ESSENT GROUP LTD. The following discussion should be read together with the "Selected Financial Data" and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K as of and for the year endedDecember 31, 2020 as filed with theSecurities and Exchange Commission and referred to herein as the "Annual Report," and our condensed consolidated financial statements and related notes as of and for the three and nine months endedSeptember 30, 2021 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 and growing private mortgage insurance company.Essent Guaranty, Inc. , our wholly-owned insurance subsidiary which we refer to as "Essent Guaranty ," is licensed to write coverage in all 50 states and theDistrict of Columbia . The financial strength ratings ofEssent Guaranty are A3 with a stable outlook by Moody's Investors Service ("Moody's"), BBB+ with a stable outlook byS&P Global Ratings ("S&P") and A (Excellent) with a stable outlook byA.M. Best .Essent Guaranty's financial strength rating was affirmed byA.M. Best onSeptember 24, 2021 . Our holding company is domiciled inBermuda and ourU.S. insurance business is headquartered inRadnor, Pennsylvania . We operate additional underwriting and service centers inWinston-Salem, North Carolina andIrvine, California . We have a highly experienced, talented team with 343 employees as ofSeptember 30, 2021 . We generated new insurance written, or NIW, of approximately$23.6 billion and$67.8 billion for the three and nine months endedSeptember 30, 2021 , respectively, compared to approximately$36.7 billion and$78.4 billion for the three and nine months endedSeptember 30, 2020 , respectively. As ofSeptember 30, 2021 , we had approximately$208.2 billion of insurance in force, due to our NIW which was offset by cancellations as the persistency rate on our portfolio was 62.2% atSeptember 30, 2021 compared to 60.1% atDecember 31, 2020 . We also offer mortgage-related insurance and reinsurance through our wholly-ownedBermuda -based subsidiary,Essent Reinsurance Ltd. , which we refer to as "Essent Re." As ofSeptember 30, 2021 , Essent Re provided insurance or reinsurance relating to GSE risk share and other reinsurance transactions covering approximately$1.6 billion of risk. Essent Re also reinsuresEssent Guaranty's NIW under a quota share reinsurance agreement. InApril 2021 ,Essent Guaranty and Essent Re agreed to increase the quota share reinsurance coverage ofEssent Guaranty's NIW provided by Essent Re from 25% to 35% effectiveJanuary 1, 2021 . The quota share reinsurance coverage provided by Essent Re forEssent Guaranty's NIW prior toJanuary 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 byA.M. Best . Essent Re's financial strength rating was affirmed byA.M. Best onSeptember 24, 2021 .
COVID-19
Due to COVID-19, we experienced a significant increase in the amount of new
defaults reported, especially during the second and third quarters of 2020. We
segmented these two quarters' 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. Beginning in the fourth
quarter of 2020, the credit characteristics of new defaults trended towards
those of the pre-pandemic periods. As a result, for new defaults reported after
September 30, 2020 , we have reverted to our normal loss reserving methodology.
It is our belief that the default-to-claim transition patterns of the Early
COVID Defaults will be different as compared to our historical defaults. We
believe that the borrowers associated with the Early COVID Defaults will be 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 may extend traditional default-to-claim timelines. As a result of
these programs, along with Federal stimulus, these borrowers associated with the
Early COVID Defaults will have more resources and an extended time period to
address the issues that triggered the default, resulting in a higher cure rate,
and correspondingly lower claim payments than historical defaults.
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Over 90% of loans insured byEssent are federally backed by Fannie Mae or Freddie Mac. As a mortgage loan in forbearance is considered delinquent, we will provide loss reserves as loans in forbearance are reported to us as delinquent once the borrower has missed two consecutive payments. However, we believe providing borrowers time to recover from the adverse financial impact of the COVID-19 event may allow some families to be able to remain in their homes and avoid foreclosure. For borrowers that have the ability to begin to pay their mortgage at the end of the forbearance period, we expect that mortgage servicers will work with them to modify their loans at which time the mortgage will be removed from delinquency status. In the three and nine months endedSeptember 30, 2021 , new defaults remained elevated although at lower levels than those reported in the second through fourth quarters of 2020. The impact on our reserves in future periods will be dependent upon the amount of delinquent notices received from loan servicers and our expectations for the amount of ultimate losses on these delinquencies. As noted in "- Liquidity and Capital Resources,"Essent had substantial liquidity and had Available Assets in excess of Minimum Required Assets under PMIERs 2.0 as ofSeptember 30, 2021 . In order to maintain continuous MI coverage, mortgage servicers are required to advance MI premiums to us even if borrowers are in a forbearance plan. Future increases in defaults may result in an increase in our provisions for loss and loss adjustment expenses compared to prior periods, reduced profit commission under our quota share reinsurance agreement with a panel of third-party reinsurers ("the QSR Agreement") and an increase in our Minimum Required Assets.
Legislative and Regulatory Developments
Our results are significantly impacted by, and our future success may be affected by, legislative and regulatory developments affecting the housing finance industry. See Part I, Item 1 "Business-Regulation" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Legislative and Regulatory Developments" in our Annual Report for a discussion of the laws and regulations to which we are subject as well as legislative and regulatory developments affecting the housing finance industry.The U.S. Internal Revenue Service and Department of the Treasury published both final and newly proposed regulations inJanuary 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 ourU.S. mortgage insurance business are based on insurance in force ("IIF") during all or a portion of a period. A change in the average IIF during a period causes premiums to increase or decrease as compared to prior periods. Average net premium rates in effect during a given period will also cause premiums to differ when compared to earlier periods. IIF at the end of a reporting period is a function of the IIF at the beginning of such reporting period plus NIW less policy cancellations (including claims paid) during the period. As a result, premiums are generally influenced by: •NIW, which is the aggregate principal amount of the new mortgages that are insured during a period. Many factors affect NIW, including, among others, the volume of low down payment home mortgage originations, the competition to provide credit enhancement on those mortgages, the number of customers 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.
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Premiums are paid either on a monthly installment basis ("monthly premiums"), in
a single payment at origination ("single premiums"), or in some cases as an
annual premium. For monthly premiums, we receive a monthly premium payment which
is recorded as net premiums earned in the month the coverage is provided.
Monthly premium payments are based on the original mortgage amount rather than
the amortized loan balance. Net premiums written may be in excess of net
premiums earned due to single premium policies. For single premiums, we receive
a single premium payment at origination, which is recorded as "unearned premium"
and earned over the estimated life of the policy, which ranges from 36 to
156 months depending on the term of the underlying mortgage and loan-to-value
ratio at date of origination. If single premium policies are cancelled due to
repayment of the underlying loan and the premium is non-refundable, the
remaining unearned premium balance is immediately recognized as earned premium
revenue. Substantially all of our single premium policies in force as of
September 30, 2021 were non-refundable. Premiums collected on annual policies
are recognized as net premiums earned on a straight-line basis over the year of
coverage. For the nine months ended September 30, 2021 and 2020, monthly premium
policies comprised 96% and 90% of our NIW, respectively.
Premiums associated with our GSE and other risk share transactions are based on the level of risk in force and premium rates on the transactions.
Persistency and Business Mix
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 62.2% atSeptember 30, 2021 . 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 ofSeptember 30, 2021 . 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
Income from other invested assets includes the Company's proportionate share of the earnings or losses in our investments principally comprised of limited partnership interests. These interests 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. ThroughJune 30, 2021 , unrealized gains and losses reported by these entities were included in other comprehensive income ("OCI"). In the three months endedSeptember 30, 2021 , management concluded that unrealized gains and losses on these investments should be reflected in earnings rather than OCI. Income from other invested assets for the three and nine months endedSeptember 30, 2021 , includes$39.5 million of net unrealized gains, which includes$21.1 million of net unrealized gains that were accumulated in OCI atJune 30, 2021 and prior periods. 27 -------------------------------------------------------------------------------- Table of Contents Other Income Other income includes revenues associated with contract underwriting services and underwriting consulting services to third-party reinsurers. The level of contract underwriting revenue is dependent upon the number of 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 throughNovember 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 ofSeptember 30, 2021 , 83% of our IIF relates to business written sinceJanuary 1, 2019 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
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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 September 30, 2021 , 83% of our IIF relates to
business written since January 1, 2019 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 and remained
elevated at September 30, 2021 . As unemployment is one of the most common
reasons for borrowers to default on their mortgage, the increase in unemployment
has increased the number of delinquencies on the mortgages we insure, and has
the potential to increase claim frequencies on defaults. As of September 30,
2021 , insured loans in default totaled 19,721 compared to 5,841 defaults as of
March 31, 2020 . For borrowers that have the ability to begin to pay their
mortgage at the end of the forbearance period, we expect that mortgage servicers
will work with them to modify their loans at which time the mortgage will be
removed from delinquency status. We believe that the forbearance process could
have a favorable effect on the frequency of claims that we ultimately pay. Based
on the forbearance programs in place and the credit characteristics of the 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.
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 due to the sudden impact on the economy following the onset of the
pandemic. We expect defaulted loans reported to us in the second quarter of 2020
to reach the end of their forbearance period in the fourth quarter of 2021. The
credit characteristics of defaults reported in October 2020 through September
2021 have trended towards those of the pre-pandemic periods and we have observed
the normalization of other default patterns during this period. In addition, the
economic conditions beginning in the fourth quarter of 2020 have been different
than those experienced in the second and third quarters of 2020. We believe that
while defaults in October 2020 through September 2021 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. It is
reasonably possible that our estimate of the losses for the COVID-19 defaults
could change in the near term as a result of the continued impact of the
pandemic on the economic environment, the results of existing and future
governmental programs designed to assist individuals and businesses impacted by
the virus and the performance of the COVID-19 defaults in the forbearance
programs. As more fully described in Note 4 to our condensed consolidated
financial statements, at September 30, 2021 , we had approximately $2.4 billion
of excess of loss reinsurance covering NIW from January 1, 2015 to March 31,
2021 and a quota share reinsurance transaction on a portion of our NIW effective
September 1, 2019 through December 31, 2020 . The impact on our reserves in
future periods will be dependent upon the amount of delinquent notices received
from loan servicers, the performance of COVID-19 defaults and our expectations
for the amount of ultimate losses on these delinquencies.
Third-Party Reinsurance
We use third-party reinsurance to provide protection against adverse loss
experience and to expand our capital sources. When we enter into a reinsurance
agreement, the reinsurer receives a premium and, in exchange, agrees to insure
an agreed upon portion of incurred losses. These arrangements have the impact of
reducing our earned premiums, but also reduce our risk in force ("RIF"), which
provides capital relief, and may include capital relief under the PMIERs
financial strength requirements. Our incurred losses are reduced by any incurred
losses ceded in accordance with the reinsurance agreement. For additional
information regarding reinsurance, see Note 4 to our condensed consolidated
financial statements.
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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 64% and 62% of other underwriting and operating expenses for the three and nine months endedSeptember 30, 2021 , respectively, compared to 61% of other underwriting and operating expenses for each of the three and nine months endedSeptember 30, 2020 . 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 toEssent's insurance and reinsurance subsidiaries. Borrowings accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company's option, plus an applicable margin. Income Taxes Income taxes are incurred based on the amount of earnings or losses generated in the jurisdictions in which we operate and the applicable tax rates and regulations in those jurisdictions. OurU.S. insurance subsidiaries are generally not subject to income taxes in the states in which we operate; however, our non-insurance subsidiaries are subject to state income taxes. In lieu of state income taxes, our insurance subsidiaries pay premium taxes that are recorded in other underwriting and operating expenses.Essent Group Ltd. ("Essent Group ") and its wholly-owned subsidiary, Essent Re, are domiciled inBermuda , which does not have a corporate income tax. Under a quota share reinsurance agreement, Essent Re reinsures 25% ofEssent Guaranty's NIW throughDecember 31, 2020 and 35% ofEssent Guaranty's NIW afterDecember 31, 2020 . Essent Re also provides insurance and reinsurance to Freddie Mac and Fannie Mae.
The amount of income tax expense or benefit recorded in future periods will be dependent on the jurisdictions in which we operate and the tax laws and regulations in effect.
Mortgage Insurance Earnings and Cash Flow Cycle
In general, the majority of any underwriting profit (premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year. Subsequent years of a book generally result in modest underwriting profit or underwriting losses. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.
Key Performance Indicators
Insurance In Force
As discussed above, premiums we collect and earn are generated based on our IIF, which is a function of our NIW and cancellations. The following table includes a summary of the change in our IIF for the three and nine months endedSeptember 30, 2021 and 2020 for ourU.S. mortgage insurance portfolio. In addition, this table includes RIF at the end of each period. 30
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Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2021 2020 2021 2020
IIF, beginning of period $ 203,559,859 $ 174,646,273 $ 198,882,352 $ 164,005,853
NIW - Flow 23,579,884 36,664,583 67,838,752 78,377,094
NIW - Bulk - - - 151
Cancellations (18,923,194) (20,499,564) (58,504,555) (51,571,806)
IIF, end of period $ 208,216,549 $ 190,811,292 $ 208,216,549 $ 190,811,292
Average IIF during the period $ 206,732,478 $ 183,135,315 $ 201,623,472 $ 172,595,003
RIF, end of period $ 45,074,159 $ 41,219,216 $ 45,074,159 $ 41,219,216 The following is a summary of our IIF at
($ in thousands) $ % 2021 (through September 30)$ 65,623,701 31.5 % 2020 83,556,296 40.1 2019 23,609,156 11.3 2018 11,062,279 5.3 2017 9,881,021 4.8 2016 and prior 14,484,096 7.0$ 208,216,549 100.0 % Average Net Premium Rate Our average net premium rate is dependent on a number of factors, including: (1) the risk characteristics and average coverage on the mortgages we insure; (2) the mix of monthly premiums compared to single premiums in our portfolio; (3) cancellations of non-refundable single premiums during the period; (4) changes to our pricing for NIW; and (5) premiums ceded under third-party reinsurance agreements. For the three and nine months endedSeptember 30, 2021 , our average net premium rate was 0.40% and 0.41%, respectively, compared to 0.46% and 0.47% for the three and nine months endedSeptember 30, 2020 , respectively. 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.
Persistency Rate
The measure for assessing the impact of policy cancellations on IIF is our persistency rate, defined as the percentage of IIF that remains on our books after any twelve-month period. See additional discussion regarding the impact of the persistency rate on our performance in "- Factors Affecting Our Results of Operations - Persistency and Business Mix."
The risk-to-capital ratio has historically been used as a measure of capital adequacy in theU.S. mortgage insurance industry and is calculated as a ratio of net risk in force to statutory capital. Net risk in force represents total risk in force net of reinsurance ceded and net of exposures on policies for which loss reserves have been established. Statutory capital for ourU.S. insurance companies is computed based on accounting practices prescribed or permitted by thePennsylvania Insurance Department . See additional discussion in "- Liquidity and Capital Resources -Insurance Company Capital ." As ofSeptember 30, 2021 , our combined net risk in force for ourU.S. insurance companies was$30.8 billion and our combined statutory capital was$2.9 billion , resulting in a risk-to-capital ratio of 10.5 to 1. The amount of capital required varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk-to-capital ratio is 25.0 to 1. State insurance regulators are currently examining their respective capital rules to determine whether, in light of the financial crisis, changes are needed to more accurately assess mortgage insurers' ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business. 31 -------------------------------------------------------------------------------- Table of Contents Results of Operations
The following table sets forth our results of operations for the periods indicated:
Summary of Operations Three Months Ended September 30, Nine Months Ended September 30, (In thousands) 2021 2020 2021 2020 Revenues: Net premiums written$ 202,348 $ 222,223 $ 608,996 $ 619,870 Decrease in unearned premiums 16,370 35 46,226 20,355 Net premiums earned 218,718 222,258 655,222 640,225 Net investment income 21,573 18,639 65,104 59,138 Realized investment gains, net 221 267 609 2,133 Income (loss) from other invested assets 40,741 (445) 41,389 (217) Other income 2,283 2,319 9,270 6,676 Total revenues 283,536 243,038 771,594 707,955 Losses and expenses: (Benefit) provision for losses and LAE (7,483) 55,280 34,490 239,220 Other underwriting and operating expenses 42,272 37,100 125,625 117,866 Interest expense 2,063 2,227 6,187 6,925 Total losses and expenses 36,852 94,607 166,302 364,011 Income before income taxes 246,684 148,431 605,292 343,944 Income tax expense 41,331 23,895 104,496 54,505 Net income$ 205,353 $ 124,536 $ 500,796 $ 289,439
Three and Nine Months Ended
For the three months endedSeptember 30, 2021 , we reported net income of$205.4 million , compared to net income of$124.5 million for the three months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , we reported net income of$500.8 million , compared to net income of$289.4 million for the nine months endedSeptember 30, 2020 . The increase in our operating results in three months endedSeptember 30, 2021 over the same period in 2020 was primarily due to a decrease in the provision for losses and LAE and an increase in income from other invested assets, partially offset by an increase in income tax expense. The increase in our operating results in nine months endedSeptember 30, 2021 over the same period in 2020 was primarily due to a decrease in the provision for losses and LAE and increases in income from other invested assets and net premiums earned, partially offset by an increase in income tax expense.
Net Premiums Written and Earned
Net premiums earned decreased in the three months endedSeptember 30, 2021 by 2%, compared to the three months endedSeptember 30, 2020 primarily due to the increase in premiums ceded under third-party reinsurance agreements, partially offset by the increase in our average IIF from$183.1 billion atSeptember 30, 2020 to$206.7 billion atSeptember 30, 2021 . Net premiums earned increased in the nine months endedSeptember 30, 2021 by 2% compared to the nine months endedSeptember 30, 2020 due to the increase in our average IIF from$172.6 billion atSeptember 30, 2020 to$201.6 billion atSeptember 30, 2021 , partially offset by an increase in premiums ceded under third-party reinsurance agreements. The average net premium rate was 0.40% and 0.41% for the three and nine months endedSeptember 30, 2021 , respectively, and 0.46% and 0.47% for the three and nine months endedSeptember 30, 2020 , respectively. The decrease in the average net premium rate in the three and nine month periods endedSeptember 30, 2021 was a result of an increase in ceded premiums, changes in the mix of mortgages we insure, in part due to lower persistency, changes in our pricing and a decrease in premiums earned on the cancellation of non-refundable single premium policies. In the three months endedSeptember 30, 2021 ceded premiums increased to$26.9 million from$21.2 million for the same period of 2020 due to a new third-party reinsurance agreement entered into in 2021. In the nine months endedSeptember 30, 2021 , ceded premiums increased to$84.4 million from$57.5 million for the same period of 2020 due to additional risk ceded under our QSR Agreement and new third-party reinsurance agreements entered in the fourth quarter of 2020 and in 2021. In the three and nine months endedSeptember 30, 2021 , premiums earned on the cancellation of non-refundable single premium policies decreased to$14.0 million and$49.5 million , 32 -------------------------------------------------------------------------------- Table of Contents respectively, from$24.6 million and$65.9 million in the three and nine months endedSeptember 30, 2020 , respectively, as a result of a decrease in existing borrowers refinancing their mortgages during 2021 as compared to 2020. Net premiums written decreased in the three months endedSeptember 30, 2021 by 9%, compared to the three months endedSeptember 30, 2020 primarily due to an increase in premiums ceded under third-party reinsurance agreements, a decrease in new single premium policies written, changes in the mix of mortgages we insure and changes in our pricing, partially offset by the increase in average IIF in the respective period. Net premiums written decreased in the nine months endedSeptember 30, 2021 by 2%, compared to the nine months endedSeptember 30, 2020 primarily due to an increase in premiums ceded under third-party reinsurance agreements, a decrease in new single premium policies written, changes in the mix of mortgages we insure and changes in our pricing, partially offset by an increase in average IIF in the respective periods. In the three months endedSeptember 30, 2021 and 2020, unearned premiums decreased by$16.4 million and$35 thousand , respectively. The change in unearned premiums was a result of net premiums written on single premium policies of$8.8 million and$40.0 million , respectively, which was offset by$25.2 million and$40.0 million , respectively, of unearned premium that was recognized in earnings during the periods. In the nine months endedSeptember 30, 2021 and 2020, unearned premiums decreased by$46.2 million and$20.4 million , respectively. This was a result of net premiums written on single premium policies of$39.6 million and$92.8 million , respectively, which was offset by$85.8 million and$113.2 million , respectively, of unearned premium that was recognized in earnings during the periods.
Net Investment Income
Our net investment income was derived from the following sources for the periods
indicated:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2021 2020 2021 2020
Fixed maturities $ 23,001 $ 19,952 $ 69,037 $ 61,135
Short-term investments 30 86 158 1,566
Gross investment income 23,031 20,038 69,195 62,701
Investment expenses (1,458) (1,399) (4,091) (3,563)
Net investment income $ 21,573 The increase in net investment income for the three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020 was due to the increase in the weighted average balance of our investment portfolio. The average cash and investment portfolio balance increased to$4.8 billion for the three months endedSeptember 30, 2021 from$4.4 billion for the three months endedSeptember 30, 2020 . The average cash and investment portfolio balance increased to$4.7 billion for the nine months endedSeptember 30, 2021 from$3.9 billion for the nine months endedSeptember 30, 2020 . The increase in the average cash and investment portfolio was primarily due to investing cash flows from operations, proceeds from the public offering of common shares completed inJune 2020 and increased borrowings under the Credit Facility. The pre-tax investment income yield increased from 1.8% in the three months endedSeptember 30, 2020 to 1.9% in the three months endedSeptember 30, 2021 primarily due to a decrease in the share of our investments allocated to cash. The pre-tax investment income yield decreased from 2.1% in the nine months endedSeptember 30, 2020 to 2.0% in the nine months endedSeptember 30, 2021 . primarily due to a general decline in investment yields due to declining interest rates and an increase in premium amortization on mortgage-backed and asset-backed securities. The pre-tax investment income yields are calculated based on amortized cost and exclude investment expenses. See "- Liquidity and Capital Resources" for further details of our investment portfolio.
Income from Other Invested Assets
Income from other invested assets for the three months endedSeptember 30, 2021 was$40.7 million as compared to a loss of$0.4 million for the three months endedSeptember 30, 2020 . Income from other invested assets for the nine months endedSeptember 30, 2021 was$41.4 million compared to a loss of$0.2 million for the nine months endedSeptember 30, 2020 . ThroughJune 30, 2021 , unrealized gains and losses reported by these entities were included in other comprehensive income ("OCI"). In the three months endedSeptember 30, 2021 , management concluded that unrealized gains and losses on these investments should be reflected in earnings rather than OCI. Income from other invested assets for the three and nine months endedSeptember 30, 2021 , includes$39.5 million of net unrealized gains, which includes$21.1 million of net unrealized gains that were accumulated in OCI atJune 30, 2021 and prior periods. 33 -------------------------------------------------------------------------------- Table of Contents Other Income Other income was$2.3 million for each of the three months endedSeptember 30, 2021 and 2020. Other income for the nine months endedSeptember 30, 2021 was$9.3 million compared to$6.7 million for the nine months endedSeptember 30, 2020 . The increase in other income for the nine months endedSeptember 30, 2021 as compared to the comparable period of 2020 was primarily due to an increase in underwriting consulting services to third-party reinsurers and changes in the fair value of the embedded derivatives contained in certain of our reinsurance agreements. In the nine months endedSeptember 30, 2021 we recorded a net unfavorable decrease in the fair value of the embedded derivatives of$1.1 million compared to a net unfavorable decrease of$2.4 million in the nine months endedSeptember 30, 2020 . Other income also includes Triad service fee income and contract underwriting revenues.
Provision for Losses and Loss Adjustment Expenses
The decrease in the provision for losses and LAE in the three and nine months endedSeptember 30, 2021 as compared to the same periods in 2020 was primarily due to a decrease in new defaults reported and cure activity for defaults with reserves using our normal reserve methodology in the three and nine months endedSeptember 30, 2021 as compared to the comparable periods of 2020.
The following table presents a rollforward of insured loans in default for our
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Beginning default inventory 23,504 38,068 31,469 5,947
Plus: new defaults 5,132 12,614 17,488 53,904
Less: cures (8,862) (15,135) (29,052) (24,032)
Less: claims paid (41) (67) (148) (329)
Less: rescissions and denials, net (12) (16) (36) (26)
Ending default inventory 19,721 35,464 19,721 35,464
The following table includes additional information about our loans in default
as of the dates indicated for our
As of
2021 2020
Case reserves (in thousands) (1)$ 380,036 $
280,447
Total reserves (in thousands) (1)$ 411,567 $
307,019
Ending default inventory 19,721
35,464
Average case reserve per default (in thousands)$ 19.3 $
7.9
Average total reserve per default (in thousands)
8.7
Default rate 2.47 % 4.54 % Claims received included in ending default inventory 52 46 (1)TheU.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of$1.4 million and$718 thousand as ofSeptember 30, 2021 and 2020, respectively. The increase in the average case reserve per default was primarily due to cure activity for Early COVID Defaults. Based on the forbearance programs in place and the credit characteristics of the defaulted loans, 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 recorded a reserve equal to approximately 7% of the risk in force for the Early COVID Defaults. We have not adjusted the loss reserves associated with the Early COVID Defaults as we continue to believe that these reserves represent the best estimate of the ultimate loss. As a result of cure activity for the Early COVID Defaults during the nine months endedSeptember 30, 2021 , the average reserve per Early COVID Default has increased from approximately 16% as ofDecember 31, 2020 to approximately 45% as ofSeptember 30, 2021 . The credit characteristics of defaults reported inOctober 2020 throughSeptember 2021 have trended towards those of the pre-pandemic periods and we have observed the normalization of other default patterns during this period. In addition, the economic conditions during the fourth quarter of 2020 through the third 34 -------------------------------------------------------------------------------- Table of Contents quarter of 2021 have been different than those experienced in the second and third quarters of 2020. We believe that while defaults inOctober 2020 throughSeptember 2021 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 afterSeptember 30, 2020 are more likely to transition like pre-pandemic defaults. Accordingly, beginning in the fourth quarter of 2020, we resumed establishing reserves for defaults reported afterSeptember 30, 2020 using our normal reserve methodology. The reserve for losses and LAE on COVID-19 defaults was$380.6 million atSeptember 30, 2021 and includes$243.4 million of reserves for Early COVID Defaults.
The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE:
Three Months Ended
2021 2020 2021 2020
Reserve for losses and LAE at beginning of
period $ 421,872 $ 250,890 $ 374,941 $ 69,362
Less: Reinsurance recoverables 27,286 7,761 19,061 71
Net reserve for losses and LAE at beginning of
period 394,586 243,129 355,880 69,291
Add provision for losses and LAE occurring in:
Current period 11,373 56,372 83,973 253,567
Prior years (18,856) (1,092) (49,483) (14,347)
Incurred losses and LAE during the current
period (7,483) 55,280 34,490 239,220
Deduct payments for losses and LAE occurring in:
Current period 103 205 231 494
Prior years 1,014 2,365 4,153 12,178
Loss and LAE payments during the current period 1,117 2,570 4,384 12,672
Net reserve for losses and LAE at end of period 385,986 295,839 385,986 295,839
Plus: Reinsurance recoverables 26,970 11,898 26,970 11,898
Reserve for losses and LAE at end of period $ 412,956 The following tables provide a detail of reserves and defaulted RIF by the number of missed payments and pending claims for ourU.S. mortgage insurance portfolio: As of September 30, 2021 Number of Percentage of Reserves as a Policies in Policies in Amount of Percentage of Defaulted Percentage of ($ in thousands) Default Default Reserves Reserves RIF Defaulted RIF Missed payments: Three payments or less 3,823 20 %$ 20,438 5 %$ 223,065 9 % Four to eleven payments 6,738 34 103,062 27 426,282 24 Twelve or more payments 9,108 46 254,499 67 595,444 43 Pending claims 52 - 2,037 1 2,516 81 Total case reserves (1) 19,721 100 % 380,036 100 %$ 1,247,307 30 IBNR 28,503 LAE 3,028 Total reserves for losses and LAE (1)$ 411,567 (1)TheU.S. mortgage insurance portfolio reserves exclude reserves on GSE and other risk share risk in force at Essent Re of$1.4 million as ofSeptember 30, 2021 . 35
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As of September 30, 2020
Number of Percentage of Reserves as a
Policies in Policies in Amount of Percentage of Defaulted Percentage of
($ in thousands) Default Default Reserves Reserves RIF Defaulted RIF
Missed payments:
Three payments or less 9,237 26 % $ 58,296 21 % $ 554,524 11 %
Four to eleven payments 25,290 71 194,892 69 1,697,419 11
Twelve or more payments 891 3 24,842 9 48,612 51
Pending claims 46 - 2,417 1 2,840 85
Total case reserves (2) 35,464 100 % 280,447 100 % $ 2,303,395 12
IBNR 21,034
LAE 5,538
Total reserves for losses and LAE (2) $ 307,019
(2)The U.S. mortgage insurance portfolio reserves exclude reserves on GSE and
other risk share risk in force at Essent Re of $718 thousand as of September 30,
2020 .
During the three months ended September 30, 2021 , the provision for losses and
LAE was a benefit of $7.5 million , comprised of $18.9 million of favorable prior
years' loss development partially offset by a provision of $11.4 million for
current year losses. During the three months ended September 30, 2020 , the
provision for losses and LAE was $55.3 million , comprised of $56.4 million of
current year losses partially offset by $1.1 million of favorable prior years'
loss development. In both periods, the prior years' loss development was the
result of a re-estimation of amounts ultimately to be paid on prior year
defaults in the default inventory, including the impact of previously identified
defaults that cured.
During the nine months ended September 30, 2021 , the provision for losses and
LAE was $34.5 million , comprised of $84.0 million of current year losses
partially offset by $49.5 million of favorable prior years' loss
development. During the nine months ended September 30, 2020 , the provision for
losses and LAE was $239.2 million , comprised of $253.6 million of current year
losses partially offset by $14.3 million of favorable prior years' loss
development. In both periods, the prior years' loss development was the result
of a re-estimation of amounts ultimately to be paid on prior year defaults in
the default inventory, including the impact of previously identified defaults
that cured.
The following table includes additional information about our claims paid and claim severity for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2021 2020 2021 2020
Number of claims paid 41 67 148 329
Amount of claims paid $ 1,069 $ 2,557 $ 4,212 $ 12,432
Claim severity 60 % 77 % 63 % 78 %
Other Underwriting and Operating Expenses
Following are the components of our other underwriting and operating expenses for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
($ in thousands) $ % $ % $ % $ %
Compensation and benefits $ 27,236 64 % $ 22,701 61 % $ 77,626 62 % $ 71,741 61 %
Premium taxes 4,593 11 5,412 15 13,645 11 14,808 13
Other 10,443 25 8,987 24 34,354 27 31,317 26
Total other underwriting and
operating expenses $ 42,272 100 % $ 37,100 100 % $ 125,625 100 % $ 117,866 100 %
Number of employees at end of period 343 383
36-------------------------------------------------------------------------------- Table of Contents The significant factors contributing to the change in other underwriting and operating expenses are: •Compensation and benefits increased in the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 due to increased incentive compensation, severance associated with the departure of a former executive and increased stock compensation expense largely due to shares granted in 2020 and 2021. Compensation and benefits includes salaries, wages and bonus, stock compensation expense, benefits and payroll taxes.
•Premium taxes decreased primarily due to a decrease in our effective premium tax rate.
•Other expenses increased primarily as a result of increases in professional fees and amortization of net deferred acquisition costs partially offset by an increase in ceding commission earned under the QSR Agreement and lower travel expenses. Other expenses include professional fees, travel, marketing, hardware, software, rent, depreciation and amortization and other facilities expenses.
Interest Expense
For the three and nine months endedSeptember 30, 2021 , we incurred interest expense of$2.1 million and$6.2 million , respectively, as compared to$2.2 million and$6.9 million for the three and nine months endedSeptember 30, 2020 , respectively. In the three months endedSeptember 30, 2021 , interest expense decreased primarily due to a decrease in the average amounts outstanding under the Credit Facility, partially offset by an increase in the weighted average interest rate for borrowings outstanding. In the nine months endedSeptember 30, 2021 , interest expense decreased primarily due to a decrease in the average amounts outstanding under the Credit Facility and a decrease in the weighted average interest rate for borrowings outstanding. For the three and nine months endedSeptember 30, 2021 , the average amount outstanding under the Credit Facility was$325.0 million and$325.9 million , respectively, as compared to$425.0 million and$362.0 million for the three and nine months endedSeptember 30, 2020 , respectively. For the three and nine months endedSeptember 30, 2021 , the borrowings under the Credit Facility had a weighted average interest rate of 2.17% and 2.30%, respectively, as compared to 1.96% and 2.37% for the three and nine months endedSeptember 30, 2020 , respectively.
Income Taxes
Our subsidiaries inthe United States file a consolidatedU.S. Federal income tax return. Our income tax expense was$41.3 million and$23.9 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$104.5 million and$54.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The provision for income taxes for the nine months endedSeptember 30, 2021 was calculated using an estimated annual effective tax rate of 15.9% as compared to an estimated annual effective tax rate of 16.0% for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , income tax expense includes$8.3 million of discrete tax expense associated with realized and unrealized gains and losses and$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. For the nine months endedSeptember 30, 2020 , income tax expense was reduced by excess tax benefits associated with the vesting of common shares and common share units of$0.5 million . The tax effects associated with realized and unrealized gains and losses, the increase to our deferred state income tax liability and vesting of common shares and common share units 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.
37
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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 ofSeptember 30, 2021 , we had substantial liquidity with cash of$65.8 million , short-term investments of$309.8 million and fixed maturity investments of$4.6 billion . We also had$300 million available capacity under the revolving credit component of our Credit Facility, with$325 million of borrowings outstanding under our Credit Facility. Borrowings under the Credit Facility contractually mature onOctober 16, 2023 . Holding company net cash and investments available for sale atEssent Group andEssent US Holdings, Inc. totaled$513.0 million atSeptember 30, 2021 . In addition,Essent Guaranty is a member of theFederal Home Loan Bank of Pittsburgh (the "FHLBank") and has access to secured borrowing capacity with the FHLBank to provideEssent Guaranty with supplemental liquidity.Essent Guaranty had no outstanding borrowings with the FHLBank atSeptember 30, 2021 . 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.
OurU.S. insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. Under the insurance laws of theCommonwealth of Pennsylvania , the insurance subsidiaries may pay dividends during any twelve-month period in an amount equal to the greater of (i) 10% of the preceding year-end statutory policyholders' surplus or (ii) the preceding year's statutory net income. For 2021,Essent Guaranty has dividend capacity of$312.1 million and Essent PA has dividend capacity of$5.4 million . ThePennsylvania statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. AtSeptember 30, 2021 ,Essent Guaranty had unassigned surplus of approximately$377.0 million and Essent PA had unassigned surplus of approximately$16.8 million . As a result of PMIERs guidance issued by the GSEs,Essent Guaranty may pay a dividend without prior GSE approval in the three months endedSeptember 30, 2021 as long as the dividend payment would not cause its Available Assets to fall below 150% of its Minimum Required Assets. In addition, the guidance specifies thatEssent Guaranty and may pay a dividend without prior GSE approval in the three months endedDecember 31, 2021 as long as the dividend payment would not cause its Available Assets to fall below 115% of its Minimum Required Assets. Essent Re is 38 -------------------------------------------------------------------------------- Table of Contents subject to certain dividend restrictions as prescribed by theBermuda Monetary Authority and under certain agreements with counterparties. In connection with a quota share reinsurance agreement withEssent Guaranty , Essent Re has agreed to maintain a minimum total equity of$100 million . As ofSeptember 30, 2021 , Essent Re had total equity of$1.2 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. AtSeptember 30, 2021 , our insurance subsidiaries were in compliance with these rules, regulations and agreements.
Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Nine Months Ended September 30,
(In thousands) 2021 2020
Net cash provided by operating activities $ 518,167 $ 548,506
Net cash used in investing activities (403,412) (1,083,317)
Net cash (used in) provided by financing activities (151,760) 582,152
Net (decrease) increase in cash $ (37,005) $ 47,341
Operating Activities
Cash flow provided by operating activities totaled $518.2 million for the nine
months ended September 30, 2021 , as compared to $548.5 million for the nine
months ended September 30, 2020 . The decrease in cash flow provided by operating
activities was primarily due to an increase in income tax payments and higher
T&L Bond purchases in 2021, partially offset by an increase in premiums
collected.
Investing Activities
Cash flow used in investing activities totaled$403.4 million and$1.1 billion for the nine months endedSeptember 30, 2021 and 2020, respectively. In both periods, cash flow used in investing activities related to investing cash flows from operations. Additionally, in 2020 cash flow used in investing activities included investing$440 million of net proceeds from the completion of a public offering of common shares in June and$200 million of increased borrowings under the Credit Facility. Financing Activities Cash flow used in financing activities totaled$151.8 million for the nine months endedSeptember 30, 2021 , primarily related to the quarterly cash dividends paid in March, June and September, repurchases of common stock as part of our share repurchase plan and treasury stock acquired from employees to satisfy tax withholding obligations. Cash flow provided by financing activities totaled$582.2 million for the nine months endedSeptember 30, 2020 , primarily related to$440 million of net proceeds from the completion of a public offering of common shares in June and$200 million of increased borrowings under the Credit Facility, partially offset by the quarterly cash dividends paid in March, June and September and treasury stock acquired from employees to satisfy tax withholding obligations.Insurance Company Capital We compute a risk-to-capital ratio for ourU.S. insurance companies on a separate company statutory basis, as well as for our combined insurance operations. The risk-to-capital ratio is our net risk in force divided by our statutory capital. Our net risk in force represents risk in force net of reinsurance ceded, if any, and net of exposures on policies for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders' surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual contributions to the contingency reserve of 50% of net premiums earned. These contributions must generally be maintained for a period of ten years. However, with regulatory approval, a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net premiums earned in a calendar year. During the three and nine months endedSeptember 30, 2021 , no capital contributions were made to ourU.S. insurance subsidiaries andEssent Guaranty paid dividends toEssent US Holdings, Inc. of$47.2 million and$147.2 million , respectively. 39 -------------------------------------------------------------------------------- Table of Contents During the nine months endedSeptember 30, 2020 , no capital contributions were made to ourU.S. insurance subsidiaries andEssent Guaranty did not pay dividends toEssent Group or any intermediate holding companies.Essent Guaranty has entered into reinsurance agreements that provide excess of loss reinsurance coverage for new defaults on portfolios of mortgage insurance policies issued in 2015 throughMarch 31, 2021 . The aggregate excess of loss reinsurance coverages decrease over a ten-year period as the underlying covered mortgages amortize. Based on the level of delinquencies reported to us, the insurance-linked note transactions (the "ILNs") thatEssent Guaranty has entered into prior toMarch 31, 2020 became subject to a "trigger event" as ofJune 25, 2020 . The aggregate excess of loss reinsurance coverage will not amortize during the continuation of a trigger event. EffectiveSeptember 1, 2019 ,Essent Guaranty entered into a quota share reinsurance agreement with a panel of third-party reinsurers (the "QSR Agreement"). Under the QSR Agreement,Essent Guaranty will cede premiums earned related to 40% of risk on eligible single premium policies and 20% of risk on all other eligible policies writtenSeptember 1, 2019 throughDecember 31, 2020 , in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. These reinsurance coverages also reduces net risk in force and PMIERs Minimum Required Assets. See Note 4 to our condensed consolidated financial statements.
Our combined risk-to-capital calculation for our
Combined statutory capital: ($ in thousands) Policyholders' surplus$ 1,138,173 Contingency reserves 1,778,629 Combined statutory capital$ 2,916,802 Combined net risk in force$ 30,766,379 Combined risk-to-capital ratio 10.5:1 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 ofEssent Guaranty plus Essent PA, after eliminating the impact of intercompany transactions. The combined risk-to-capital ratio equals the sum of the net risk in force ofEssent Guaranty and Essent PA divided by combined statutory capital. The information above has been derived from the annual and quarterly statements of our insurance subsidiaries, which have been prepared in conformity with accounting practices prescribed or permitted by thePennsylvania Insurance Department and theNational Association of Insurance Commissioners Accounting Practices and Procedures Manual . Such practices vary from accounting principles generally accepted inthe 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% ofEssent Guaranty's NIW throughDecember 31, 2020 and 35% ofEssent Guaranty's NIW afterDecember 31, 2020 . During the nine months endedSeptember 30, 2021 and 2020, Essent Re paid no dividends toEssent Group andEssent Group made no capital contributions to Essent Re. As ofSeptember 30, 2021 , Essent Re had total stockholders' equity of$1.2 billion and net risk in force of$15.5 billion .
Financial Strength Ratings
The insurer financial strength rating ofEssent Guaranty , our principal mortgage insurance subsidiary, is rated A3 with a stable outlook by Moody's Investors Service ("Moody's"), BBB+ with a stable outlook by S&P and A (Excellent) with stable outlook byA.M. Best . The insurer financial strength rating of Essent Re is BBB+ with a stable outlook by S&P and A (Excellent) with stable outlook byA.M. Best .
Private Mortgage Insurer Eligibility Requirements
EffectiveDecember 31, 2015 , Fannie Mae and Freddie Mac, at the direction of the FHFA, implemented new coordinated Private Mortgage Insurer Eligibility Requirements, which we refer to as the "PMIERs." The PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. The PMIERs include financial strength requirements incorporating a risk-based framework that require approved insurers to have a sufficient level of liquid assets from which to pay claims. This risk-based framework provides that an insurer must hold a substantially higher level of required assets for insured loans that are in default compared 40 -------------------------------------------------------------------------------- Table of Contents to a performing loan. The PMIERs also include enhanced operational performance expectations and define remedial actions that apply should an approved insurer fail to comply with these requirements. In 2018, the GSEs released revised PMIERs framework ("PMIERs 2.0") which became effective onMarch 31, 2019 . As ofSeptember 30, 2021 ,Essent Guaranty , our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0. As ofSeptember 30, 2021 ,Essent Guaranty's Available Assets were$3.16 billion or 162% of its Minimum Required Assets of$1.95 billion based on our interpretation of PMIERs 2.0. Under PMIERs guidance issued by the GSEs effectiveJune 30, 2020 ,Essent will apply a 0.30 multiplier to the risk-based required asset amount factor for each insured loan in default backed by a property located in aFederal Emergency Management Agency ("FEMA") Declared Major Disaster Area eligible for Individual Assistance and that either 1) is subject to a forbearance plan granted in response to a FEMA Declared Major Disaster, the terms of which are materially consistent with terms of forbearance plans, repayment plans or loan modification trial period offered by Fannie Mae or Freddie Mac, or 2) has an initial missed payment occurring up to either (i) 30 days prior to the first day of the incident period specified in the FEMA Major Disaster Declaration or (ii) 90 days following the last day of the incident period specified in the FEMA Major Disaster Declaration, not to exceed 180 days from the first day of the incident period specified in the FEMA Major Disaster Declaration. In the case of the foregoing, the 0.30 multiplier shall be applied to the risk-based required asset amount factor for 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 afterMarch 1, 2020 and prior toApril 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 ofSeptember 30, 2021 , stockholders' equity was$4.17 billion , compared to$3.86 billion as ofDecember 31, 2020 . Stockholders' equity increased primarily due to net income generated in 2021 partially offset by dividends paid, a decrease in accumulated other comprehensive income related to a decrease in our net unrealized investment gains and the repurchase of common shares under our share repurchase plan. Investments As ofSeptember 30, 2021 , investments totaled$5.0 billion compared to$4.7 billion as ofDecember 31, 2020 . In addition, our total cash was$65.8 million as ofSeptember 30, 2021 , compared to$102.8 million as ofDecember 31, 2020 . The increase in investments was primarily due to investing net cash flows from operations during the nine months endedSeptember 30, 2021 partially offset by a decrease in our net unrealized investment gains. 41
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Investments Available for Sale by Asset ClassAsset Class September 30, 2021 December 31, 2020 ($ in thousands) Fair Value Percent Fair Value Percent U.S. Treasury securities $ 331,216 6.8 % $ 268,444 5.9 % U.S. agency securities 5,536 0.1 18,085 0.4 U.S. agency mortgage-backed securities 989,552 20.3 995,905 21.8 Municipal debt securities(1) 592,458 12.2 551,517 12.1 Non-U.S. government securities 79,994 1.6 61,607 1.3 Corporate debt securities(2) 1,524,144 31.3 1,126,512 24.7 Residential and commercial mortgage securities 539,186 11.1 409,282 9.0 Asset-backed securities 554,475 11.4 454,717 9.9 Money market funds 253,456 5.2 679,304 14.9 Total Investments Available for Sale$ 4,870,017 100.0 %$ 4,565,373 100.0 % September 30, December 31,
(1) The following table summarizes municipal debt securities as of :
2021 2020
Special revenue bonds 78.0 % 76.8 %
General obligation bonds 19.4 20.3
Certificate of participation bonds 2.0 2.3
Tax allocation bonds 0.6 0.6
Total 100.0 % 100.0 %
September 30, December 31,(2) The following table summarizes corporate debt securities as of :
2021 2020
Financial 35.8 % 34.9 %
Consumer, non-cyclical 19.2 19.1
Communications 11.7 9.3
Industrial 7.6 5.3
Consumer, cyclical 6.4 8.0
Energy 5.5 8.2
Technology 5.4 6.1
Utilities 4.9 5.9
Basic materials 3.4 3.1
Government 0.1 0.1
Total 100.0 % 100.0 %
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Investments Available for Sale by RatingRating(1) September 30, 2021 December 31, 2020 ($ in thousands) Fair Value Percent Fair Value Percent Aaa$ 2,356,302 48.4 %$ 2,564,746 56.2 % Aa1 106,743 2.2 133,100 2.9 Aa2 320,018 6.6 260,462 5.7 Aa3 212,516 4.4 204,917 4.5 A1 288,177 5.9 249,710 5.5 A2 459,205 9.4 401,175 8.8 A3 293,220 6.0 229,882 5.0 Baa1 302,771 6.2 260,602 5.7 Baa2 260,360 5.4 178,926 3.9 Baa3 190,999 3.9 48,199 1.1 Below Baa3 79,706 1.6 33,654 0.7 Total Investments Available for Sale$ 4,870,017 100.0 %$ 4,565,373 100.0 %
(1)Based on ratings issued by Moody's, if available. S&P or Fitch Ratings ("Fitch") rating utilized if Moody's not available.
Investments Available for Sale by Effective DurationEffective Duration September 30, 2021 December 31, 2020 ($ in thousands) Fair Value Percent Fair Value Percent < 1 Year$ 1,181,803 24.3 %$ 1,568,505 34.4 % 1 to < 2 Years 644,007 13.2 581,003 12.7 2 to < 3 Years 530,003 10.9 616,069 13.5 3 to < 4 Years 688,472 14.1 426,333 9.3 4 to < 5 Years 493,847 10.1 367,633 8.1 5 or more Years 1,331,885 27.4 1,005,830 22.0 Total Investments Available for Sale$ 4,870,017 100.0 %$ 4,565,373 100.0 % 43
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Top Ten Investments Available for Sale Holdings
September 30, 2021
Rank Amortized Unrealized Credit
($ in thousands) Security Fair Value Cost Gain (Loss)(1) Rating(2)
1 U.S. Treasury 1.500% 8/15/2026 $ 34,839 $ 34,553 $ 286 Aaa
2 U.S. Treasury 0.250% 5/31/2025 25,174 25,573 (399) Aaa
3 Fannie Mae 3.500% 1/1/2058 23,079 21,816 1,263 Aaa
4 U.S. Treasury 2.625% 6/30/2023 20,571 19,704 867 Aaa
5 U.S. Treasury 0.875% 6/30/2026 19,573 19,636 (63) Aaa
6 U.S. Treasury 5.250% 11/15/2028 19,351 18,268 1,083 Aaa
7 U.S. Treasury 0.125% 10/15/2023 17,564 17,603 (39) Aaa
8 Fannie Mae 2.000% 8/1/2050 16,469 16,958 (489) Aaa
9 U.S. Treasury 0.375% 1/31/2026 15,161 15,363 (202) Aaa
10 Freddie Mac 2.500% 5/1/2051 14,956 15,034 (78) Aaa
Total
4.2 %
(1)As of September 30, 2021 , 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.
Rank December 31, 2020 ($ in thousands) Security Fair Value 1 Fannie Mae 3.500% 1/1/2058$ 26,634 2 U.S. Treasury 0.250% 5/31/2025 25,558 3 U.S. Treasury 2.625% 6/30/2023 20,966 4 Fannie Mae 2.000% 8/1/2050 20,549 5 U.S. Treasury 5.250% 11/15/2028 20,540 6 Freddie Mac 4.000% 11/1/2048 20,371 7 U.S. Treasury 1.500% 8/15/2026 18,525 8 U.S. Treasury 0.125% 10/15/2023 17,611 9 Freddie Mac 2.500% 7/1/2050 17,063 10 U.S. Treasury 2.625% 7/15/2021 14,946 Total$ 202,763 Percent of Investments Available for Sale 4.4 % 44 -------------------------------------------------------------------------------- Table of Contents The following tables include municipal debt securities for states that represent more than 10% of the total municipal bond position as ofSeptember 30, 2021 : Amortized Credit ($ in thousands) Fair Value Cost Rating (1), (2) Texas North Texas Tollway System$ 9,198 $ 8,868 A2 University of Houston 6,529 6,294 Aa2 Texas A&M University 6,190 5,753 Aaa Love Field Airport Modernization Corp 5,947 6,128 Aa2 State of Texas 5,694 5,343 Aaa City of Houston TX Combined Utility System Revenue 5,106 4,569 Aa2 LCRA Transmission Services Corp 3,085 3,008 A2 Dallas Fort Worth International Airport 2,545 2,445 A2 City of Austin TX Electric Utility Revenue 2,326 2,113 Aa3 Harris County-Houston Sports Authority 2,256 2,055 A2 City of Houston TX 2,213 2,058 Aa3 North Texas Municipal Water District 2,017 1,900 Aaa Lifeschool of Dallas 1,836 1,840 Aaa City of Dallas TX 1,822 1,642 Aa3 City of Houston TX Airport System Revenue 1,718 1,654 A1 Houston Community College System 1,612 1,665 Aaa City of Fort Worth TX Water & Sewer System Revenue 1,503 1,427 Aa1 Tarrant Regional Water District Water Supply System Revenue 1,495 1,411 Aaa City of San Antonio TX Airport System 1,270 1,174 A1 City of Corpus Christi TX Utility System Revenue 1,159 1,058 Aa3 Harris County Toll Road Authority 1,029 996 Aa1 Texas Tech University System 1,003 1,000 Aa1 Central Texas Turnpike System 970 936 Baa1Metropolitan Transit Authority of Harris County Sales & Use Tax Revenue 925 910 Aaa Frisco Independent School District 857 861 Aaa County of Fort Bend TX 849 782 Aa1 Austin-Bergstrom Landhost Enterprises, Inc. 613 579 A3 San Jacinto Community College District 577 533 Aa3 City of Houston TX Reinvestment Zone No 16 352 332 A2 Austin Independent School District 293 295 Aaa$ 72,989 $ 69,629 45
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Amortized Credit
($ in thousands) Fair Value Cost Rating (1), (2)
New York
New York City Transitional Finance Authority
Future Tax Secured Revenue $ 12,707 $ 12,064 Aa1
The Port Authority of New York and New Jersey 7,590 7,175 Aa3
Metropolitan Transportation Authority 7,582 7,135 A3
State of New York Personal Income Tax Revenue 7,261 6,799 Aa2
City of New York NY 7,215 6,466 Aa2
New York City Water & Sewer System 6,456 6,393 Aa1
Long Island Power Authority 4,286 4,158 A2
Metropolitan Transportation Authority Payroll
Mobility Tax Revenue 3,652 3,652 Aa1
The Research Foundation of State University of
New York 3,016 2,750 A1
New York State Dormitory Authority 2,832 2,724 A1
TSASC, Inc. 2,472 2,158 A2
City of Yonkers NY 2,415 2,297 A3
County of Nassau NY 2,149 1,964 A2
New York City Transitional Finance Authority
Building Aid Revenue 1,572 1,491 Aa3
Town of Oyster Bay NY 1,041 1,018 Aa2
Yankee Stadium LLC 841 797 A2
$ 73,087 $ 69,041 (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 inBermuda . The Radnor Re special purpose insurers are special purpose variable interest entities that are not consolidated in our condensed consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. As ofSeptember 30, 2021 , our estimated off-balance sheet maximum exposure to loss from the Radnor Re entities was$0.6 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 2020 Form 10-K. See Note 2 to our condensed consolidated financial statements for recently issued accounting standards adopted or under evaluation. 46
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