AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Ratings of “a” (Excellent) of the operating subsidiaries of Essent Group Ltd., which are Essent Guaranty, Inc., Essent Guaranty of PA, Inc. (both domiciled in Radnor, PA) and Essent Reinsurance Ltd. (Hamilton, Bermuda) (collectively referred to as Essent). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect Essent’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, limited business profile and appropriate enterprise risk management.
Essent’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is at the strongest level in base and stress scenarios. The base and stress scenarios are analyzed based on the company’s financial statements as of June 30, 2023. The company’s compliance with Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0), utilization of traditional reinsurance and mortgage insurance-linked securities (MILS) to reduce its earnings and capital volatility against potential unfavorable macroeconomic conditions, strong liquidity position and conservative investment portfolio, as well as the financial flexibility to raise capital, support the balance sheet assessment of strongest.
AM Best assesses Essent’s operating performance as strong. In the period from 2018 through the first half of 2023, Essent recorded the lowest average combined ratio in the private mortgage insurance industry. The strong performance in 2022 was driven by favorable reserve development due to better-than-expected cure activity on COVID-related delinquencies. Net income in 2023 is on track for a slight decrease compared with 2022. The company’s percentage of loans in default continued to decrease in first-half 2023. The company’s expense ratio has declined over the past five years as the company has scaled up its production, though it did increase slightly in 2022. Essent’s credit profile remains strong, driven by its strict underwriting standards and the effect of the risk-based capital charges established by PMIERs 2.0.
AM Best assesses Essent’s business profile as limited, as the company is a monoline (re)insurer. Furthermore, it faces stiff competition from other private mortgage insurers and governmental agencies (e.g., Federal Housing Administration and Veterans Affairs) providing mortgage insurance. In addition, product risk is considered high because the performance of the mortgage insurance industry is linked to the macroeconomic environment and the standards set by the government-sponsored enterprises (i.e., Fannie Mae and Freddie Mac). The product risk is mitigated somewhat by continued use of reinsurance protection via the traditional reinsurance and MILS markets.
Essent’s overall ERM assessment is appropriate, as the company employs a robust ERM framework and infrastructure that is embedded across the company. Essent’s ERM framework is commensurate with the size, nature and complexity of its mortgage insurance business. AM Best considers Essent’s risk assessment capabilities to be aligned appropriately with its risk profile.
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