OLDWICK, N.J.–(BUSINESS WIRE)–AM Best has affirmed the Financial Strength Rating of A (Excellent) and a Long-Term Issuer Credit Rating of “a” 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. (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 categorizes as strongest, as well as its strong operating performance, limited business profile and appropriate enterprise risk management (ERM).
Essent’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is at the strongest level in base and various COVID-19 stress scenarios. The base scenario is analyzed based on the company’s financial statements as of June 30, 2020, which already included some of the impact from the COVID-19 pandemic. The COVID-19 stress scenarios include increases in COVID-19-related losses, and other stress test components in the baseline stress test outlined in “Stress Testing Rated Companies for COVID-19,” published by AM Best on May 18, 2020. The application of the COVID-19 stresses on Essent’s book of business broadly follows the guidelines in AM Best’s criteria procedure, “Catastrophe Analysis in AM Best Ratings.” The most impactful stresses relate to the assumed claim rates, which range from 4-6% of Essent’s current primary risk-in-force, which was $44 billion as of June 30, 2020. In these stress tests, AM Best assumed that Essent’s realizes losses over a two-year period, while booking premiums in that timeframe, and that surplus is reduced by tax-affected losses after reinsurance. After applying the various stresses to Essent’s book of business, the company’s risk-adjusted capitalization, as determined by BCAR, remained at the strongest level.
The company’s compliance with Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0), utilization of traditional reinsurance and mortgage insurance-linked securities to reduce its earnings and capital volatility against unfavorable housing environment, strong liquidity position and conservative investment portfolio, as well as the financial flexibility to raise capital during the COVID-19 pandemic, support the balance sheet assessment of strongest.
Essent’s operating performance is assessed as strong despite the COVID-19 pandemic. The company’s loss ratio, combined ratio and percentage of loans in default increased in the first half of 2020 from 2019. However, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), forbearance programs and foreclosure moratorium have helped to mitigate the negative impact of the COVID-19 pandemic on Essent. Essent’s average loss, expense and combined ratios for the past five and a half years, from 2015 to June 2020, showed underwriting profitability. Essent’s historical loss and combined ratios continued to be low until a spike in the second quarter of 2020 due to the COVID-19 pandemic. Essent’s expense ratio has declined significantly over the past few years as it continued to scale up its production and achieve scale. The company’s credit profile continues to improve, mainly driven by its underwriting standards as well as the effect of the risk-based capital charges established by the PMIERs 2.0.
Essent’s business profile is assessed as limited, as the company is a monoline (re)insurer. Furthermore, it faces stiff competition from other private mortgage insurers and governmental agencies (i.e., 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).
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.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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