AM Best affirms FSR of Essent’s subsidiaries
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, which are: Essent Guaranty and Essent Guaranty of PA, which are both domiciled in Radnor, PA; and Essent Reinsurance, which is domiciled in Hamilton, Bermuda. The outlook of these 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 (ERM).
Essent’s risk-adjusted capitalisation, as measured by AM Best’s capital adequacy ratio (BCAR), is at the strongest level in base and stress scenarios. The base scenario is analysed based on the company’s financial statements as of 30 June, 2022, which reflects the improved housing market and the diminished impact from the COVID-19 pandemic.
The company’s compliance with private mortgage insurer eligibility requirements (PMIERs 2.0), utilisation of traditional reinsurance and mortgage insurance-linked securities (MILS) to reduce its earnings and capital volatility against potential unfavourable macro 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.
AM Best assesses Essent’s operating performance as strong. In the period from 2015 through the first half of 2022 (1H 2022), Essent recorded the lowest average combined ratio in the industry. The strong performance in 2021 was fuelled by favourable macroeconomic conditions, which positively affected originations and the credit quality of borrowers, as well as significant embedded equity in the existing book of business due to home price growth since 2020.
Net income has shown consistent growth over the past five years except for a slight drop in 2020 as a result of the onset of COVID-19. The company’s loss ratio, combined ratio and percentage of loans in default continued to decrease in 1H 2022. The loss and combined ratios in 1H 2022 were negative resulting from the release of reserves after better-than-expected cure activity on COVID-19 defaults.
The company’s expense ratio also has declined significantly over the past five years as the company has scaled up its production. 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”, AM Best said, 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, it said, 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, it added.
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 said, adding that it considers Essent’s risk assessment capabilities to be aligned appropriately with its risk profile.