Essent Group rating affirmed

Mortgage re/insurer Essent Group has had its financial strength rating affirmed by AM Best.

The ratings agency said the Bermuda-based holding company, its Bermuda registered reinsurer Essent Reinsurance and its US subsidiaries Essent Guaranty, and Essent Guaranty of PA remain A rated with a stable outlook.

AM Best said the ratings reflected Essent’s balance sheet strength which was assessed as strongest, as well as its strong operating performance, limited business profile and appropriate enterprise risk management.

“Essent’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), is at the strongest level in base and stress scenarios,” the agency said. “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 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 noted that 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 favourable reserve development due to better-than-expected cure activity on COVID-related delinquencies,” the agency said. “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.”

AM Best said the rating was offset by Essent’s limited business profile 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.”