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, 2021 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 six months endedJune 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 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 . OnJuly 21, 2022 , Moody's affirmedEssent Guaranty's financial strength rating of A3 with a stable outlook. 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 349 employees as ofJune 30, 2022 . We generated new insurance written, or NIW, of approximately$20.1 billion and$32.9 billion for the three and six months endedJune 30, 2022 , respectively, compared to approximately$25.0 billion and$44.3 billion for the three and six months endedJune 30, 2021 , respectively. As ofJune 30, 2022 , we had approximately$215.9 billion of insurance in force. 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 ofJune 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 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 .
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
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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 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
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% atJune 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 ofJune 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. ThroughJune 30, 2021 , unrealized gains and losses reported by these entities were included in other comprehensive income ("OCI"). Subsequent toJune 30, 2021 , management concluded that unrealized gains and losses on these investments should be reflected in earnings rather than OCI. 28 -------------------------------------------------------------------------------- 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 ofJune 30, 2022 , 81% of our IIF relates to business written sinceJanuary 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 29 -------------------------------------------------------------------------------- Table of Contents 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 ofJune 30, 2022 , 81% of our IIF relates to business written sinceJanuary 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 inMarch 2020 as a result of COVID-19, unemployment inthe 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 endedJune 30, 2020 and 12,614 defaults in the three months endedSeptember 30, 2020 , which resulted in a significant increase in our default rate from 0.83% atMarch 31, 2020 to 4.54% atSeptember 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 ofFebruary 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 ofMarch 31, 2020 and in prior periods that did not have access to forbearance plans. SinceJune 30, 2020 , we have experienced a decline in our default rate. As ofJune 30, 2022 , insured loans in default totaled 12,707 compared to 16,963 defaults as ofDecember 31, 2021 . The credit characteristics of defaults reported subsequent toSeptember 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 toSeptember 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 afterSeptember 30, 2020 using our normal reserve methodology. As ofMarch 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 atMarch 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 throughMarch 31, 2022 and our expectations for future cure activity, as ofMarch 31, 2022 , we lowered our estimate of ultimate loss for the Early COVID Defaults. During the three months endedJune 30, 2022 , Early COVID Defaults cured at levels that exceeded our estimate as ofMarch 31, 2022 , and we further lowered our estimate of loss for these defaults as ofJune 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 endedJune 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, atJune 30, 2022 , we had approximately$2.6 billion of 30 -------------------------------------------------------------------------------- Table of Contents excess of loss reinsurance covering NIW fromJanuary 1, 2015 toDecember 31, 2022 and quota share reinsurance on portions of our NIW effectiveSeptember 1, 2019 throughDecember 31, 2020 andJanuary 1, 2022 throughDecember 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 endedJune 30, 2022 , respectively, compared to 62% and 60% of other underwriting and operating expenses for the three and six months endedJune 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 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
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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 $ 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
($ 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 theU.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 ourU.S. mortgage insurance portfolio: Three Months Ended Six Months Ended June 30, 2022 2021 2022 2021 Base average premium rate 0.41 % 0.43 % 0.41 % 0.44 % Single premium cancellations 0.01 0.03 0.01 0.03 Gross average premium rate 0.42 0.46 0.42 0.47 Ceded premiums (0.04) (0.05) (0.04) (0.06) Net average premium rate 0.38 % 0.41 % 0.38 % 0.41 %
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.
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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 ofJune 30, 2022 , our combined net risk in force for ourU.S. insurance companies was$31.2 billion and our combined statutory capital was$3.1 billion , resulting in a risk-to-capital ratio of 10.2 to 1. The amount of capital required varies in each jurisdiction in which we operate; however, generally, the maximum permitted risk-to-capital ratio is 25.0 to 1. State insurance regulators are currently examining their respective capital rules to determine whether, in light of the financial crisis, changes are needed to more accurately assess mortgage insurers' ability to withstand stressful economic conditions. As a result, the capital metrics under which they assess and measure capital adequacy may change in the future. Independent of the state regulator and GSE capital requirements, management continually assesses the risk of our insurance portfolio and current market and economic conditions to determine the appropriate levels of capital to support our business.
Results of Operations
The following table sets forth our results of operations for the periods indicated: Summary of Operations Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2022 2021 2022 2021 Revenues: Net premiums written$ 210,342
1,669 15,150 17,268 29,856
Net premiums earned 212,011 217,437 427,341 436,504
Net investment income 29,339 21,743 54,019 43,531
Realized investment (losses) gains, net (471) (253) (7,823) 388
Income from other invested assets 1,953 122 26,658 648
Other income 1,577 4,212 8,825 6,987
Total revenues 244,409 243,261 509,020 488,058
Losses and expenses:
(Benefit) provision for losses and LAE (76,199) 9,651 (183,057) 41,973
Other underwriting and operating expenses 41,898 41,114 82,694 83,353
Interest expense 2,887 2,073 5,113 4,124
Total losses and expenses (31,414) 52,838 (95,250) 129,450
Income before income taxes 275,823 190,423 604,270 358,608
Income tax expense 44,054 30,628 98,334 63,165
Net income $ 231,769 $ 159,795 $ 505,936 $ 295,443 Three and Six Months Ended
For the three months endedJune 30, 2022 , we reported net income of$231.8 million , compared to net income of$159.8 million for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , we reported net income of$505.9 million , compared to net income of$295.4 million for the six months endedJune 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 33
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Net Premiums Written and Earned
Net premiums earned decreased in the three and six months endedJune 30, 2022 by 2%, compared to the three and six endedJune 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 endedJune 30, 2022 and 2021, respectively and 0.38% and 0.41% for the six months endedJune 30, 2022 and 2021, respectively. See "-Key Performance Indicators-Average Net Premium Rate" above. In the three and six months endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2022 , respectively, compared to the three and six months endedJune 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 endedJune 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 endedJune 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
34
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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 endedJune 30, 2022 was$2.0 million as compared to$0.1 million for the three months endedJune 30, 2021 . Income from other invested assets for the six months endedJune 30, 2022 was$26.7 million as compared to$0.6 million for the six months endedJune 30, 2021 . ThroughJune 30, 2021 , unrealized gains and losses reported by these entities were included in other comprehensive income ("OCI"). Subsequent toJune 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 endedJune 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 endedJune 30, 2022 was$1.6 million as compared to$4.2 million for the three months endedJune 30, 2021 . The decrease in other income for the three months endedJune 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 endedJune 30, 2022 was$8.8 million compared to$7.0 million for the six months endedJune 30, 2021 . The increase in other income for the six months endedJune 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 endedJune 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 endedJune 30, 2021 . In the six months endedJune 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$0.3 million in the six months endedJune 30, 2021 .
Provision for Losses and Loss Adjustment Expenses
The decrease in the provision for losses and LAE in the three and six months endedJune 30, 2022 as compared to the same period in 2021 was primarily due to a decrease in the estimate of ultimate loss for Early COVID Defaults as well as cure activity for defaults with reserves using our normal reserve methodology in the three and six months endedJune 30, 2022 as compared to the comparable period of 2021.
The following table presents a rollforward of insured loans in default for our
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Beginning default inventory 14,923 29,080 16,963 31,469
Plus: new defaults 5,495 4,934 11,683 12,356
Less: cures (7,639) (10,453) (15,806) (20,190)
Less: claims paid (65) (46) (120) (107)
Less: rescissions and denials, net (7) (11) (13) (24)
Ending default inventory 12,707 23,504 12,707 23,504
35-------------------------------------------------------------------------------- Table of Contents The following table includes additional information about our loans in default as of the dates indicated for ourU.S. mortgage insurance portfolio: As of June
30,
2022 2021
Case reserves (in thousands) (1)$ 193,416 $
387,690
Total reserves (in thousands) (1)$ 209,829 $
420,482
Ending default inventory 12,707
23,504
Average case reserve per default (in thousands)$ 15.2 $
16.5
Average total reserve per default (in thousands)
17.9
Default rate 1.61 % 2.96 % Claims received included in ending default inventory 81 45 (1)TheU.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 ofJune 30, 2022 and 2021, respectively. As ofMarch 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 atMarch 31, 2022 exceeded our initial estimated cure rate implied by our 7% estimate of ultimate loss for these defaults. Based on cure activity throughMarch 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 endedJune 30, 2022 , Early COVID Defaults cured at levels that exceeded our estimate as ofMarch 31, 2022 , and we further lowered our estimate of loss for these defaults as ofJune 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 endedJune 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 ofJune 30, 2022 as compared to approximately 76% as ofDecember 31, 2021 and approximately 24% as ofJune 30, 2021 . The reserve for losses and LAE atJune 30, 2022 includes$70.8 million of reserves for Early COVID Defaults. The credit characteristics of defaults reported subsequent toSeptember 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 inOctober 2020 , the economic conditions have been different than those experienced in the second and third quarters of 2020. We believe that while defaults subsequent toSeptember 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 afterSeptember 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 afterSeptember 30, 2020 using our normal reserve methodology. 36
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Table of Contents 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
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
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 June 30, 2022 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 4,036 32 %$ 18,653 10 %$ 250,303 7 % Four to eleven payments 4,741 37 59,753 31 304,764 20 Twelve or more payments 3,849 30 111,442 57 236,440 47 Pending claims 81 1 3,568 2 3,574 100 Total case reserves (1) 12,707
100 % 193,416 100 % $ 795,081 24
IBNR 14,506
LAE 1,907
Total reserves for losses and LAE (1) $ 209,829 (1)The
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As of June 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 3,926 17 % $ 25,915 7 % $ 234,604 11 %
Four to eleven payments 9,316 40 147,383 38 585,390 25
Twelve or more payments 10,217 43 212,634 55 680,733 31
Pending claims 45 - 1,758 - 2,139 82
Total case reserves (2) 23,504 100 % 387,690 100 % $ 1,502,866 26
IBNR 29,077
LAE 3,715
Total reserves for losses and LAE (2) $ 420,482 (2)The
During the three months endedJune 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 endedJune 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 endedJune 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 endedJune 30, 2021 , the provision for losses and LAE was$42.0 million , comprised of$72.6 million of current year losses partially offset by$30.6 million of favorable prior years' loss development. In both periods, the prior years' loss development was the result of a re-estimation of amounts ultimately to be paid on prior year defaults in the default inventory, including the impact of previously identified defaults that cured.
The following table includes additional information about our claims paid and claim severity for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
($ in thousands) 2022 2021 2022 2021
Number of claims paid 65 46 120 107
Amount of claims paid $ 1,137 $ 1,154 $ 1,963 $ 3,143
Claim severity 50 % 57 % 43 % 64 %
38-------------------------------------------------------------------------------- Table of Contents Other Underwriting and Operating Expenses
Following are the components of our other underwriting and operating expenses for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in thousands) $ % $ % $ % $ %
Compensation and benefits $ 25,291 60 % $ 25,630 62 % $ 50,121 61 % $ 50,390 60 %
Premium taxes 4,545 11 4,550 11 8,513 10 9,052 11
Other 12,062 29 10,934 27 24,060 29 23,911 29
Total other underwriting and
operating expenses $ 41,898 100 % $ 41,114 100 % $ 82,694 100 % $ 83,353 100 %
Number of employees at end of period 349 372
The significant factors contributing to the change in other underwriting and operating expenses are:
•Compensation and benefits decreased in the three and six months endedJune 30, 2022 as compared to the three and six months endedJune 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 endedJune 30, 2022 compared to the three months endedJune 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 endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to a decrease in our effective premium tax rate. •Other expenses increased during the three and six months endedJune 30, 2022 compared to the three and six months endedJune 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 endedJune 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 endedJune 30, 2021 , respectively. The increase during the three months endedJune 30, 2022 when compared to the three months endedJune 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 endedJune 30, 2022 when compared to the six months endedJune 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 endedJune 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 endedJune 30 , 2021,respectively. For the three and six months endedJune 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 endedJune 30, 2021 , respectively. 39 -------------------------------------------------------------------------------- Table of Contents Income Taxes Our subsidiaries inthe United States file a consolidatedU.S. Federal income tax return. Our income tax expense was$44.1 million and$30.6 million for the three months endedJune 30, 2022 and 2021, respectively, and$98.3 million and$63.2 million for the six months endedJune 30, 2022 and 2021, respectively. The provision for income taxes for the six months endedJune 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 endedJune 30, 2021 . For the six months endedJune 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 endedJune 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 ofJune 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 onDecember 10, 2026 . Holding company net cash and investments available for sale totaled$619.2 million atJune 30, 2022 . 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 atJune 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 40 -------------------------------------------------------------------------------- Table of Contents 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 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. ThePennsylvania statute also requires that dividends and other distributions be paid out of positive unassigned surplus without prior approval. AtJune 30, 2022 ,Essent Guaranty had unassigned surplus of approximately$313.5 million and Essent PA had unassigned surplus of approximately$18.4 million . As ofJune 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 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 ofJune 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. AtJune 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 endedJune 30, 2022 , as compared to$339.8 million for the six months endedJune 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 endedJune 30, 2022 and$239.5 million for the six months endedJune 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 endedJune 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 41 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 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.
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 six months endedJune 30, 2022 , no capital contributions were made to ourU.S. insurance subsidiaries andEssent Guaranty paid dividends toEssent US Holdings, Inc. of$200 million . During the six months endedJune 30, 2021 , no capital contributions were made to ourU.S. insurance subsidiaries andEssent Guaranty paid a dividend toEssent 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 throughDecember 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") 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. As ofNovember 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 ofJuly 25, 2022 . EffectiveSeptember 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 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 63% that varies directly and inversely with ceded claims. EffectiveJanuary 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 writtenJanuary 1, 2022 throughDecember 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
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 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 . 42
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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 six months endedJune 30, 2022 and 2021, Essent Re paid no dividends toEssent Group andEssent Group made no capital contributions to Essent Re. As ofJune 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 ofEssent Guaranty , our principal mortgage insurance subsidiary, is rated A3 with a stable outlook byMoody'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 . OnJuly 21, 2022 , Moody's affirmedEssent Guaranty's financial strength rating of A3 with a stable outlook.
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 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 ofJune 30, 2022 ,Essent Guaranty , our GSE-approved mortgage insurance company, was in compliance with PMIERs 2.0. As ofJune 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 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 ofJune 30, 2022 , stockholders' equity was$4.27 billion , compared to$4.24 billion as ofDecember 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 endedJune 30, 2022 , the repurchase of common shares under our share repurchase plan and dividends paid. 43
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Investments
As ofJune 30, 2022 , investments totaled$4.8 billion compared to$5.1 billion as ofDecember 31, 2021 . In addition, our total cash was$77.9 million as ofJune 30, 2022 , compared to$81.5 million as ofDecember 31, 2021 . The decrease in investments was primarily due to an increase in our net unrealized investment losses primarily due to increases in market interest rates in the six months endedJune 30, 2022 , partially offset by investing net cash flows from operations during the six months endedJune 30, 2022 . Investments Available for Sale by Asset Class Asset Class June 30, 2022 December 31, 2021 ($ in thousands) Fair Value Percent Fair Value Percent U.S. Treasury securities$ 470,146 10.2 % $ 448,793 9.1 % U.S. agency securities 2,000 - 5,504 0.1 U.S. agency mortgage-backed securities 783,438 17.0 1,008,863 20.3 Municipal debt securities(1) 540,772 11.7 627,599 12.7 Non-U.S. government securities 65,135 1.4 79,743 1.6 Corporate debt securities(2) 1,354,110 29.3 1,455,247 29.3 Residential and commercial mortgage securities 545,999 11.8 545,423 11.0 Asset-backed securities 618,115 13.4 581,703 11.7 Money market funds 240,625 5.2 210,012 4.2 Total Investments Available for Sale$ 4,620,340 100.0 %$ 4,962,887 100.0 % June 30, December 31,
(1) The following table summarizes municipal debt securities as of:
2022 2021
Special revenue bonds 78.0 % 77.1 %
General obligation bonds 21.9 20.5
Certificate of participation bonds - 1.9
Tax allocation bonds 0.1 0.5
Total 100.0 % 100.0 %
June 30, December 31,(2) The following table summarizes corporate debt securities as of:
2022 2021
Financial 38.0 % 33.7 %
Consumer, non-cyclical 17.1 19.8
Communications 9.9 11.4
Industrial 7.0 7.0
Consumer, cyclical 7.2 7.0
Energy 6.8 6.0
Technology 6.0 6.8
Utilities 6.0 4.6
Basic materials 2.0 3.7
Total 100.0 % 100.0 %
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Investments Available for Sale by RatingRating(1) June 30, 2022 December 31, 2021 ($ in thousands) Fair Value Percent Fair Value Percent Aaa$ 2,247,042 48.6 %$ 2,412,273 48.6 % Aa1 87,609 1.9 96,331 1.9 Aa2 340,956 7.4 354,951 7.2 Aa3 212,582 4.6 221,914 4.5 A1 343,606 7.4 263,820 5.3 A2 379,762 8.2 427,282 8.6 A3 237,827 5.2 274,525 5.5 Baa1 237,793 5.1 305,204 6.1 Baa2 212,313 4.6 274,011 5.5 Baa3 211,721 4.6 240,755 4.9 Below Baa3 109,129 2.4 91,821 1.9
Total Investments Available for Sale
4,962,887 100.0 %
(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 June 30, 2022 December 31, 2021 ($ in thousands) Fair Value Percent Fair Value Percent < 1 Year$ 1,225,902 26.5 %$ 1,104,397 22.2 % 1 to < 2 Years 377,295 8.2 561,297 11.3 2 to < 3 Years 525,739 11.4 539,174 10.9 3 to < 4 Years 469,535 10.2 593,663 12.0 4 to < 5 Years 601,988 13.0 663,127 13.4 5 or more Years 1,419,881 30.7 1,501,229 30.2 Total Investments Available for Sale$ 4,620,340 100.0 %$ 4,962,887 100.0 % 45
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Top Ten Investments Available for Sale Holdings
June 30, 2022
Rank Amortized Unrealized Credit
($ in thousands) Security Fair Value Cost Gain (Loss)(1) Rating(2)
1 US Treasury 2.875% 06/15/2025 $ 43,495 $ 43,143 $ 352 Aaa
2 US Treasury 1.500% 08/15/2026 31,971 34,469 (2,498) Aaa
3 US Treasury 0.250% 05/31/2025 23,653 25,580 (1,927) Aaa
4 US Treasury 2.500% 01/31/2024 20,252 20,387 (135) Aaa
5 US Treasury 2.625% 06/30/2023 19,694 19,723 (29) Aaa
6 US Treasury 0.000% 02/23/2023 19,677 19,866 (189) Aaa
7 US Treasury 0.875% 06/30/2026 18,060 19,638 (1,578) Aaa
8 US Treasury 5.250% 11/15/2028 17,171 17,972 (801) Aaa
9 US Treasury 0.125% 10/15/2023 17,000 17,611 (611) Aaa
10 Fannie Mae 3.500% 01/01/2058 16,942 18,229 (1,287) Aaa
Total
4.9 %
(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.
Rank December 31, 2021 ($ in thousands) Security Fair Value 1 Fannie Mae 2.000% 10/1/2051$ 34,743 2 U.S. Treasury 1.500% 8/15/2026 34,404 3 U.S. Treasury 0.000% 6/30/2022 28,548 4 U.S. Treasury 0.250% 5/31/2025 24,918 5 Fannie Mae 3.500% 1/1/2058 21,424 6 U.S. Treasury 2.625% 6/30/2023 20,348 7 U.S. Treasury 0.000% 12/29/2022 19,376 8 U.S. Treasury 0.875% 6/30/2026 19,349 9 U.S. Treasury 5.250% 11/15/2028 19,082 10 U.S. Treasury 0.125% 10/15/2023 17,449 Total$ 239,641 Percent of Investments Available for Sale 4.8 %
The following tables include municipal debt securities for states that represent
more than 10% of the total municipal bond position as of
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Amortized Credit
($ in thousands) Fair Value Cost Rating (1), (2)
California
Bay Area Toll Authority 7,664 9,110 A1
State of California 6,929 6,949 Aa2
San Joaquin Hills Transportation Corridor Agency 6,559 7,725 A1
City of Anaheim CA 6,176 7,725 A1
Community Hospitals of Central California
Obligated Group 5,830 7,725 A1
City of Carson CA 3,627 4,408 Aa3
Golden State Tobacco Securitization Corp 3,470 4,235 A3
City of Long Beach CA Harbor Revenue 3,211 3,159 Aa2
Redwoods/The a Community of Seniors 3,180 3,740 Aa3
San Jose Unified School District 3,105 4,090 Aaa
Los Angeles Unified School District/CA 2,761 3,072 Aa3
County of Kern CA 2,757 2,740 Baa2
Chabot-Las Positas Community College District 2,668 2,621 Aa2
City of Los Angeles Department of Airports 2,650 2,650 Aa3
City of Inglewood CA 2,562 3,135 Aa2
University of California 2,514 2,510 Aa2
Port of Oakland 2,462 2,411 A1
City of Monterey Park CA 2,198 2,967 Aa2
San Francisco City & County Airport Comm-San
Francisco International Airport 2,154 2,122 A1
County of Riverside CA 2,142 2,250 A1
State of California Personal Income Tax Revenue 2,057 2,022 Aa3
Foothill-Eastern Transportation Corridor Agency 1,895 2,350 A1
Regents of the University of California Medical
Center Pooled Revenue 1,349 1,361 Aa3
Riverside County Transportation Commission 1,339 1,665 A2
Kaiser Foundation Hospitals 1,304 1,314 Aa3
City of Torrance CA 1,152 1,245 Aa2
City of San Francisco CA Public Utilities
Commission Water Revenue 1,106 1,364 Aa2
City of El Cajon CA 1,057 1,284 Aa2
County of Sacramento CA 920 894 A3
City of El Monte CA 874 1,000 Aa2
Alameda Corridor Transportation Authority 852 878 A3
Cathedral City Redevelopment Agency Successor
Agency 734 724 Aa2
Pomona Redevelopment Agency Successor Agency 697 700 Aa2
California Independent System Operator Corp 536 725 A1
County of San Bernardino CA 532 539 Aa3
California County Tobacco Securitization Agency 414 478 A3
Oxnard Union High School District 216 250 Aa2
City of San Jose CA 181 205 Aa2
City of Riverside CA 151 155 Aa2
Compton Community College District 122 116 Aa3
City of Los Angeles CA 91 111 Aa3
$ 92,196 $ 104,723
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Amortized Credit
($ in thousands) Fair Value Cost Rating (1), (2)
New York
City of New York NY 9,129 8,983 Aa2
Port Authority of New York & New Jersey 8,948 9,433 Aa3
New York City Transitional Finance Authority
Future Tax Secured Revenue 7,835 8,398 Aa1
State of New York Personal Income Tax Revenue 7,348 7,358 Aa1
Metropolitan Transportation Authority 6,613 7,048 A3
Metropolitan Transportation Authority Payroll
Mobility Tax Revenue 5,059 5,866 Aa1
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 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 ofJune 30, 2022 , our estimated off-balance sheet maximum exposure to loss from theRadnor 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. 48
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