common shares earned will be determined on a straight-line basis between the respective levels shown. In May 2022, additional shares were granted to a member of senior management that are subject to the same time-based and performance-based vesting as the February 2022 grants.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
In connection with our incentive program covering bonus awards for performance year 2021, in February 2022, time-based share units were issued to certain employees that vest in three equal installments on March 1, 2023, 2024 and 2025.
Quoted market prices are used for the valuation of common shares granted that do not contain a market condition under ASC 718. The performance-based share awards granted in February 2022 and February 2021 contain a market condition and were valued based on analysis provided by a third-party valuation firm using a risk neutral simulation taking into
effect the vesting conditions of the grant.
In February 2021, the performance-based share awards granted in 2019 and 2020 to certain members of senior management were amended to provide that such awards will no longer be subject to the achievement of the compounded annual book value per share growth metrics and will be subject to only service-based vesting. As a result, the unvested shares subject to the amended 2019 awards vested on March 1, 2022 and the amended 2020 awards will vest on March 1, 2023, subject to the continued service requirements and other terms and conditions set forth in the applicable award agreements, without taking into consideration any performance metrics. Total incremental compensation expense related to amending these awards is $i4.0 million.
As of June 30, 2022, there was $i0.9 million of unrecognized compensation expense related to amending these awards and we expect to recognize the expense over a weighted average period of i0.7
years.
The total fair value on the vesting date of nonvested shares, share units or DEUs that vested was $i17.2 million and $i18.4
million for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there was $i25.5 million of total unrecognized compensation expense related to nonvested shares or share units outstanding
at June 30, 2022 and we expect to recognize the expense over a weighted average period of i2.2 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 i128,432 in the six months ended June 30, 2022. The tendered shares were recorded at cost and included in treasury stock. All treasury stock has been cancelled as of June 30, 2022.
i
Compensation
expense, net of forfeitures, and related tax effects recognized in connection with nonvested shares was as follows:
Three Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2022
2021
2022
2021
Compensation
expense
$
i4,198
$
i5,385
$
i9,005
$
i10,564
Income
tax benefit
i828
i1,034
i1,785
i2,045
/
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 ordinary dividends during any 12-month period in an amount equal to the greater of (i) 10% of
the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. The Pennsylvania statute also specifies that dividends and other distributions can be paid out of positive unassigned surplus without prior approval. At June 30, 2022, Essent Guaranty had unassigned surplus of approximately $i313.5 million and Essent PA had unassigned surplus of approximately $i18.4
million. In the three and six months ended June 30, 2022, Essent Guaranty paid dividends of $i100.0 million and $i200.0 million,
respectively, to its parent, Essent US Holdings, Inc. Essent Guaranty paid a dividend of $ii100.0/ million
to its parent, Essent US Holdings, Inc. in the three and six months ended June 30, 2021. Essent PA did iiiino///t
pay a dividend in the three and six months ended June 30, 2022 or 2021. As of June 30, 2022, Essent Guaranty and Essent PA could pay additional ordinary dividends in 2022 of $i297.7 million and $i5.6
million, respectively.
Essent Re is subject to certain dividend restrictions as prescribed by the Bermuda Monetary Authority and under certain agreements with counterparties. In connection with the quota share reinsurance agreement with Essent Guaranty, Essent Re has agreed to maintain a minimum total equity of $i100 million. As of June 30, 2022, Essent Re had total equity of $i1.4
billion.
At June 30, 2022, our insurance subsidiaries were in compliance with these rules, regulations and agreements.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
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 June 30,
Six
Months Ended June 30,
(In thousands, except per share amounts)
2022
2021
2022
2021
Net income
$
i231,769
$
i159,795
$
i505,936
$
i295,443
Basic
weighted average shares outstanding
i106,921
i112,118
i107,540
i112,067
Dilutive
effect of nonvested shares
i362
i336
i393
i349
Diluted
weighted average shares outstanding
i107,283
i112,454
i107,933
i112,416
Basic
earnings per share
$
i2.17
$
i1.43
$
i4.70
$
i2.64
Diluted
earnings per share
$
i2.16
$
i1.42
$
i4.69
$
i2.63
/
There
were i180,561 and i159,568
antidilutive shares for the three months ended June 30, 2022 and 2021, respectively, and i131,073 and i255,562
antidilutive shares for the six months ended June 30, 2022 and 2021, respectively.
The nonvested performance-based share awards are considered contingently issuable for purposes of the EPS calculation. Based on the compounded annual book value per share growth and relative total shareholder return as of June 30, 2022, the 2022 performance-based share awards would be issuable at i177%
of target under the terms of the arrangements if June 30, 2022 was the end of the contingency period, which is i88.5% of the shares issued, and the 2021 performance-based share awards would be issuable at i100%
of target under the terms of the arrangements if June 30, 2021 was the end of the contingency period, which is i50% of the shares issued.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 12. iAccumulated Other Comprehensive Income (Loss)
i
The
following table presents the rollforward of accumulated other comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021:
Unrealized
holding losses arising during the period
(i405,229)
i59,152
(i346,077)
(i24,800)
i2,375
(i22,425)
Less:
Reclassification adjustment for losses (gains) included in net income (1)
i7,823
i980
i8,803
(i388)
(i30)
(i418)
Net
unrealized (losses) gains on investments
(i397,406)
i60,132
(i337,274)
(i25,188)
i2,345
(i22,843)
Other
comprehensive (loss) income
(i397,406)
i60,132
(i337,274)
(i25,188)
i2,345
(i22,843)
Balance
at end of period
$
(i332,126)
$
i45,559
$
(i286,567)
$
i143,136
$
(i27,705)
$
i115,431
(1)Included
in net realized investment gains (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
$
i448,793
$
i—
$
i—
$
i448,793
U.S.
agency securities
i—
i5,504
i—
i5,504
U.S.
agency mortgage-backed securities
i—
i1,008,863
i—
i1,008,863
Municipal
debt securities
i—
i627,599
i—
i627,599
Non-U.S.
government securities
i—
i79,743
i—
i79,743
Corporate
debt securities
i—
i1,455,247
i—
i1,455,247
Residential
and commercial mortgage securities
i—
i545,423
i—
i545,423
Asset-backed
securities
i—
i581,703
i—
i581,703
Money
market funds
i210,012
i—
i—
i210,012
Total
assets at fair value (1) (2)
$
i658,805
$
i4,304,082
$
i—
$
i4,962,887
(1)Does
not include the fair value of embedded derivatives, which we have accounted for separately as freestanding derivatives and included in other assets or other accrued liabilities in our condensed consolidated balance sheet. See Note 4 for more information.
(2)Does not include certain other invested assets that are measured at fair value using the net asset value per share (or its equivalent) as a practical expedient, as applicable accounting standards do not provide for classification within the fair value hierarchy.
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 six months ended June 30:
(In thousands)
2022
2021
Essent Guaranty
Statutory
net income
$
i367,283
$
i234,354
Statutory
surplus
i1,018,795
i1,048,335
Contingency
reserve liability
i1,928,827
i1,648,384
Essent
PA
Statutory net income
$
i1,310
$
i1,919
Statutory
surplus
i57,368
i55,374
Contingency
reserve liability
i57,415
i56,919
Net
income determined in accordance with statutory accounting practices differs from GAAP. In 2022 and 2021, the more significant differences between net income determined under statutory accounting practices and GAAP for Essent Guaranty and Essent PA relate to policy acquisition costs and income taxes. Under statutory accounting practices, policy acquisition costs are expensed as incurred while such costs are capitalized and amortized to expense over the life of the policy under GAAP. We are eligible for a tax deduction, subject to certain limitations for amounts required by state law or regulation to be set aside in statutory contingency reserves when we purchase non-interest-bearing United States Mortgage Guaranty Tax and Loss Bonds (“T&L Bonds”) issued by the Treasury Department. Under statutory accounting practices, this deduction reduces the tax provision recorded by Essent Guaranty and Essent PA and, as a result, increases statutory net income and surplus
as compared to net income and equity determined in accordance with GAAP.
At June 30, 2022 and 2021, the statutory capital of our U.S. insurance subsidiaries, which is defined as the total of statutory surplus and contingency reserves, was in excess of the statutory capital necessary to satisfy their regulatory requirements.
Effective December 31, 2015, Fannie Mae and Freddie Mac, at the direction of the Federal Housing Finance Agency, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs
represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective on March 31, 2019. As of June 30, 2022, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0.
Statement of Statutory Accounting Principles
No. 58, Mortgage Guaranty Insurance, requires mortgage insurers to establish a special contingency reserve for statutory accounting purposes included in total liabilities equal to 50% of earned premium for that year. During the six months ended June 30, 2022, Essent Guaranty increased its contingency reserve by $i142.5 million and Essent PA increased its contingency reserve by $i0.5 million. This
reserve is required to be maintained for a period of 120 months to protect against the effects of adverse economic cycles. After 120 months, the reserve is released to unassigned funds. In the event an insurer’s loss ratio in any calendar year exceeds 35%, however, the insurer may, after regulatory approval, release from its contingency reserves an amount equal to the excess portion of such losses. During the six months ended June 30, 2022 and 2021, Essent Guaranty released contingency reserves of $i6.3 million
and $i0.9 million,
Notes
to Condensed Consolidated Financial Statements (Unaudited)
respectively, and Essent PA released contingency reserves of $i0.5 million and $i0.1 million,
respectively, to unassigned funds upon completion of the 120 month holding period.
Under The Insurance Act 1978, as amended, and related regulations of Bermuda (the "Insurance Act"), Essent Re is required to annually prepare statutory financial statements and a statutory financial return in accordance with the financial reporting provisions of the Insurance Act, which is a basis other than GAAP. The Insurance Act also requires that Essent Re maintain minimum share capital of $1 million and must ensure that the value of its general business assets exceeds the amount of its general business liabilities by an amount greater than the prescribed minimum solvency margins and enhanced capital requirement pertaining to its general business. At December 31, 2021, all such requirements were met.
Essent
Re's statutory capital and surplus was $i1.5 billion as of June 30, 2022 and $i1.3
billion as of December 31, 2021. Essent Re's statutory net income was $i178.5 million and $i104.4
million for the six months ended June 30, 2022 and 2021, respectively. Statutory capital and surplus as of June 30, 2022 and December 31, 2021 and statutory net income in the six months ended June 30, 2022 and 2021 determined in accordance with statutory accounting practices were not significantly different than the amounts determined under GAAP.
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, 2021 as filed with the Securities and Exchange Commission and referred to herein as the “Annual Report,” and our condensed consolidated financial statements and related notes as of and for the three and six months ended June 30, 2022 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we refer to as the “Quarterly Report.” In addition to historical information, this discussion
contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward-Looking Statements” in this Quarterly Report and Part I, Item 1A “Risk Factors” in our Annual Report and Part II, Item 1A “Risk Factors” in this Quarterly Report. We are not undertaking any obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made.
Overview
We
are an established private mortgage insurance company. Essent Guaranty, Inc., our wholly-owned insurance subsidiary which we refer to as "Essent Guaranty," is licensed to write coverage in all 50 states and the District of Columbia. The financial strength ratings of Essent Guaranty are A3 with a stable outlook by Moody’s Investors Service (“Moody's”), BBB+ with a stable outlook by S&P Global Ratings (“S&P”) and A (Excellent) with a stable outlook by A.M. Best. On July 21, 2022, Moody’s affirmed Essent Guaranty’s financial strength rating of A3 with a stable outlook.
Our holding company is domiciled in Bermuda and our U.S. insurance business is headquartered in Radnor, Pennsylvania. We operate additional underwriting and service centers in Winston-Salem, North Carolina and Irvine, California. We have a
highly experienced, talented team with 349 employees as of June 30, 2022. We generated new insurance written, or NIW, of approximately $20.1 billion and $32.9 billion for the three and six months ended June 30, 2022, respectively, compared to approximately $25.0 billion and $44.3 billion for the three and six months ended June 30, 2021, respectively. As of June 30, 2022, we had approximately $215.9 billion of insurance in force.
We also offer mortgage-related insurance and reinsurance through our wholly-owned Bermuda-based subsidiary, Essent Reinsurance Ltd., which we refer to as "Essent Re." As of June 30, 2022, Essent Re provided
insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately $1.9 billion of risk. Essent Re also reinsures Essent Guaranty’s NIW under a quota share reinsurance agreement. In April 2021, Essent Guaranty and Essent Re agreed to increase the quota share reinsurance coverage of Essent Guaranty’s NIW provided by Essent Re from 25% to 35% effective January 1, 2021. The quota share reinsurance coverage provided by Essent Re for Essent Guaranty’s NIW prior to January 1, 2021 will continue to be 25%, the quota share percentage in effect at the time NIW was first ceded. The insurer financial strength rating of Essent Re is BBB+ with a stable outlook by S&P and A (Excellent) with a stable outlook by A.M. Best.
COVID-19
Due
to the novel coronavirus disease 2019 ("COVID-19"), we experienced a significant increase in the amount of new defaults reported in 2020, especially during the second and third quarters of 2020. We segmented these two quarters’ 49,398 defaults as specifically COVID-19 related (“Early COVID Defaults”) and provided losses for these two cohorts differently as compared to our normal loss reserving methodology. The default-to-claim transition patterns of the Early COVID Defaults have been different than our historical defaults. We believe that the borrowers associated with the Early COVID Defaults have been able to take advantage of foreclosure moratoriums and mortgage forbearance programs instituted by Federal legislation along with actions taken by the Federal Housing Finance Agency (“FHFA”), Fannie Mae and Freddie Mac (collectively the “GSEs”) which has extend traditional default-to-claim timelines. As a result of these programs, along with
Federal stimulus, these borrowers associated with the Early COVID Defaults have had more resources and an extended time period to address the issues that triggered the default, that we believe will result in a higher cure rate, and correspondingly lower claim payments than historical defaults. Beginning in the fourth quarter of 2020, the credit characteristics of new defaults trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, beginning in the fourth quarter of 2020, we observed a normalization of the proportion of unemployment claims related to permanent layoffs as compared to a higher proportion of temporary layoffs during the second and third quarters of 2020. As a result, for new defaults reported after September 30, 2020, we reverted to our normal loss reserving methodology.
Over
90% of loans insured by Essent are federally backed by Fannie Mae or Freddie Mac. As a mortgage loan in forbearance is considered delinquent, we will provide loss reserves as loans in forbearance are reported to us as delinquent once
the borrower has missed two consecutive payments. However, we believe providing borrowers time to recover from the adverse financial impact of the COVID-19 event may allow some families to be able to remain in their homes and avoid foreclosure. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will continue to work with them to modify their loans at
which time the mortgage will be removed from delinquency status.
As of June 30, 2022, approximately 97% of the Early COVID Defaults had cured. In the three and six months ended June 30, 2022, new defaults remained elevated although at lower levels than those reported in the second through fourth quarters of 2020 and the first and second quarters of 2021. 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 June 30, 2022.
In order to maintain continuous MI coverage, mortgage servicers are required to advance MI premiums to us even if borrowers are in a forbearance plan. Future increases in defaults may result in an increase in our provisions for loss and loss adjustment expenses compared to prior periods, reduced profit commission under our quota share reinsurance agreements with a panels of third-party reinsurers ("the QSR Agreements") and an increase in our Minimum Required Assets.
Legislative and Regulatory Developments
Our results are significantly impacted by, and our future success may be affected by, legislative and regulatory developments affecting the housing finance industry. See Part I, Item 1 “Business—Regulation”
and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legislative and Regulatory Developments” in our Annual Report for a discussion of the laws and regulations to which we are subject as well as legislative and regulatory developments affecting the housing finance industry.
The U.S. Internal Revenue Service and Department of the Treasury published both final and newly proposed regulations in January 2021 relating to the tax treatment of passive foreign investment companies ("PFICs"). The final regulations provide guidance on various PFIC rules, including changes resulting from the 2017 Tax Cuts and Jobs Act. In addition, the Company is evaluating the potential impact of the newly proposed PFIC regulations to its shareholders and business operations.
The newly proposed regulations, among other provisions, set a limit on the amount of assets that may be deemed “good assets” within the PFIC asset test of a foreign holding company.
Factors Affecting Our Results of Operations
Net Premiums Written and Earned
Premiums associated with our U.S. mortgage insurance business are based on insurance in force ("IIF") during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average net premium rates in effect during a given period will also cause premiums to differ when compared
to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus NIW less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by:
•NIW, which is the aggregate principal amount of the new mortgages that are insured during a period. Many factors affect NIW, including, among others, the volume of low down payment home mortgage originations, the competition to provide credit enhancement on those mortgages, the number of customers who have approved us to provide mortgage insurance and changes in our NIW from certain customers;
•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.
Premiums are paid either on a monthly installment basis (“monthly premiums”), in a single payment at origination (“single premiums”), or in some cases as an annual premium. For monthly premiums, we receive a monthly premium payment which is recorded as net premiums earned in the month the coverage is provided. Monthly premium payments are based on the original mortgage amount rather than the amortized loan balance. Net premiums written may be in excess of net premiums earned due to single premium policies. For single premiums, we receive a single premium payment at origination, which is recorded as “unearned premium” and earned over the estimated life of the policy, which ranges from 36 to 156 months depending on the term of the underlying mortgage and loan-to-value ratio at date of origination. If single premium policies are cancelled due to repayment of the underlying loan and the
premium is non-refundable, the remaining unearned premium balance is immediately recognized as earned premium revenue. Substantially all of our single premium policies in force as of June 30, 2022 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 each of the six months ended June 30, 2022 and 2021, monthly premium policies comprised 95% of our NIW.
Premiums associated with our GSE and other risk share transactions are based on the level of risk in force and premium rates on the transactions.
Persistency and Business Mix
The
percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 73.4% at June 30, 2022. 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 June 30, 2022. 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, financial services and technology funds, and traditional 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.
Through June 30, 2021,
unrealized gains and losses reported by these entities were included in other comprehensive income (“OCI”). Subsequent to June 30, 2021, management concluded that unrealized gains and losses on these investments should be reflected in earnings rather than OCI.
Other income includes revenues associated with contract underwriting services and underwriting consulting services
to third-party reinsurers. The level of contract underwriting revenue is dependent upon the number of customers who have engaged us for this service and the number of loans underwritten for these customers. Revenue from underwriting consulting services to third-party reinsurers is dependent upon the number of customers who have engaged us for this service and the level of premiums associated with the transactions 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 fee which is recorded in other income. The services agreement provides for a flat monthly fee through November 30, 2022. The services agreement provides for one subsequent one-year renewal at Triad's option.
As more fully described in Note 4 to our condensed consolidated financial statements, the premiums ceded under certain reinsurance contracts with unaffiliated third parties vary based on changes in market interest rates. Under GAAP, these contracts contain embedded derivatives that are accounted for separately as freestanding derivatives. The change in the fair value of the embedded derivatives is reported in
earnings and included in other income.
Provision for Losses and Loss Adjustment Expenses
The provision for losses and loss adjustment expenses reflects the current expense that is recorded within a particular period to reflect actual and estimated loss payments that we believe will ultimately be made as a result of insured loans that are in default.
Losses incurred are generally affected by:
•the overall state of the economy, which broadly affects the likelihood that borrowers may default on their loans and have the ability to cure such defaults;
•changes
in housing values, which affect our ability to mitigate our losses through the sale of properties with loans in default as well as borrower willingness to continue to make mortgage payments when the value of the home is below or perceived to be below the mortgage balance;
•the product mix of IIF, with loans having higher risk characteristics generally resulting in higher defaults and claims;
•the size of loans insured, with higher average loan amounts tending to increase losses incurred;
•the loan-to-value ratio, with higher average loan-to-value ratios tending to increase losses incurred;
•the
percentage of coverage on insured loans, with deeper average coverage tending to increase losses incurred;
•credit quality of borrowers, including higher debt-to-income ratios and lower FICO scores, which tend to increase incurred losses;
•the level and amount of reinsurance coverage maintained with third parties;
•the rate at which we rescind policies. Because of tighter underwriting standards generally in the mortgage lending industry and terms set forth in our master policy, we expect that our level of rescission activity will be lower than rescission activity seen in the mortgage insurance industry for vintages originated prior to the financial crisis; and
•the
distribution of claims over the life of a book. As of June 30, 2022, 81% of our IIF relates to business written since January 1, 2020 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. Claims incidence for defaults associated with COVID-19 may not follow this pattern. As of June 30, 2022, 81% of our IIF relates to business written since January 1, 2020 and was less than three years old. Although the claims experience on new insurance written by us to date has been favorable, we expect incurred losses and claims to increase as a greater amount of this book of insurance reaches its anticipated period of highest claim frequency. The actual default rate and the average reserve per default that we experience as our portfolio matures is difficult to predict and is dependent on the specific characteristics of our current in-force book (including the credit score of the borrower, the loan-to-value ratio of the mortgage, geographic concentrations, etc.), as well as the profile
of new business we write in the future. In addition, the default rate and the average reserve per default will be affected by future macroeconomic factors such as housing prices, interest rates and employment.
Due to business restrictions, stay-at-home orders and travel restrictions implemented in March 2020 as a result of COVID-19, unemployment in the United States increased significantly in the second quarter of 2020, declining during the second half of 2020 and throughout 2021. As unemployment is one of the most common reasons for borrowers to default on their mortgage, the increase in unemployment increased the number of delinquencies on the mortgages we insure, and has the potential to increase claim frequencies on defaults. As a result, 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.
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 FHFA and 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. Based on the forbearance programs in place and the credit characteristics of the Early COVID Defaults, we expect 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.
Since
June 30, 2020, we have experienced a decline in our default rate. As of June 30, 2022, insured loans in default totaled 12,707 compared to 16,963 defaults as of December 31, 2021. The credit characteristics of defaults reported subsequent to September 30, 2020 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, beginning in the fourth quarter of 2020, the economic conditions have been different than those experienced in the second and third quarters of 2020. We believe that while defaults subsequent to September 30, 2020 were impacted by the pandemic’s effect on the economy, the underlying credit performance of these defaults
may not be the same as the expected performance for Early COVID Defaults that occurred following the onset of the pandemic and these defaults are more likely to transition like pre-pandemic defaults. Accordingly, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults reported after September 30, 2020 using our normal reserve methodology.
As of March 31, 2022, the defaulted loans reported to us in the second and third quarters of 2020 had reached the end of their forbearance periods. During the first quarter of 2022, the Early COVID Defaults cured at elevated levels, and the cumulative cure rate for the Early COVID Defaults at March 31, 2022 exceeded our initial estimated cure rate implied by our 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 $62.9 million and $164.1 million for the three and six months ended June
30, 2022. It is reasonably possible that our estimate of the losses for the Early COVID Defaults could change in the near term as a result of changes in the economic environment, the continued impact of the pandemic on the economic environment, and the results of existing and future governmental programs designed to assist individuals and businesses impacted by the virus. As more fully described in Note 4 to our condensed consolidated financial statements, at June 30, 2022, we had approximately $2.6 billion of
excess of loss reinsurance covering NIW from January 1, 2015
to December 31, 2022 and quota share reinsurance on portions of our NIW effective September 1, 2019 through December 31, 2020 and January 1, 2022 through December 31, 2022. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers, the performance of COVID-19 defaults and our expectations for the amount of ultimate losses on these delinquencies.
Third-Party Reinsurance
We use third-party reinsurance to provide protection against adverse loss experience and to expand our capital sources.
When we enter into a reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements have the impact of reducing our earned premiums, but also reduce our risk in force ("RIF"), which provides capital relief, and may include capital relief under the PMIERs financial strength requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement. For additional information regarding reinsurance, see Note 4 to our condensed consolidated financial statements.
Other Underwriting and Operating Expenses
Our other underwriting and operating expenses include components that are substantially fixed, as well as expenses that generally increase or decrease in line
with the level of NIW.
Our most significant expense is compensation and benefits for our employees, which represented 60% and 61% of other underwriting and operating expenses for the three and six months ended June 30, 2022, respectively, compared to 62% and 60% of other underwriting and operating expenses for the three and six months ended June 30, 2021, 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.
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
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 the states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating
expenses.
Essent Group Ltd. ("Essent Group") and its wholly-owned subsidiary, Essent Re, are domiciled 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 six months ended June 30, 2022 and 2021 for our U.S. mortgage insurance portfolio. In addition, this table includes RIF at the end of each
period.
Three Months Ended June 30,
Six Months Ended June 30,
(In thousands)
2022
2021
2022
2021
IIF,
beginning of period
$
206,842,996
$
197,091,191
$
207,190,544
$
198,882,352
NIW - Flow
20,096,135
25,004,854
32,937,617
44,258,868
NIW
- Bulk
196
—
196
—
Cancellations
(11,042,796)
(18,536,186)
(24,231,826)
(39,581,361)
IIF,
end of period
$
215,896,531
$
203,559,859
$
215,896,531
$
203,559,859
Average IIF during the period
$
210,896,297
$
199,739,297
$
209,038,105
$
198,980,667
RIF,
end of period
$
47,289,910
$
42,906,519
$
47,289,910
$
42,906,519
The following is a summary of our IIF at June 30, 2022 by vintage:
($ in thousands)
$
%
2022
(through June 30)
$
32,324,812
15.0
%
2021
75,326,623
34.9
2020
67,409,464
31.2
2019
16,560,800
7.7
2018
7,611,480
3.5
2017
and prior
16,663,352
7.7
$
215,896,531
100.0
%
Average Net Premium Rate
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) changes in our base premium rate due to the risk characteristics and average coverage on the mortgages we insure, the mix of monthly premiums compared to single premiums in our portfolio, and changes to our pricing for NIW; (2) cancellations of non-refundable single premiums during the period; (3) premiums ceded under third-party reinsurance agreements. The following table presents the average net premium rate for our U.S. mortgage insurance portfolio:
We
anticipate that 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 will reduce our average net premium rate in future periods.
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 June 30,
2022, our combined net risk in force for our U.S. insurance companies was $31.2 billion and our combined statutory capital was $3.1 billion, resulting in a risk-to-capital ratio of 10.2 to 1. The amount of capital required varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk-to-capital ratio is 25.0 to 1. State insurance regulators are currently examining their respective capital rules to determine whether, in light of the financial crisis, changes are needed to more accurately assess mortgage insurers’ ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business.
Results
of Operations
The following table sets forth our results of operations for the periods indicated:
For the three months ended June 30, 2022, we reported net income of $231.8 million, compared to net income of $159.8 million for the three months ended June 30, 2021. For the six months ended June 30, 2022, we reported net income of $505.9 million, compared to net income of $295.4 million for the six months ended June 30, 2021. The increases in our operating results in 2022 over the same periods in 2021 were primarily due to decreases in the provision for losses and LAE and
increases in income from other invested assets and net investment income, partially offset by increases in income tax expense and decreases in net premiums earned.
Net Premiums Written and Earned
Net premiums earned decreased in the three and six months ended June 30, 2022 by 2%, compared to the three and six ended June 30, 2021 primarily due a decrease in our average net premium rate, partially offset by an increase in our average
IIF. The average net premium rate was 0.38% and 0.41% for the three months ended June 30, 2022 and 2021,
respectively and 0.38% and 0.41% for the six months ended June 30, 2022 and 2021, respectively. See "—Key Performance Indicators—Average Net Premium Rate" above. In the three and six months ended June 30, 2022, premiums earned on the cancellation of non-refundable single premium policies decreased to $5.3 million and $14.4 million, respectively, from $15.6 million and $35.4 million in the three and six months ended June 30, 2021, respectively, as a result of a decrease in existing borrowers refinancing their mortgages during 2022 as compared to 2021. In the three and six months ended June 30, 2022 ceded premiums decreased to $22.3 million and $42.8 million, respectively, from $26.7 million and $57.6 million, respectively,
for the same period of 2021 primarily due to a reduction in loss reserves ceded under our QSR Agreements that reduced ceded premium.
Net premiums written increased by 4% and 1% in the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021 primarily due to an increase in average IIF in the respective periods and a decrease in premiums ceded under third-party reinsurance agreements partially offset by changes in the mix of mortgages we insure and changes in our pricing.
In the three months ended June 30, 2022 and 2021, unearned premiums decreased by $1.7 million
and $15.2 million, respectively. The change in unearned premiums was a result of net premiums written on single premium policies of $14.4 million and $12.5 million, respectively, which was offset by $16.1 million and $27.7 million, respectively, of unearned premium that was recognized in earnings during the periods. In the six months ended June 30, 2022 and 2021, unearned premiums decreased by $17.3 million and $29.9 million, respectively. This was a result of net premiums written on single premium policies of $18.5 million and $30.8 million, respectively, which was offset by $35.8 million and $60.7 million, respectively, of unearned premium that was recognized in earnings during the periods.
Net Investment Income and Realized Investment Gains (Losses)
Our
net investment income was derived from the following sources for the periods indicated:
Six Months Ended June 30,
(In thousands)
2022
2021
Fixed
maturities
$
57,298
$
46,036
Short-term investments
258
128
Gross investment income
57,556
46,164
Investment
expenses
(3,537)
(2,633)
Net investment income
$
54,019
$
43,531
The changes in net investment income
for the three and six months ended June 30, 2022 as compared to the same periods in 2021 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 average cash and investment portfolio balance increased to $5.0 billion for each of the three and six months ended June 30, 2022 from $4.7 billion for the three and six months ended June 30, 2021. The increase in the average cash and investment portfolio was primarily due to investing cash flows from operations. The pre-tax investment income yield increased from 2.0% in the three and six months ended June 30, 2021 to 2.5% and 2.3% in the three and six months ended June 30, 2022, respectively,
primarily due to a general increase in investment yields due to increasing interest rates partially offset by an increase in premium amortization on mortgage-backed and asset-backed securities. The pre-tax investment income yields are calculated based on amortized cost and exclude investment expenses. See “— Liquidity and Capital Resources” for further details of our investment portfolio.
Realized investment gains (losses) for the three months ended June 30, 2022 was a net loss of $0.5 million as compared to a net loss of $0.3 million for the three months ended June 30, 2021. Realized investment gains (losses) for the six months ended June 30, 2022 was a net loss of $7.8 million as compared
to a net gain of $0.4 million for the six months ended
June 30, 2021. Included in the results for the three and six months ended June 30, 2022 are impairments of $0.5 million and $7.3 million, respectively, due to our intent to sell securities in an unrealized loss position.
Income from Other Invested Assets
Income from other invested assets for the three months ended June
30, 2022 was $2.0 million as compared to $0.1 million for the three months ended June 30, 2021. Income from other invested assets for the six months ended June 30, 2022 was $26.7 million as compared to $0.6 million for the six months ended June 30, 2021.
Through June 30, 2021, unrealized gains and losses reported by these entities were included in other comprehensive income (“OCI”). Subsequent to June 30, 2021, management concluded that unrealized gains and losses on these investments should be reflected in earnings rather than OCI. Income from other invested assets for the three and
six months ended June 30, 2022, includes $2.4 million of net unrealized losses and $12.6 million of net unrealized gains, respectively.
Other Income
Other income for the three months ended June 30, 2022 was $1.6 million as compared to $4.2 million for the three months ended June 30, 2021. The decrease in other income for the three months ended June 30, 2022 as compared to the same period in 2021 was primarily due to an unfavorable decrease in the fair value of the embedded derivatives partially offset by an increase in underwriting consulting services to third-party reinsurers. Other income for the
six months ended June 30, 2022 was $8.8 million compared to $7.0 million for the six months ended June 30, 2021. The increase in other income for the six months ended June 30, 2022 as compared to the same period in 2021 was primarily due to an increase in underwriting consulting services to third-party reinsurers partially offset by a net unfavorable decrease in the fair value of the embedded derivatives and lower Triad service fees and contract underwriting revenues. In the three months ended June 30, 2022, we recorded an unfavorable decrease in the fair value of these embedded derivatives of $5.5 million compared to a favorable increase in the fair value of the embedded derivatives
of $1.0 million in the three months ended June 30, 2021. In the six months ended June 30, 2022 we recorded a net unfavorable decrease in the fair value of the embedded derivatives of $1.2 million compared to a net favorable increase of $0.3 million in the six months ended June 30, 2021.
Provision for Losses and Loss Adjustment Expenses
The decrease in the provision for losses and LAE in the three and six months ended June 30, 2022 as compared to the same period in 2021 was primarily due to a decrease in the estimate of ultimate loss for Early COVID Defaults
as well as cure activity for defaults with reserves using our normal reserve methodology in the three and six months ended June 30, 2022 as compared to the comparable period of 2021.
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
81
45
(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 and
$1.4 million as of June 30, 2022 and 2021, respectively.
As of March 31, 2022, the defaulted loans reported to us in the second and third quarters of 2020 had reached the end of their forbearance periods. During the first quarter of 2022, the Early COVID Defaults cured at elevated levels, and the cumulative cure rate for the Early COVID Defaults at March 31, 2022 exceeded our initial estimated cure rate implied by our 7% estimate of ultimate loss for these defaults. Based on cure activity through March 31, 2022 and our expectations for future cure activity, we lowered our estimate of ultimate loss for the Early COVID Defaults from 7% to 4%
of the initial risk in force. During the three months ended June 30, 2022, Early COVID Defaults cured at levels that exceeded our estimate as of March 31, 2022, and we further lowered our estimate of loss for these defaults as of June 30, 2022 to 2% of the initial risk in force. These revisions to our estimate of ultimate loss for the Early COVID Defaults resulted in a benefit recorded to the provision for losses of $62.9 million and $164.1 million for the three and six months ended June 30, 2022, respectively. It is reasonably possible that our estimate of the losses for the Early COVID Defaults could change in the near term as a result of changes in the economic environment, the continued impact of the pandemic on the economic environment, and the results of existing and
future governmental programs designed to assist individuals and businesses impacted by the virus. The average reserve per Early COVID Default was approximately 74% as of June 30, 2022 as compared to approximately 76% as of December 31, 2021 and approximately 24% as of June 30, 2021. The reserve for losses and LAE at June 30, 2022 includes $70.8 million of reserves for Early COVID Defaults.
The credit characteristics of defaults reported subsequent to September 30, 2020 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, beginning in October 2020, the
economic conditions have been different than those experienced in the second and third quarters of 2020. We believe that while defaults subsequent to September 30, 2020 were impacted by the pandemic’s effect on the economy, the underlying credit performance of these defaults may not be the same as the expected performance for the Early COVID Defaults that occurred following the onset of the pandemic and defaults after September 30, 2020 are more likely to transition consistent with pre-pandemic defaults. Accordingly, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults reported after September 30, 2020 using our normal reserve methodology.
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE:
Three Months Ended June 30,
Six
Months Ended June 30,
(In thousands)
2022
2021
2022
2021
Reserve for losses and LAE at beginning of period
$
293,072
$
411,123
$
407,445
$
374,941
Less:
Reinsurance recoverables
19,335
24,907
25,940
19,061
Net reserve for losses and LAE at beginning of period
273,737
386,216
381,505
355,880
Add
provision for losses and LAE occurring in:
Current period
18,726
24,611
43,095
72,600
Prior years
(94,925)
(14,960)
(226,152)
(30,627)
Incurred
losses and LAE during the current period
(76,199)
9,651
(183,057)
41,973
Deduct payments for losses and LAE occurring in:
Current period
80
14
81
128
Prior
years
1,142
1,267
2,051
3,139
Loss and LAE payments during the current period
1,222
1,281
2,132
3,267
Net
reserve for losses and LAE at end of period
196,316
394,586
196,316
394,586
Plus: Reinsurance recoverables
13,657
27,286
13,657
27,286
Reserve
for losses and LAE at end of period
$
209,973
$
421,872
$
209,973
$
421,872
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 of June 30, 2022.
(2)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at
Essent Re of $1.4 million as of June 30, 2021.
During the three months ended June 30, 2022, the provision for losses and LAE was a benefit of $76.2 million, comprised of $94.9 million of favorable prior years’ loss development, including $62.9 million related to Early COVID Defaults, partially offset by a provision of $18.7 million for current year losses. During the three months ended June 30, 2021, the provision for losses and LAE was $9.7 million, comprised of $24.6 million of current year losses partially offset by $15.0 million of favorable prior years’ loss development. In both periods, the prior years’ loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including
the impact of previously identified defaults that cured.
During the six months ended June 30, 2022, the provision for losses and LAE was a benefit of $183.1 million, comprised of $226.2 million of favorable prior years’ loss development, including $164.1 million related to Early COVID Defaults, partially offset by a provision of $43.1 million of current year losses. During the six months ended June 30, 2021, the provision for losses and LAE was $42.0 million, comprised of $72.6 million of current year losses partially offset by $30.6 million of favorable prior years’ loss development. In both periods, the prior years’ loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified
defaults that cured.
The following table includes additional information about our claims paid and claim severity for the periods indicated:
The significant factors contributing to the change in other underwriting and operating expenses are:
•Compensation
and benefits decreased in the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021 primarily due to decreased salaries and overtime as a result of decreased headcount and decreased stock compensation expense, partially offset by an increase in incentive compensation. Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.
•Premium taxes were largely unchanged in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to a decrease in our effective premium tax rate, partially offset by an increase in net premiums written.
Premium taxes decreased in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to a decrease in our effective premium tax rate.
•Other expenses increased during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021 primarily as a result of increased travel and underwriting expenses as well as a decrease in ceding commission earned under our QSR Agreements, partially offset by decreases in professional fees and amortization of net deferred acquisition costs. Other expenses include professional fees, travel, marketing, hardware, software, rent, depreciation and amortization and
other facilities expenses.
Interest Expense
For the three and six months ended June 30, 2022, we incurred interest expense of $2.9 million and $5.1 million, respectively, as compared to $2.1 million and $4.1 million for the three and six months ended June 30, 2021, respectively. The increase during the three months ended June 30, 2022 when compared to the three months ended June 30, 2021 was primarily due to an increase in the weighted average interest rate for borrowings outstanding, as well as an increase in the average amounts outstanding under the Credit Facility. The increase during the six months ended
June 30, 2022 when compared to the six months ended June 30, 2021 was due to an increase in the average amounts outstanding under the Credit Facility, partially offset by a lower weighted average interest rate for the period. For each of the three and six months ended June 30, 2022, the average amount outstanding under the Credit Facility was $425.0 million, as compared to $327.7 million and $326.4 million for the three and six months ended June 30, 2021,respectively. For the three and six months ended June 30, 2022, the borrowings under the Credit Facility had a weighted average interest rate of 2.47% and 2.16%, respectively, as compared to 2.29% and 2.30% for the three and six months ended June 30,
2021, respectively.
Our subsidiaries in the United States file a consolidated U.S. Federal income tax return. Our income tax expense was $44.1 million and $30.6 million for the three months ended June 30, 2022 and 2021, respectively, and $98.3 million and $63.2 million for the six months ended June
30, 2022 and 2021, respectively. The provision for income taxes for the six months ended June 30, 2022 was calculated using an estimated annual effective tax rate of 16.0% as compared to an estimated annual effective tax rate of 16.0% for the six months ended June 30, 2021. For the six months ended June 30, 2022, income tax expense includes $6.7 million of discrete tax expense associated with realized and unrealized gains and losses. For the six months ended June 30, 2021, income tax expense includes $5.7 million of discrete tax expense associated with an increase in the estimate of our beginning of the year deferred state income tax liability. The tax effects associated with realized and unrealized gains and losses and
the increase to our deferred state income tax liability are treated as a 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;
•borrowings under our Credit Facility; and
•issuance of capital shares.
Our obligations consist primarily of:
•claim payments under our policies;
•interest payments and repayment of borrowings under our Credit Facility;
•the other costs and operating expenses of our business;
•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 June 30, 2022, we had substantial liquidity with cash of $77.9 million, short-term investments of $355.6 million and fixed maturity investments of $4.3 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 $619.2 million at June 30,
2022. 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 June 30, 2022.
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 related to COVID-19, 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. 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 ordinary 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 June 30, 2022, Essent Guaranty had unassigned surplus of approximately $313.5 million and Essent PA had unassigned surplus of approximately $18.4 million. As of June 30, 2022, Essent Guaranty and Essent PA could pay additional ordinary dividends in 2022 of $297.7 million and $5.6 million, respectively. Essent Re is subject to certain dividend restrictions as prescribed by the Bermuda Monetary Authority and under certain agreements with counterparties. In connection with a quota share reinsurance agreement with Essent
Guaranty, Essent Re has agreed to maintain a minimum total equity of $100 million. As of June 30, 2022, Essent Re had total equity of $1.4 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 June 30, 2022, our insurance subsidiaries were in compliance with these rules, regulations and agreements.
Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Six
Months Ended June 30,
(In thousands)
2022
2021
Net cash provided by operating activities
$
243,898
$
339,795
Net cash used in investing activities
(105,597)
(239,516)
Net
cash used in financing activities
(141,940)
(60,969)
Net (decrease) increase in cash
$
(3,639)
$
39,310
Operating Activities
Cash flow provided by operating activities totaled $243.9 million for the six months ended June
30, 2022, as compared to $339.8 million for the six months ended June 30, 2021. The decrease in cash flow provided by operating activities was primarily due to increases in other assets and income tax payments.
Investing Activities
Cash flow used in investing activities totaled $105.6 million for the six months ended June 30, 2022 and $239.5 million for the six months ended June 30, 2021. In both periods, cash flow used in investing activities related to investing cash flows from operations.
Financing Activities
Cash
flow used in financing activities totaled $141.9 million for the six months ended June 30, 2022, primarily related to the repurchases of common stock as part of our share repurchase plan and treasury stock acquired from employees to satisfy
tax withholding obligations and quarterly cash dividends paid in March and June. Cash flow used in financing activities totaled $61.0 million for the six months ended June 30, 2021, primarily related to the quarterly cash dividends paid in March and June 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. insurance companies on a separate company statutory basis, as well as for our combined insurance operations. The risk-to-capital ratio is our net risk in force divided by our statutory capital. Our net risk in force represents risk in force net of reinsurance ceded, if any, and net of exposures on policies for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual contributions to the contingency reserve of 50% of net premiums earned. These contributions
must generally be maintained for a period of ten years. However, with regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year.
During the six months ended June 30, 2022, no capital contributions were made to our U.S. insurance subsidiaries and Essent Guaranty paid dividends to Essent US Holdings, Inc. of $200 million. During the six months ended June 30, 2021, no capital contributions were made to our U.S. insurance subsidiaries and Essent Guaranty paid a dividend to Essent US Holdings,
Inc. of $100 million.
Essent Guaranty has entered into reinsurance agreements that provide excess of loss reinsurance coverage for new defaults on portfolios of mortgage insurance policies issued in 2015 through December 31, 2022. 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. As of November
26, 2021, Radnor Re 2019-2 was no longer subject to a trigger event. Radnor Re 2020-1 was no longer subject to a trigger event as of July 25, 2022. Effective September 1, 2019, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers ("QSR 2019"). Under QSR 2019, Essent Guaranty will cede premiums earned related to 40% of risk on eligible single premium policies and 20% of risk on all other eligible policies written September 1, 2019 through December 31, 2020, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 63% that varies directly and inversely with ceded claims. Effective January
1, 2022, Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers ("QSR 2022"). Under QSR 2022, Essent Guaranty will cede premiums earned related to 20% of risk on all eligible policies written January 1, 2022 through December 31, 2022, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% that varies directly and inversely with ceded claims. These reinsurance coverages also reduces net risk in force and PMIERs Minimum Required Assets. See Note 4 to our condensed consolidated financial statements.
Our combined risk-to-capital calculation for our U.S. insurance subsidiaries
as of June 30, 2022 was as follows:
Combined statutory capital: ($ in thousands)
Policyholders’ surplus
$
1,076,196
Contingency reserves
1,986,242
Combined statutory capital
$
3,062,438
Combined
net risk in force
$
31,221,406
Combined risk-to-capital ratio
10.2:1
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 six months ended June 30, 2022 and 2021, Essent Re paid no dividends to Essent Group and Essent Group made no capital contributions to Essent Re. As of June 30, 2022, Essent Re had total stockholders’ equity of $1.4 billion and net risk in force of $17.8 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. On July 21, 2022, Moody’s affirmed Essent Guaranty’s financial strength rating of A3 with a stable outlook.
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 June 30, 2022, Essent Guaranty, our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0. As of June 30, 2022, Essent
Guaranty's Available Assets were $3.12 billion or 167% of its Minimum Required Assets of $1.87 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.
Financial Condition
Stockholders’
Equity
As of June 30, 2022, stockholders’ equity was $4.27 billion, compared to $4.24 billion as of December 31, 2021. Stockholders' equity increased primarily due to net income generated in 2022, partially offset by a decrease in accumulated other comprehensive income related to an increase in our net unrealized investment losses associated with increases in market interest rates in the six months ended June 30, 2022, the repurchase of common shares under our share repurchase plan and dividends paid.
As of June 30, 2022, investments totaled $4.8 billion compared to $5.1 billion as of December 31, 2021. In addition, our total cash was $77.9 million as of June 30, 2022, compared to $81.5 million as of December 31, 2021. The decrease in investments was primarily due to an increase in our net unrealized investment losses primarily due to increases in market interest rates in the six months ended June 30, 2022, partially offset by investing net cash flows from operations during the six months ended June
30, 2022.
(1)As of June 30, 2022, 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 June 30, 2022:
Research
Foundation of State University of New York/The
2,714
2,750
A1
Rochester Institute of Technology
2,263
2,207
A1
City of Yonkers NY
2,199
2,293
A3
Long
Island Power Authority
1,690
1,694
A2
New York State Dormitory Authority
1,613
1,697
Aa3
New York City Transitional Finance Authority Building Aid Revenue
1,500
1,495
Aa2
State
of New York Sales Tax Revenue
1,263
1,489
Aa1
State University of New York Dormitory Facilities Revenue
904
1,000
Aa3
Town of Oyster Bay NY
678
677
Aa2
Yankee
Stadium LLC
646
795
A1
New York City Water & Sewer System
467
511
Aa1
County of Nassau NY
277
276
A1
$
61,145
$
63,971
(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.
Off-Balance Sheet Arrangements
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 June 30, 2022, our estimated off-balance sheet maximum exposure to loss from the Radnor Re entities was $0.5 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 2021 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 June 30, 2022, the effective duration of our investments available for sale was 3.7 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 3.7% in fair value of our investments available for sale. Excluding short-term investments, our investments available for sale effective duration was 4.1 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 4.1% 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 June 30, 2022, 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, 2021. 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 June 30, 2022.
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)In
April 2022, the Company repurchased 543,399 common shares at a total cost of $22.3 million, completing the repurchase plan authorized in May 2021. In May 2022, the Board of Directors approved a new share repurchase plan that authorizes the Company to repurchase up to $250 million of its common shares in the open market by the end of 2023. The remaining $250.0 million in the table represents the amount available to repurchase shares under the May 2022 share repurchase plan as of June 30, 2022.
Item 5. Other Information
Appointment
of Director
On August 3, 2023, the Board of Directors (the “Board”) of Essent Group Ltd. (the "Company") appointed Anu (Henna) A. Karna, to fill a vacancy on the Board, effectively immediately, to serve as a Class II director until the 2024 annual meeting of shareholders. With Dr. Karna’s appointment, the Board consists of nine directors. Dr. Karna was also appointed to the Technology, Innovation and Operations Committee of the Board.
Dr. Karna, 45, has more than 25 years of experience leading innovation across digital/data in the high-tech, consumer packaged goods, risk management and insurance industries. Dr. Karna has served as the general manager of global insurance, reinsurance and risk management solutions at Alphabet Inc. (Google) since 2020, where
she leads Google Cloud's global insurance strategy, products and solutions operations. From 2017 to 2020, Dr. Karna served as executive vice president and chief data officer of AXA XL, the property and casualty, specialty risk, risk management and reinsurance subsidiary of AXA SA, a global insurance company. Prior to that, Dr. Karna served from 2015 to 2016 as a managing director and the global actuarial chief information officer of American International Group, Inc. (AIG), a multinational finance and insurance corporation, and held various roles with Verisk Analytics, Inc., a data and analytics and risk management firm, from 2009 to 2015, including most recently serving as the president of its Verisk Digital Services business unit. Dr. Karna holds an MBA from the Massachusetts Institute of Technology, masters and doctorate degrees in mathematics from the University of Massachusetts, and a BS in mathematical sciences from Worcester Polytechnic Institute.
On August 3, 2022, the Board adopted and approved certain amendments to the Company’s Code of Conduct and Business Ethics (the "Code"). The Code was amended and updated with respect to confidentiality duties and obligations and otherwise to make administrative and non-substantive amendments to the Code. The foregoing description of the amendments to the Code is qualified in its entirety by reference to the full text of the amended Code, a copy of which can be found through the Governance page of our website
at www.essentgroup.com. The information on the Company's website does not constitute part of this Quarterly Report on Form 10-Q for any purpose and is not incorporated by reference herein. The aforementioned amendments to the Code did not relate or result in any waiver, explicit or implicit, of any provision of the Code.
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 June 30, 2022, 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.
